FBAR Penalties
Penalties for Not Reporting Foreign Accounts
FBAR Penalties for Not Filing FinCEN Form 114
If you have a foreign bank account, you may need to report it when you file your tax return. If you don’t report your accounts as required, you can face severe penalties, as well as criminal charges. Worried about FBAR penalties? Then, contact us for help today. Otherwise, keep reading for an overview.
What Is FBAR?
Basically, the FBAR is a rule that requires eligible U.S. persons with certain financial accounts outside the United States to report the accounts to the U.S. Treasury. This is done by filing Financial Crimes Enforcement Network (FinCEN) Form 114 (Report of Foreign Bank and Financial Account) which is also known as FBAR.
The foreign bank account reporting requirement is part of the Bank Secrecy Act (BSA). The BSA is a federal law that places special recordkeeping and reporting requirements on individuals and financial institutions concerning certain financial transactions and assets.
The purpose of the FBAR requirement is to help the U.S. government identify individuals who use foreign financial accounts to avoid reporting taxable income or use their money for illegal purposes. In other words, as long as you’re not doing anything illegal, you can think of FBAR as just another bit of paperwork you have to deal with every year.
Who’s Required to File an FBAR?
Two main conditions must exist to file an FBAR. First, a U.S. person must have a financial interest in (or some type of legal authority over) at least one financial account that’s located outside the United States. Second, the aggregate amount in the foreign account(s) must exceed $10,000 at any point during the calendar year.
This means if you had three different bank accounts overseas and their combined balances never exceeded $10,000 in a calendar year, then the FBAR requirement doesn’t apply to you. But if you have just one foreign account and its balance reaches $10,000.01 or more at any point in time, you’ll need to file an FBAR.
What is a U.S. person?
A “U.S. person” refers to all U.S. citizens and residents. It also includes estates and legal entities that were created under state or federal law, such as corporations, LLCs, partnerships, and trusts.
Note that “resident” is defined by 26 U.S.C. § 7701(b)(1)(A)(i)-(iii). It includes lawful permanent residents and individuals who have a substantial presence in the United States. If you’re unsure of whether or not you’re a resident, consult with a tax attorney.
What is a foreign financial account?
For the purposes of the FBAR, a foreign financial account includes most banking and investment accounts that exist outside the United States. However, it does not include:
- Nostro or correspondent accounts.
- Accounts maintained on a U.S. military banking facility.
- Qualified retirement accounts, such as an IRA (individual retirement account) that include a foreign financial account.
How to File FinCEN Form 114
There are two ways to file Form 114. The primary method is to use the BSA E-Filing System. Alternatively, you can file a paper FBAR, if you get a special exemption from FinCEN’s Resource Center. If you jointly own a foreign financial account with your spouse and they file an FBAR on your behalf, you must file FinCen Form 114a.
FBAR Questions on Tax Returns
When you file your individual tax return (Form 1040), you must answer a question about your foreign bank account(s). The question asks if you had a foreign bank account during the previous tax year. Then, the following question asks if you were required to file an FBAR. If you were required to file an FBAR, you also need to list the names of the countries where you hold foreign accounts.
There are similar questions for partnerships on Form 1065, corporations on Form 1120, and trusts on Form 1041. Keep in mind that answering these questions does not fulfill your reporting duty. Again, you must also file the standalone FinCen form.
FBAR Recordkeeping Requirements
You must also keep certain records relating to the accounts that are subject to FBAR reporting. There are no specific document requirements, but you must keep documents that contain the following information:
- Name on the account.
- Maximum account value.
- Type of account.
- Name and address of the financial institution holding or administering the account.
- Account number.
These documents must be kept for five years from the applicable FBAR reporting deadline.
When Is the FBAR Due?
Generally speaking, the FBAR is due on April 15 for the prior calendar year. This deadline is therefore similar to regular income tax returns. If the taxpayer misses this deadline, it’s automatically extended to October 15; no extension request is necessary. Additional extensions are possible in rare situations, such as natural disasters.
FBAR Penalties for Not Filing
The type and extent of the penalties depend on the type of violation and there are four main types of violations:
- Negligent.
- Pattern of negligent activity.
- Non-willful.
- Willful.
Violations that are the result of negligence or a pattern of negligent activity can lead to civil monetary penalties of at least $1,350, but as much as $105,083. These two types of violations only apply to entities, not individuals.
Next, there are non-willful and willful violations, which apply to any person or entity subject to FBAR reporting requirements. As of 2023, non-willful violations lead to civil monetary penalties of $15,611. This amount is indexed to inflation, and it increases annually.
According to the recent U.S. Supreme Court case, Bittner v. United States, these civil penalties in non-willful violation cases apply on a per-report basis, not per account. In other words, if a person commits a non-willful violation by failing to file a report and that report should have listed 10 foreign accounts, then the person must pay a penalty of $15,611, not $156,110.
If there’s a willful violation, there could be a civil monetary penalty equal to the greater of $15,611 or 50% of the amount of money in the foreign account at the time of violation. For example, if there was $1 million in the account, the penalty could be $500,000.
The worst thing about willful violations is that they can also result in criminal penalties. Filing a false FBAR can result in a $10,000 fine and/or five years in prison. Intentionally not filing FBAR or keeping adequate records can lead to a $250,000 fine and/or five years in prison. If the FBAR violation results in the breaking of other laws, these criminal penalties could double to $500,000 and/or 10 years in prison.
How to Avoid FBAR Reporting Penalties
The best way to avoid penalties for FBAR violations is to know the law and seek help from a tax professional. But what if you weren’t aware of this reporting requirement? After all, if a person doesn’t know they have to do something, they’ll never look up the law or consult with a professional to get tax advice.
In these situations, the IRS has streamlined filing compliance procedures that can reduce any penalties that may result from not filing FBAR. This process can also help you avoid criminal penalties as it offers a way for you to certify that your FBAR noncompliance was non-willful.
If you missed the filing deadline, you may be able to file late. The FinCen online filing tool has an option that allows you to explain why you’re filing late.
Misconceptions About FBAR Penalties
The FBAR rules can be pretty complicated, and unfortunately, there are a few misconceptions about the requirements. Here is the truth about some of the most common misconceptions.
Myth: The FBAR applies to all foreign assets.
Truth: The FBAR only applies to foreign bank accounts. If you have other foreign assets, you may need to file IRS Form 8938. This is part of a federal income tax return and is prepared when certain foreign financial assets must be reported to the IRS. While a taxpayer that must file Form 8938 doesn’t always have FBAR obligations, they often go hand-in-hand. Note that the reporting thresholds vary for each of these reporting requirements.
Myth: U.S. citizens who live abroad don’t have to file an FBAR.
Truth: All U.S. citizens are subject to FBAR reporting rules regardless of where they live. Living abroad or being a citizen of another country doesn’t mean you are exempt from FBAR. If you hold dual citizenship or call a country other than the United States home, you still may have a reporting requirement.
Myth: You must report all foreign bank accounts.
Truth: You don’t need to report all foreign bank accounts. You only need to report your accounts if their total balance exceeds $10,000 at any point in the tax year. If your total balance exceeds this threshold, you must report all of your foreign accounts even if they have very low balances.
Myth: Minors don’t need to worry about FBAR.
Truth: If a minor owns a foreign bank account that exceeds the reporting threshold, they must file an FBAR.
Myth: If you don’t have a filing requirement, you don’t need to file FBAR.
Truth: Even if you normally don’t need to file a tax return, you need to file this form if you have an FBAR reporting requirement. In some cases, this may be the only reason that you need to file a tax return.
Need Help Filing an FBAR or Dealing With Penalties?
If you aren’t sure about your FBAR requirements or how to complete FinCEN Form 114, please contact the tax professionals of The W Tax Group. Consultations are free.
We can also help you if you’ve missed one or more FBAR deadlines and want to avoid paying any more FBAR penalties than necessary. Already incurred a penalty? Then, call us for help. The sooner you reach out, the easier the process will be.
