For ex-pats and other United States taxpayers with foreign bank accounts, understanding the Report of Foreign Bank and Financial Accounts (FBAR) and other informational filing requirements is essential. Failing to file an FBAR when required can result in hefty fines and even criminal penalties.
Fortunately, the IRS’s Streamlined Filing Compliance Procedures can help you correct past foreign bank account reporting mistakes.
What are the FBAR filing requirements?
All U.S. citizens, residents, corporations, partnerships, LLCs, trusts and estates must file an FBAR if they have a financial interest in or signature authority over a financial account located in a foreign country and the aggregate value of all foreign accounts exceeded $10,000 at any time during the calendar year.
A foreign financial account can include bank accounts, foreign mutual funds, brokerage accounts, and pension accounts, even if the account didn’t produce any taxable income.
The deadline to file the FBAR is generally April 15th of the following tax year. However, if you miss the April 15th deadline, the IRS automatically gives you an automatic extension to October 15th. If either of those dates falls on a weekend or holiday, the due date shifts to the next business day.
You can only file an FBAR electronically through FinCEN’s BSA E-Filing System. You can’t mail it to the IRS or file it with your federal income tax return.
What are the FBAR penalties?
Penalties for FBAR violations can vary widely depending on whether your failure to file was willful or non-willful.
- Willful FBAR violations. Willful failure to file means that you knew (or reasonably should have known) that you were required to file an FBAR and chose not to. Civil penalties for willful violations are $100,000, or 50% of the account balance at the time of the violation, whichever is higher. That penalty applies for each year that an FBAR form wasn’t filed. If the IRS believes that failing to file an FBAR was intentional, you could even face criminal penalties.
- Non-willful FBAR violations. Non-willful failure means you didn’t know (or reasonably couldn’t be expected to know) that you were required to file an FBAR. The standard penalty for non-willful violations is $10,000 per account for each year that the FBAR form wasn’t filed.
How to Fix FBAR Reporting Problems
There are two ways to approach getting caught up with FBAR requirements: “quiet” disclosure or “noisy” disclosure.
In a quiet disclosure, you simply file delinquent FBAR reports (and amended income tax returns, if necessary) and send a check for the estimated income taxes, penalties and interest. You don’t call attention to the fact that you’re out of compliance with FBAR rules and hope that the IRS Criminal Investigation division won’t pursue criminal penalties.
In a noisy disclosure, you come forward and admit non-compliance and let the IRS know you’re willing to pay back taxes, interest and penalties. The IRS has a long-standing policy of allowing taxpayers with past compliance issues to come forward voluntarily and avoid the harshest consequences.
While a quiet disclosure might seem like the easiest approach, it can be very risky. Attempting quiet disclosure can turn non-willful non-compliance into a willful or criminal situation. And if the IRS discovers your quiet disclosure, you lose any opportunity to take advantage of voluntary disclosure programs, such as the streamlined filing compliance procedures.
What are Streamlined Filing Compliance Procedures?
The Streamlined Compliance Procedures allow taxpayers whose failure to comply with FBAR reporting requirements was non-willful to get compliant and reduce their potential penalties.
The main benefit of the Streamlined Filing Compliance Program is certainty regarding your penalty assessment. If your streamlined filing is successful, you won’t be liable for failure-to-file penalties, failure-to-pay penalties, accuracy-related penalties, or information return penalties.
Instead, you pay a Title 26 miscellaneous offshore penalty, which is computed as 5% of:
- Any assets that should have been reported on an FBAR in the prior six-year period but weren’t
- Any foreign assets that should have been reported on a Form 8938 in the prior three-year period but weren’t
- Any foreign financial assets that were properly reported in the prior three-year period on an information return but for which income from the foreign asset was not properly reported to the IRS.
What Is Included in a Streamlined Filing Procedures Submission?
There are two options under this program: the Streamlined Foreign Offshore Procedures (SFOP), available to non-U.S. residents, and the Streamlined Domestic Offshore Procedures (SDOP), available to U.S. residents.
Under either program, the taxpayer has four primary obligations:
- File three years of amended or original tax returns
- File six years of international informational returns, including the FBAR or FinCEN Form 114
- Complete Form 14654 (SDOP) or Form 14653 (SFOP), including certifying in a narrative that your conduct was not willful.
- Pay all necessary taxes, penalties, and interest
The narrative portion of the procedure is extremely important. It must include the specific reasons for your failure to report income, pay tax, and file required information returns. You should also explain how you came to own the account. For example, was it inherited? Did you open the account while living in a foreign country? Provide all relevant information on your personal and financial background. If you relied on advice from a professional advisor, you also need to provide their name, contact information, and a summary of their advice.
For more detail on what to include in the narrative, review FAQ 13 from the IRS’s FAQs on the Streamlined Filing Procedures.
Who Qualifies for the Streamlined Filing Compliance Procedures?
To qualify for either the SFOP or the SDOP, you must meet the following requirements:
- Be an individual taxpayer (or the estate of an individual taxpayer)
- Not be facing an IRS civil or criminal investigation for any tax year
- Have a valid Taxpayer Identification Number-typically a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
How to Start the Streamlined Filing Compliance Procedures
Because the SDOP and SFOP require filing multiple years of tax returns and information returns, disclosing account balances, calculating penalties, and explaining your reasons for non-compliance, it’s not something you want to handle on your own.
We recommend working with an experienced tax advisor to save time and ensure accuracy. If you need help determining whether you qualify for the streamlined procedures or preparing your submission, please get in touch with an AB FinWright advisor. We’d love to help you get back on track with your foreign bank account reporting requirements and enjoy the peace of mind you deserve.