A taxpayer must file a Foreign Bank and Financial Accounts Report (FBAR) if they have an interest in, or have signatory authority over, foreign financial accounts above a certain amount. There is no limit under U.S. law for how much money someone can have in a foreign bank account, just as long as they disclose it to the Treasury Department. The unique aspects of FBARs in Washington might make retaining the services of an experienced FBAR attorney a wise investment.
Form 114 becomes mandatory once a taxpayer’s foreign financial account’s aggregate value exceeds $10,000 at any point during the tax year. Although it was historically due on June 30, since 2017 it is due on April 15, coinciding with the Form 1040 deadline. However, the IRS grants automatic extensions to file which a taxpayer does not have to apply for, meaning the true deadline is October 15 each year. It must be filed electronically through FinCEN, which is the Financial Enforcement Crimes Network of the Department of Treasury. If the filing is especially complex, it is recommended that the taxpayer consult a tax professional in order to ensure it is handled properly.
Generally speaking, a taxpayer with an FBAR filing requirement who does not file their FBAR or files it late, will be subject to a $10,000 penalty. However, depending upon whether the taxpayer was willful or non-willful, the penalty can vary significantly, with everything from a warning letter, up to a $10,000 penalty per year, or in willful cases: penalties the greater of $100,000 or 50% of the total account value.
In certain extremely rare situations, the penalty could be 100% of the highest foreign account value, with criminal punishment of up to 10 years in prison and a $500,000 penalty. A lawyer could evaluate someone’s situation to determine if they have criminal exposure.
One of the unique aspects of the FBAR is that there is no tax associated with it, so it will be in a Washington DC taxpayer’s best interest to file one if it applies to them.
There is a six-year statute of limitations on civil penalties for FBARs and a five-year statute of limitations on criminal penalties. If a taxpayer were to make a disclosure and clean up their records, they would only have to file up to the previous six years of delinquent FBARs to get into compliance. Even if they have delinquent FBARs older than six years, they will not need to file them.
When a U.S. person or entity directly or indirectly owns a greater than 50% interest in another entity that is required to file an FBAR, they are authorized to file a consolidated FBAR on its behalf. This unique version of the FBAR generally only applies to more complex situations (usually involving businesses) in which one corporation or business owns another business that must be FBAR-compliant. It does not usually apply to individual taxpayers.
A tax attorney can advise a taxpayer on how Form 114 works, and even prepare it personally if the account is complicated. If there are unfiled FBARs, the attorney could estimate what the current penalty exposure might be, both civil and criminal, and advise on what the best methods are to resolve these compliance issues with the lowest amount of penalties.
An attorney could also advise on whether the taxpayer’s action in not filing their FBAR, or filing delinquent, will be determined as willful or not. Depending on the perceived willfulness, there are different types of disclosures with different penalty frameworks, with the objective of getting the taxpayer into compliance as quickly as possible while simultaneously trying to minimize their penalty exposure.
The rules for reporting overseas assets can be complex. Place a call to a tax lawyer to learn about the unique aspects of FBARs in Washington DC and how you can comply with the Treasury Department in order to stave off potential penalties.