Foreign Account Reporting, Handled With Care.
U.S. persons with foreign financial accounts face annual reporting requirements and significant penalties for failing to meet them. We advise on reporting, evaluate the IRS’s options for correcting past years, and represent clients in FBAR penalty matters.
The Reporting Requirements
A U.S. person with a financial interest in, or signature authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during the calendar year must file FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (FBAR). Form 8938, filed with the income tax return, has separate and higher thresholds, and some taxpayers must file both.
FBAR Penalties
Non-willful violations
Up to $10,000 per violation, adjusted for inflation (31 U.S.C. §5321(a)(5)(B)). In Bittner v. United States, 598 U.S. 85 (2023), the Supreme Court held that the non-willful penalty applies per report, not per account. No non-willful penalty applies if the violation was due to reasonable cause and the account balance was properly reported.
Willful violations
Up to the greater of $100,000, adjusted for inflation, or 50 percent of the account balance at the time of the violation (31 U.S.C. §5321(a)(5)(C) and (D)).
Criminal penalties
Willful violations can also be prosecuted, with fines of up to $250,000 and imprisonment of up to five years, or up to $500,000 and ten years in aggravated cases (31 U.S.C. §5322).
Correcting Past Years
Streamlined filing compliance procedures
For taxpayers whose failures were not willful. Taxpayers residing in the United States file amended returns for the most recent three years and delinquent FBARs for the most recent six years, and pay a miscellaneous offshore penalty of 5 percent of the highest aggregate balance of the covered assets. Different terms apply to taxpayers residing outside the United States.
Voluntary disclosure
For taxpayers whose conduct may have been willful, IRS Criminal Investigation’s Voluntary Disclosure Practice is available only if the disclosure is timely, and it does not guarantee immunity from prosecution. The IRS has proposed updates to the program’s terms.
Choosing a path
Which option fits depends on the facts, particularly whether the failure was willful. The wrong choice can increase penalties or exposure, so the analysis should come before anything is filed.
Privilege
Discussions about past conduct and intent should take place with counsel. Confidential communications with an attorney made to obtain legal advice are privileged, while the limited privilege for CPAs and enrolled agents under IRC §7525 does not apply in criminal matters. Information that will be reported on a return or an FBAR generally is not privileged.
Questions About Foreign Accounts?
Contact Advantage Tax Law for a confidential consultation before filing late or amended reports.