Some taxpayers are not aware of the requirement that they file a Foreign Bank Account Report (FBAR) if the value of their foreign financial accounts exceeds $10,000 at any time during the year. Even taxpayers who are aware of their obligation to disclose offshore bank accounts may not understand every situation that will trigger an FBAR filing requirement, or the methods for disclosing a previously unreported foreign account.
The following are some of the most common mistakes when filing FBARs:
- Failure to file FBARs
The biggest mistake you can make regarding an FBAR is failing to file it. The civil penalties for this mistake are severe—more than $12,000 per violation per year for non-willful violations, and the greater of $124,588 or 50 percent of the account balance per violation for willful violations. Criminal sanctions, including jail time, can also be imposed. There is a six-year statute of limitations on the assessment of FBAR penalties.
The general rule is that any United State person with a signature authority or financial interest in a foreign account, with an aggregate value of foreign accounts that exceeded $10,000 at any point during the year, must file an FBAR. Note that non-U.S. citizens can be included under this requirement. If you pass the IRS green card test or the substantial presence test, then the IRS considered you a “United States person,” and you will have to file FBARs if your account values exceed the filing threshold.
2. Misunderstanding the Filing Requirements for Joint Accounts
In general, you must report any interests in foreign joint accounts. If you own an account jointly with a parent or child, you are both considered to have a financial interest in this account, and an FBAR must be filed if you meet the other FBAR requirements.
There is an exception for accounts owned jointly by spouses. The spouse of a person who files an FBAR does not need to file a separate FBAR of all three of following conditions are met:
- all the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse;
- the filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed; and
- the filers have completed and signed Form 114a, “Record of Authorization to Electronically File FBAR’s
If all of these conditions are not met, then the spouse must file separate FBARs.
3. Failure to Use the Appropriate Disclosure Options
Taxpayers that have failed to file FBARs have several options for coming into compliance and eliminating the risk of harsh penalties. The Streamlined Filing Compliance Procedures are available to taxpayers whose failure to file was non-willful. The Offshore Voluntary Disclosure program involves much higher penalty payments, but can be used by taxpayers whose conduct was willful in failing to file FBARs. Taxpayers can also simply file delinquent FBARs and include a reasonable cause statement, hoping to avoid all penalties.
Your unique situation will determine which disclosure method is most appropriate, but all of these options are preferable to paying steep fines—and possibly facing prison time—due to unreported foreign financial accounts. Talk to a tax attorney to figure out which disclosure option will best protect your financial interests, or download our free report on the IRS Streamlined Filing Procedures.