• Representing the Troubled Taxpayer: How to Handle the Failure to Report Foreign Bank Accounts
  • March 19, 2013
  • Law Firm: Stein Sperling Bennett De Jong Driscoll PC - Rockville Office
  • What is the FBAR?

    IRS Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (“FBAR”), is used to report a financial interest in or signature authority over a foreign financial account. A U.S. person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. The FBAR must be filed by June 30 of the year immediately following the calendar year being reported. This filing date cannot be extended.

    What are the repercussions for failing to file an FBAR?

    The repercussions for failing to file an FBAR are significant. Criminal exposure can range from up to $500,000 in fines to 10 years in prison. Civil penalties can reach the greater of $100,000 or 50% of the balance of the foreign account. Taxpayers must also consider the cost of any back taxes, penalties and interest on any unreported income.

    OVDP

    Taxpayers who have failed to file FBARs for prior years need to consider the Offshore Voluntary Disclosure Program (“OVDP”). Under the terms of the OVDP, in most cases, taxpayers who come forward voluntarily face reduced penalties and generally can avoid the threat of criminal prosecution. The IRS has warned that the OVDP could be discontinued at any time.

    The terms of the program are substantially similar to previous Offshore Disclosure programs offered by the IRS. Taxpayer must:

    1. File original and/or amended tax returns including any income that was not reported from the overseas assets for eight back tax years.
    2. Pay any back income tax plus a 20% accuracy penalty and interest on such amounts.
    3. File FBARs for eight back tax years.
    4. Pay or make acceptable arrangements to pay an amount equal to 27.5% of the highest aggregate balance in the foreign bank accounts for the period spanning 2003-2010. Some taxpayers may qualify for a reduced penalty of 12.5% or 5%. The 12.5% penalty would apply where a taxpayer’s highest aggregate foreign accounts/fair market asset values in each of the years covered by the OVDP are less than $75,000. The 5% penalty only applies where the taxpayer has not opened or caused the account to be opened, has had minimal contact with the account, has not withdrawn more than $1,000 from the account in any year covered by the OVDP, and can establish that all applicable U.S. taxes have been paid on funds deposited to the account.

    Would You Come Forward?

    The idea of paying 27.5% of the highest balance over the last eight years because you failed to file an information return is arguably excessive. Some taxpayers were made signatory authorities over foreign accounts without their knowledge. Given the severity of the penalties, it is important for taxpayer to discuss the terms of the OVDP with qualified tax counsel before electing to participate.

    Form 8938

    Certain taxpayers are also reminded of their obligation to file a Form 8938. Generally, Form 8938 must be filed if “specified foreign assets” exceed $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year ($50,000/$75,000 for single filers). Specified foreign assets include not only any financial account maintained by a foreign financial institution but also other assets held for investment including stock or securities that are issued by someone other than a U.S. person. Thus, while overlap exists between the FBAR and the Form 8938, the latter covers a much broader class of foreign assets. Failure-to-file Form 8938 may result in a penalty of $10,000 (increasing to $50,000 if not paid within 90 days).