If you have undisclosed foreign financial accounts that should have been reported on the Report of Foreign Bank and Financial Accounts (“FBAR”), you may be facing the FBAR penalties. By far, the FBAR contains the most severe civil penalties and significant criminal penalties among all international tax forms. It is important to understand that these penalties, despite their apparently extreme nature, are real and you may be facing them.
FBAR Criminal Penalties
The two most common cases for criminal prosecution are willful failure to file an FBAR and willful filing a false FBAR, especially when combined with potential tax evasion. The criminal FBAR penalties in these cases may be up to the limit set in 31 U.S.C. § 5322. This means that, potentially, a person who willfully fails to file an FBAR or files a false FBAR may be subject to a prison term of up to 10 years, criminal penalties of up to $500,000 or both.
FBAR Civil Penalties
In addition to criminal penalties, FBAR penalties include a rich arsenal of civil penalties. The exact penalties that a person may be facing will depend on that person’s particular circumstances; these circumstances must be evaluated by an experienced international tax attorney.
In general, where the taxpayer willfully failed to file the FBAR, or destroyed or otherwise failed to maintain proper records of account, and the IRS learned about it (e.g. during an investigation), the taxpayer is likely to face the worst-case scenario with draconian penalties. The IRS may impose civil FBAR penalties of up to the greater of $100,000, or 50 percent of the value of the account at the time of the violation (in addition to the already discussed criminal FBAR penalties of up to $500,000, or 10 years of imprisonment, or both).
In certain circumstances, it is possible to mitigate the penalties, but this issue should be evaluated by an experienced international tax attorney. If mitigation is an option for you, then it may dramatically alter your calculation of willful penalties.
A less severe round of civil FBAR penalties may be imposed if a US person negligently and non-willfully failed to file the FBAR, and the IRS learned about it during an investigation. Unlike the first scenario, there are unlikely to be criminal penalties for the non-willful failure to file the FBAR. Rather, the taxpayer is likely to face non-willful FBAR penalties of up to $10,000 per violation (i.e. each unreported account in each year). However, where there is a pattern of negligence, additional civil FBAR penalties of no more than $50,000 may be imposed per each violation. Again, in limited circumstances, the taxpayer maybe eligible for the mitigation the penalties, but this issue should be evaluated by an experienced international tax attorney. While the impact of non-willful mitigation is not likely to be as dramatic as that of the willful penalties, such mitigation may still have a significant impact on the total number of penalties.
Reasonable Cause Exception and OVDP FAQ #17
There are two major exceptions to FBAR penalties. First, if you are able to establish reasonable cause, you may be able to escape all FBAR penalties. Again, an experienced international tax attorney should be consulted on whether you have a valid reasonable cause exception and the chances that this strategy will succeed. Second, in general, pursuant to OVDP FAQ #17, you may be able to avoid FBAR penalties if you have no additional U.S. tax liability as a result of your voluntary disclosure and you already reported all of the income associated with the undisclosed foreign financial account on your tax returns. I cannot stress enough the importance of consulting an international tax attorney to determine whether your case fits within the requirements of the OVDP Q&A #17.
IRS Offshore Voluntary Disclosure Program
It is important to note that the FBAR penalty structure outlined above is not followed by the official IRS Offshore Voluntary Disclosure Program (OVDP). Rather, OVDP replaces this penalty structure with its own three-tiered penalty system with the emphasis on the aggregate balance of all accounts, rather than the number of accounts. Moreover, there is no reasonable cause exception to the OVDP structure of penalties. However, OVDP FAQ #17 can still be applied to the foreign financial accounts of the participating taxpayer whenever the situation warrants its application.
Given the enormous differences that exist between the IRS OVDP and the traditional statutory FBAR penalties, it is crucially important to consult an experienced international tax attorney in choosing your way to reduce your FBAR penalties.
Contact Sherayzen Law Office for Help With Your FBAR Penalties
If you have undisclosed foreign financial acccounts and you are facing the FBAR penalties, contact Sherayzen Law Office as soon as possible. Our international tax firm will thoroughly analyze your case, estimate your FBAR penalties (both, under the traditional and OVDP penalty structures), determine the options and strategies that may be used in your Offshore Voluntary Disclosure, and implement your case plan (including the creation of any necessary legal documents and tax forms).
We are the tax experts you are looking for to handle your case!