Federal law requires individuals to report annually to the Internal Revenue Service any financial interests they have in any bank, securities, or other financial accounts in a foreign country. 31 U.S.C. § 5314(a). The report is made by filing a completed Form TD F 90-22.1 with the Department of the Treasury, and the report must be filed on or before April 15 of each calendar year with respect to foreign financial accounts maintained during the previous calendar year. 31 C.F.R. § 1010.350.
The Secretary of the Treasury may impose a civil money penalty on any person who fails to timely file the report. 31 U.S.C. § 5321(a)(5)(A). In cases where a person “willfully” fails to file the FBAR, the government may impose an increased maximum penalty, up to $100,000 or fifty percent of the balance in the account at the time of the violation. 31 U.S.C. § 5321(a)(5)(C).
The IRS’ investigation may probe the following areas:
- Why the individual failed to file the FBAR reports, when did the person first learn of the FBAR reporting requirements, and did the individual read the information supplied by the government in the tax forms;
- What is the individual’s reasonable cause defense for failing to report the foreign accounts under 35 U.S.C. § 5321(a)(5)(B)(ii) (non-willfulness civil penalty);
- Why the individual answered “no” in response to Question 7a, Part IV of Schedule B, if that is the case;
- What is person’s level of education and sophistication, particularly in the field of business and accounting;
- Did the individual engage in any activity with respect to the funds overseas (e., transferring money overseas, buying and selling securities, or making investments) or is the account a “passive account”; and
- Did the individual know that the funds deposited into the foreign financial account were taxable, and why did the person failed to report the offshore income, if that is the case.
The IRS may seek to interview the individual to obtain answers to its questions. Also, if an accountant or enrolled agent prepared the tax returns at issue, the IRS may interview the return preparer to determine what, if anything, the taxpayer told the accountant about the undisclosed bank accounts. The IRS may want a copy of any tax organizer to see whether the person disclosed the foreign accounts to the return preparer. See e.g., United States v. McBride, 2012 U.S. Dist. LEXIS 161206 (D. Utah 2012); United States v. Williams, 2012 U.S. App. LEXIS 15017 (4th Cir. Va. 2012).
Individuals who fail to report their interest in foreign financial accounts run the risk of substantial civil penalties and possibly a criminal investigation by the IRS. Persons with unfiled foreign bank account reports or unreported income from offshore accounts would be wise to seek the advice of competent tax counsel, who can evaluate the case, explain the options, and develop a defensible strategy.
FAQs
Penalties for failure to file a Foreign Bank Account Report (FBAR) can be either criminal (as in you can go to jail), or civil, or some cases, both. The criminal penalties include: Willful Failure to File an FBAR. Up to $250,000 or 5 years in jail or both.
What happens if I don't report my foreign bank account? ›
The standard penalty for willful failure to file is $100,000 or 50% of the account's maximum value at the time of the violation, whichever is higher, for each year a person didn't file a required FBAR. In some cases, willful non-compliance results in criminal penalties, including a prison sentence.
Do you have to report a foreign bank account to the IRS? ›
Per the Bank Secrecy Act, every year you must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts.
What happens if you don't file an FBAR? ›
Failing to comply with the FBAR reporting and recordkeeping requirements may result in civil and criminal penalties depending on the facts and circ*mstances. For willful violations, the maximum civil penalty is the greater of $100,000 or 50% of the balance in the account at the time of the violation.
What happens if you make a mistake on an FBAR? ›
The form on which these reports must be made is known as the Report of Foreign Bank and Financial Accounts (FBAR). Even a small mistake on the form can result in up to a $10,000 penalty (adjusted for inflation), and penalties are substantially higher for willful violations.
Can overseas bank accounts be seized? ›
Imprisonment: Criminal charges come with severe penalties, such as prison time, significant fines, and more. Asset seizure: Law enforcers may choose to seize your assets if they discover you're using an offshore account for illegal purposes.
What is the penalty for not reporting foreign income? ›
Learn about what to do if you have unreported foreign income and accounts. Non-Compliance with foreign asset reporting can lead to some hefty penalties such as: Failure to file FBAR: $10,000 for each non-willful violation. Failure to willfully file FBAR: the greater of $100,000 or 50% of the account's highest balance.
How does IRS track foreign bank accounts? ›
Through FATCA, the IRS receives account numbers, balances, names, addresses, and identification numbers of account holders. Americans with foreign accounts must also submit Form 8938 to the IRS in addition to the largely redundant FBAR form.
Can the IRS seize a foreign bank account? ›
Taking international assets
In many cases, the IRS can take money from international bank accounts. Those can get levied, just like domestic accounts. You may wake up and find out that your money is gone. However, the IRS does not have complete free reign over accounts all over the world.
What is the IRS threshold for foreign accounts? ›
The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. A U.S. person is: A citizen or resident of the United States, or • Any domestic legal entity such as a partnership, corporation, estate or trust.
In general, the IRS has 6 years from the date that the FBAR violation occurs to assess penalties.
Do I need to file FBAR if less than $10,000? ›
A person required to file an FBAR must report all of his or her foreign financial accounts, including any accounts with balances under $10,000.
Who is exempt from FBAR? ›
Example: A government employee retirement or welfare benefit plan is not required to file an FBAR because it is a governmental entity. Example: A state administered college or university is not required to file an FBAR because it is a governmental entity.
What if I forgot to fill out the FBAR? ›
Once the IRS realizes that you have forgotten to file your FBAR, the agency will send you Letter 4265 (FBAR Appointment Letter). Then, the IRS will request information about your foreign accounts and have you schedule a time to talk with an examiner on the phone. A lot hinges on your meeting with the examiner.
Does filing an FBAR trigger an audit? ›
FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
What is the penalty for willful violation of FBAR? ›
1 The maximum civil penalty for a willful violation is 50 percent of the maximum account balance during the year (or, if greater, $100,000 [adjusted for inflation] per violation).
What happens if you don t report foreign travel to security clearance? ›
You may be subject to administrative action by your agency that includes, but is not limited to, revocation of your security clearance or eligibility to hold a sensitive position.
What happens if you don't report fatca? ›
If you must file Form 8938 and do not do so, you may be subject to penalties: a $10,000 failure to file penalty, an additional penalty of up to $50,000 for continued failure to file after IRS notification, and a 40 percent penalty on an understatement of tax attributable to non-disclosed assets.
Can the IRS seize foreign bank accounts? ›
In many cases, the IRS can take money from international bank accounts. Those can get levied, just like domestic accounts. You may wake up and find out that your money is gone.
Do I need to report my foreign financial assets? ›
You must report the maximum value of the foreign financial assets or financial accounts with foreign financial institutions, and certain other foreign non-account investment assets. The assets are reported in U.S. dollars using the end of the taxable year exchange rates.
