For U.S. taxpayers with foreign bank accounts, the annual June 30 deadline for reporting those accounts to the IRS is fast approaching. A recent memo from the tax agency provides new guidance on the penalties to be imposed on those who fail to report offshore accounts. Although the guidance softens the notoriously harsh civil penalties for FBAR violations, the consequences can still be steep - especially for those whose noncompliance is found to be willful and criminal.
All U.S. taxpayers with foreign financial accounts totaling $10,000 or more at any point during the year must disclose those assets to the IRS by filing a Report of Foreign Bank Account (FBAR). The reporting requirement applies not only to offshore bank accounts, but also foreign brokerage accounts, gold bullion holdings, mutual funds, cash-value life insurance and other financial accounts.
Filing an FBAR is a separate and distinct process from filing income taxes, and must be completed even if the foreign accounts generated no interest dividends or other income during the year. In most cases, the filing requirement applies to anyone with signature authority over the account or accounts in question, with or without a financial interest.
Because of how the federal tax code is written, it was once possible for people with unreported foreign accounts to face civil penalties that exceeded the value of the accounts themselves, even if they avoided criminal charges. That law is still in effect but the new guidance establishes caps on the civil penalties for both willful and non-willful FBAR violations.
Under the new IRS guidance, non-willful failure to file an FBAR will be penalized according to a three-tiered structure that allows for discretion on the part of the tax examiner based on the individual circumstances involved in the violation. In most cases, the recommended penalty for non-willful FBAR violations will be $10,000 per year. However, the memo also provides alternative recommendations for more lenient and more stringent penalties. The more lenient tier recommends a single penalty of $10,000 to cover all years of noncompliance, while the more stringent option provides for penalties of $10,000 for each individual unreported account per year.
Meanwhile, for U.S. taxpayers whose failure to file an FBAR is found to be willful, the civil penalty structure outlined in the memo is still harsh at 50 percent of the value of the accounts in most cases, up to a maximum of 100 percent in certain situations. This penalty is only applied once, not every year, as allowed under the statute. For those facing criminal charges for failing to file an FBAR, the penalties can be far more severe, including hundreds of thousands of dollars in fines as well as potential prison time.
The FBAR filing requirement applies not only to U.S. citizens who meet the foreign asset threshold, but also to certain non-citizens including green-card holders and others who spend substantial quantities of time in the United States. Business entities such as corporations, partnerships and limited liability companies are also subject to foreign bank account reporting requirements, as are estates and trusts formed under U.S. law.
If you have undisclosed foreign financial accounts, it is very important that you discuss your situation in detail with an attorney who is experienced in matters of complex tax litigation and criminal defense. Contact the Law Offices of Horwitz & Citro, P.A., for advice about the options that are available to help you resolve the situation while minimizing your personal, financial and legal risks.
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