If you’re required to file an FBAR (Foreign Bank and Financial Accounts Report) and fail to do so in a timely and accurate manner, you may face significant consequences, including civil monetary penalties, criminal penalties, or both.
For U.S. persons who discover they should have filed an FBAR in previous years, it’s important to take immediate action. The recommended course of action is to electronically file the overdue FBAR using the BSA E-Filing System. This article will delve deeper into the types of penalties associated with FBAR non-compliance, how these penalties are assessed, and the steps to become compliant.
Understanding FBAR and Its Filing Obligations
The FBAR is a critical reporting requirement for U.S. persons holding foreign bank accounts. This requirement is triggered when the total value of an individual’s foreign financial assets exceeds the reporting threshold of $10,000 at any time during the calendar year. It’s crucial to understand that these assets include not just bank accounts, but also other financial assets held overseas. Failing to meet these filing obligations can lead to significant penalties, as detailed in the sections below.
Civil Penalties for FBAR Non-Compliance: An Overview
The civil monetary penalties for failing to comply with FBAR requirements come with various upper limits, but there is no set minimum. These limits are subject to annual adjustments for inflation, as mandated by the Federal Civil Penalties Inflation Adjustment Act of 1990 and its subsequent amendment, the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. For penalties assessed after August 1, 2016, linked to violations that occurred post-November 2, 2015, the adjusted maximum penalty amounts are outlined in Title 31 of the Code of Federal Regulations (CFR), section 1010.821, under the Penalty Adjustment Table. This section details the inflation-adjusted civil penalties that can be imposed for failing to meet the FBAR reporting and recordkeeping obligations.
FBAR Penalties for Non-Willful Failure to File
Non-willful penalties refer to failures or errors in filing that are not due to intentional disregard of the legal requirement. Under the Civil Penalty Authority of 31 USC 5321(a)(5)(B), individuals who fail to file an FBAR without willful intent can still face significant penalties.
The civil penalty for a non-willful violation, as per 31 CFR 1010.821, can be up to $15,611 (adjusted from the original $10,000 as last amended by statute), effective for penalties assessed on or after January 19, 2023. It’s important to note that criminal penalties do not apply in cases of non-willful failure to file. This penalty structure applies to all U.S. persons, underscoring the importance of understanding and meeting FBAR requirements to avoid these substantial fines.
FBAR Penalties for Willful Violation
In cases of willful violation of FBAR filing requirements, the penalties are significantly more severe, reflecting the intentional nature of the non-compliance. Governed by the Civil Penalty Authority under 31 USC 5321(a)(5)(C), individuals who willfully fail to file their FBARs can face substantial financial consequences. The civil penalty for a willful violation can be as high as $100,000 as specified in 31 CFR 1010.821, or 50% of the balance in the foreign account at the time of the violation. This dual-criterion for determining penalties underscores the seriousness with which the U.S. government treats willful non-compliance in foreign financial account reporting.
FBAR Penalties for Negligent Violation
Negligence penalties in the context of FBAR compliance refer to instances where due care is not taken in adhering to the reporting requirements but without the intent of willful evasion. The Civil Penalty Authority for such violations is outlined in 31 USC 5321(a)(6)(A). In these cases, the civil penalty can be up to the amount specified in 31 CFR 1010.821. It’s important to note that criminal penalties are not applicable for negligent violations. Additionally, this type of violation does not apply to individuals, indicating a focus on entities or organizations that may fail to exercise the necessary diligence in their FBAR reporting obligations.
Criminal Penalties Associated with FBAR Violations
Criminal penalties in the realm of FBAR compliance are reserved for the most serious violations, reflecting the gravity of intentional misconduct. Two primary scenarios can trigger criminal penalties:
- Knowingly and Willfully Filing False FBAR: When an individual knowingly and willfully submits a false FBAR, the consequences are severe. Under 18 USC 1001 and 31 CFR 1010.840(d), the penalties for this violation can include a fine of up to $10,000, imprisonment for up to 5 years, or both. This underscores the importance of accuracy and honesty in FBAR filings.
- Failure to File FBAR or Retain Required Records: If an individual fails to file an FBAR or maintain necessary records, the penalties can be quite stringent. As per 31 USC 5322(a) and 31 CFR 1010.840(b), the punishment for this violation can be a fine of up to $250,000, imprisonment for up to 5 years, or both. Moreover, if this violation occurs in conjunction with other specific legal breaches, the penalties can escalate further.
These criminal penalties highlight the critical nature of compliance with FBAR regulations and the serious consequences of willful neglect or falsification in managing foreign financial accounts.
Common Mistakes in FBAR Preparation for US Expats
When US expats prepare their Foreign Bank and Financial Accounts Report (FBAR), several common errors can occur, often leading to complications and potential penalties. Understanding these mistakes is crucial for ensuring accurate and compliant FBAR filings.
- Unreported Accounts: One of the most frequent mistakes is the failure to report all foreign bank accounts. Expats must remember that all accounts, including those with minimal balances or those not generating income, need to be reported if the aggregate account balance exceeds the $10,000 threshold at any point during the calendar year.
- Federal Tax Returns and FBAR Filing: A common misconception is that filing federal tax returns is synonymous with filing an FBAR. It’s important to note that these are separate requirements. While information about foreign income is reported on federal tax returns, the FBAR is a separate filing that specifically details foreign account holdings.
- Understanding Aggregate Account Balance: Many expats misunderstand the concept of aggregate balance of their accounts. It’s not just the balance of a single account that matters but the total of all foreign accounts. If the combined balance of all accounts exceeds $10,000 at any time, an FBAR must be filed.
- Authority Over Accounts: Another error involves misunderstanding the definition of having authority over accounts. Expats often think they need not report accounts they don’t own. However, if they have signatory authority or control over any foreign account, even if it’s not theirs, it must be reported.
- Negligent Failure to File: Negligent failure, often due to a lack of understanding or oversight, can lead to penalties. This includes inaccuracies in reporting account balances or not filing on time. It’s essential to be thorough and seek professional advice if there’s any uncertainty about the filing process.
By being aware of these common mistakes and ensuring all relevant accounts are accurately reported, US expats can avoid the pitfalls of non-compliance and the resultant penalties. Regularly reviewing and understanding the requirements for both federal tax returns and FBAR filings is key to maintaining compliance while living abroad.
Navigating Delinquent FBAR Submissions
If you’re a U.S. person who has recently realized the need to file Delinquent FBARs for previous years, it’s crucial to address this oversight promptly and correctly. When filing the delinquent FBARs, you can specify the calendar years you’re reporting, including those of past years. Additionally, you’ll have the opportunity to “explain a late filing.” If the IRS determines that the failure to file was due to reasonable cause, and not willful neglect, they will most likely not impose a penalty. This highlights the importance of providing a clear and honest explanation for your late submission.
At 1040 Abroad, we understand that navigating the complexities of FBAR filings can be challenging, especially when dealing with delinquent submissions. To assist you in this process, we offer free tax consultations via email. If you need help or guidance with your FBAR filings, don’t hesitate to contact us. Our expertise ensures that your filings are handled correctly and efficiently. Additionally, we provide FBAR filing and preparation services for a flat fee of $100, offering peace of mind that your financial obligations are being met accurately and in compliance with U.S. regulations.