IF you are a US citizen (or dual citizen) residing outside the U.S. but do not report your foreign accounts, you may be subject to harsh penalties—penalties that are more severe than you expect, penalties that can even exceed balances in your accounts. It is therefore critical that you learn the new rules for FBAR (Report of Foreign Bank and Financial Accounts) to determine if you should report your offshore accounts.
Background on FBARs. Each US person who has a financial interest, signature, or other authority over any foreign financial accounts, including bank and securities accounts with an aggregate value of more than $10,000 at any time during the calendar year, in a foreign country, must report in each calendar year by filing an FBAR Form FinCEN 114 with the
Department of the Treasury.
FBAR penalties.
• The IRS may assess a civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause.
• For willful violations, the inflation-adjusted penalty may be the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each violation.
Reasonable Cause for Failure to File FBAR:
Factors weighing in favor of a determination that an FBAR violation was due to reasonable cause include:
• Reliance upon a professional tax advisor who was informed of the existence of the foreign account.
• That the unreported account was established for a legitimate purpose and there were no indications of efforts taken to intentionally conceal the reporting of income or assets, and
• That there was no tax deficiency (or there was a tax deficiency but the amount was de minimis).
Factors weighing against such a determination that an FBAR violation was due to reasonable cause:
• Whether taxpayer’s background and education indicate that he should have known of FBAR reporting,
• Whether there was a tax deficiency related to the unreported foreign account, and
• Whether the taxpayer failed to disclose the existence of account to the person preparing his tax return.
Generally, reasonable cause relief is granted when the taxpayer can demonstrate to the IRS that he/she exercised ordinary business care and prudence but nevertheless failed to meet the tax burden. Factors demonstrating whether or not ordinary business care and prudence were exercised include:
• Reasons provided for failing to meet the tax obligations;
• Taxpayer’s compliance history;
• Length of time between the taxpayer’s failure to file and the subsequent compliance;
• Circumstances beyond the taxpayer’s control.
What IRS Considers as Facts and Circumstance to determine Reasonable Cause for Failure to File FBAR:
• The taxpayer’s education;
• Whether the taxpayer has been previously subject to the tax;
• Whether the taxpayer has been penalized before;
• Whether there were changes in the tax law that taxpayer could not reasonably be expected to know;
• Level of complexity of a tax or compliance issue.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].