If you are a U.S. 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 U.S. 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 on or before June 30th of the succeeding year.
Potential FBAR penalties
• Generally, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50% of the total balance of the foreign account at the time of the violation.
• Alternatively, non-willful violations that the IRS concludes are not due to reasonable cause are subject to a penalty of up to $10,000 per violation.
• In addition to the failure to file and failure to pay penalties, the IRS said that other civil penalties may arise, including the accuracy-related penalty, fraud penalty and the other information reporting penalties.
• No penalties are imposed if the IRS determines the violation was due to reasonable cause.
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 include:
• Whether the taxpayer’s background and education indicate that he should have known of the FBAR reporting,
• Whether there was a tax deficiency related to the unreported foreign account, and
• Whether the taxpayer failed to disclose the existence of the 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 meet the tax obligation and the subsequent compliance;
• Circumstances beyond the taxpayer’s control.
What the IRS Considers as Facts and Circumstance that 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 recent changes in the tax law that the taxpayer could not reasonably be expected to know;
• Level of complexity of a tax or compliance issue.
* * *
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.
* * *
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].