The Foreign Bank Account Report (FBAR), formally known as FinCEN Form 114, is a crucial filing requirement for U.S. taxpayers with foreign financial accounts exceeding $10,000 in aggregate at any time during the year. Failure to file can lead to significant penalties. This article provides a detailed analysis of how to address missed FBAR filings and explains the distinction between willful and non-willful noncompliance, which determines the applicability of two main resolution process, including the Voluntary Disclosure Practice of the IRS and the Streamlined Filing Compliance Procedures.
FBAR – Filing Deadline and Reporting Obligations
The FBAR must be filed annually by April 15 of the following year, with an automatic extension to October 15. Taxpayers with foreign accounts that collectively exceed $10,000 at any point during the year must report these accounts.
For example, if a taxpayer holds two accounts, one with $5,000 and another with $6,000, the combined value of $11,000 triggers the FBAR filing requirement, even if the balance exceeds $10,000 for just one day.
Schedule B and Additional Reporting Requirements
Taxpayers who have foreign accounts must also complete Schedule B of Form 1040, which includes:
- Reporting interest earned on foreign accounts.
- Declaring whether the taxpayer has a financial interest or signature authority over foreign accounts.
Failure to file Schedule B accurately may indicate noncompliance and complicate attempts to resolve missed FBAR filings.
Willful vs. Non-Willful Noncompliance
The IRS categorizes noncompliance into two types based on intent:
- Willful Noncompliance: Generally occurs when a taxpayer intentionally or recklessly fails to report foreign accounts, such as knowingly omitting accounts on FBAR or tax returns.
- Non-Willful Noncompliance: Happens due to unintentional errors, oversight, or lack of awareness of reporting obligations.
It must be clarified that the facts and circumstances of the specific case determine the willfulness o non-willfulness. The result of such determination controls the appropriate pathway for resolving the issue and the severity of penalties.
Resolving Willful Noncompliance: Voluntary Disclosure Practice
Taxpayers who willfully failed to file FBARs should use the Voluntary Disclosure Practice, a process offered by the IRS to encourage compliance while mitigating criminal prosecution risks. The process involves multiple steps, beginning with preclearance to determine eligibility for the program:
- Submitting a Preclearance Request:
- Taxpayers must file a preclearance request with the IRS Criminal Investigation (CI) unit to request admission into the program (Form 14457).
- The IRS uses the information provided on the request to determine if the taxpayer is eligible for voluntary disclosure, focusing on whether the taxpayer’s case is already under audit or investigation.
- Receiving Preclearance Approval:
- If the IRS grants preclearance, it indicates that the taxpayer may proceed with a formal disclosure. However, preclearance is not a guarantee of acceptance into the program, as full disclosure and compliance with additional requirements are necessary.
- Submitting a Voluntary Disclosure Package:
- After preclearance approval, the taxpayer must provide:
- Amended or delinquent tax returns for the applicable years.
- All missing FBARs.
- A narrative explanation detailing the willfulness of the noncompliance and the steps taken to come into compliance.
- Paying Penalties:
- Willful violations carry substantial penalties, often up to 50% of the highest aggregate account balance per year or $100,000 per violation, whichever is greater.
- Participation in the Voluntary Disclosure Practice does not eliminate penalties but can significantly reduce the risk of criminal prosecution and allow for the possibility of negotiating penalty terms.
Resolving Non-Willful Noncompliance: Streamlined Filing Compliance Procedures
For non-willful cases, the IRS offers the Streamlined Filing Compliance Procedures, a more lenient option. There are two variations:
- Streamlined Domestic Offshore Procedures (SDOP): For U.S. residents:
- File three years of amended or delinquent tax returns.
- File six years of delinquent FBARs.
- Certify non-willfulness on Form 14654.
- Pay a reduced penalty equal to 5% of the highest aggregate account balance.
- Streamlined Foreign Offshore Procedures (SFOP): For non-residents:
- Similar requirements as SDOP, but no penalty is imposed.
- Include a statement clarifying residency and non-willfulness, using form 14653.
Both procedures require a clear, concise explanation of the taxpayer’s non-willful conduct, supported by documentation.
Relevance for Taxpayers
FBAR noncompliance can lead to severe penalties, but resolution pathways exist based on the nature of the violation. Timely action is critical:
- Taxpayers with willful violations should opt for the Voluntary Disclosure Practice to avoid criminal exposure.
- Non-willful taxpayers can benefit from the streamlined procedures, reducing penalties and restoring compliance.
Consulting a tax attorney ensures that taxpayers navigate these processes effectively and minimize legal and financial consequences.