What Every US Expat Should Know About FBAR Penalty Mitigation
The IRS requires the Report of Foreign Bank and Financial Accounts, FinCen 114 (FBAR), when a U.S. person has one or more foreign financial accounts with an aggregate value greater than $10,000. Failure to do so can result in an audit that can lead to excessive fines and possible imprisonment.
Four Things You Should Know About FBAR Penalty Mitigation
- FBAR penalties are staggering and unique. Unlike IRS income tax penalties authorized under Title 26, FBAR penalties are provided for under Title 31 and not based on tax avoided, but rather account size.
- There are two types of FBAR penalties: Ugly or disastrous. The “ugly” FBAR penalty is $10,000. This penalty is typically assessed if you can prove your conduct was merely negligent. The “disastrous penalty” is the greater of 50% of account value or $100,000, if the IRS feels you purposely hid assets. Both penalties can be assessed multiple times.
- Court is an option if you want to fight FBAR penalty assessments. You can have your day in court, but most taxpayers elect to initially file an appeal with the IRS. Your other option is to pay all assessments, and then file a suit for refund in US District Court.
- The IRS is much easier to deal with when inside the Offshore Voluntary Disclosure Program (OVDP). The main purpose of the FBAR OVDP is to minimize tax, penalty and interest, and to avoid possible criminal prosecution. Secondly, OVDP limits the number of years for which the taxpayer is responsible to eight years. This is why it is extremely important (and advisable) to use the OVDP to limit the FBAR penalty and exposure to tax, penalties and interest.
Do You Qualify for FBAR Penalty Mitigation?
According to the IRS, a taxpayer that meets the following threshold requirements qualifies for the FBAR penalty mitigation:
- The person has no history of past FBAR penalty assessments and (for violations after October 22, 2004) the person has no history of BSA or criminal tax convictions for the preceding ten years;
- No money passing through any of the foreign accounts associated with the person are from illegal sources or were used to further criminal purposes;
- The person cooperated during examination (i.e., IRS did not resort to summons power); and
- The IRS did not sustain a civil fraud penalty for underpayment of tax for the year in question due to failure to report income related to any foreign account.
In the case of a non-willful violation, the penalties are mitigated in varying levels from 1-3, dependent on the balances in the accounts. In the case of a willful violation, the IRS will impose financial penalties in varying levels 1-4, but with much higher fees.
Due to the complexities of FBAR mitigation, a taxpayer should seek legal counsel from an experienced and highly skilled U.S. tax attorney whose practice is focused on resolving U.S. expat tax issues.