If you have financial interest in a foreign financial account such as a mutual fund, trust or bank account exceeding certain thresholds, you will be required to report the account annually by electronically filing a form called a Report of Foreign Bank and Financial Accounts. You only need to file this form known as the “FBAR” if all your accounts combined exceed $10,000 at any time during the calendar year.
If You Failed to File an FBAR
If you failed to file an FBAR for the previous year and did nothing to rectify the situation, you could face civil and criminal penalties. You could also accrue more penalties in the future. It is important to know that foreign banks usually turn over information under the Foreign Account Tax Compliance Act (FATCA). Also, someone at the bank where your foreign account is located can disclose information to the IRS as a whistleblower to collect a reward. There are also instances where former employees or ex-spouses reveal this type of information exposing the taxpayer’s obligation.
You cannot just close your foreign bank account and hope that the penalties will go away. While you won’t owe anything in the future, it doesn’t rectify the violations that occurred in the previous years. In addition, the IRS might deem such as action as an attempt to hide the violation. If you choose to wire the money back to the United States, you should know that federal authorities still monitor wire transfers, particularly larger ones over $10,000. This could be a risky endeavor as well.
How to Achieve Compliance
The IRS is giving U.S. taxpayers the opportunity to come clean about offshore accounts and make use of reduced penalties, which can significant bring down what taxpayers would otherwise be subjected to, should the IRS become aware of their offshore accounts. If your failure to file an FBAR in a timely manner is not willful, you may wish to consider the Streamlined Filing Compliance procedures, where you will end up paying a 5 percent penalty on your total account balance instead of 27.5 percent.
If you are a “willful non-filer,” or if you deliberately did not disclose your offshore accounts, you may still be able to achieve compliance. You may be able to file amended returns reporting the income and pay a flat 27.5 percent penalty as opposed to paying 50 percent.
You will need to provide copies of tax returns from previous years covered by the voluntary disclosure. You also need to complete accurate offshore-related information returns for the all those tax years. You will be required to be cooperative in providing information about all your offshore accounts and banks.
If you are dealing with foreign bank account reporting issues, our Virginia tax attorneys can explain your options and work with you to achieve the best possible outcome in your case. Dealing with the IRS can be a stressful and arduous experience. It is important that you file the correct paperwork in a timely manner so you are not paying additional penalties. Call us to schedule a free initial consultation.