With the 2015 FBAR deadline now upon us, what are the possible consequences for Americans with foreign bank accounts who haven't filed?
What is it?
FBAR is an acronym for the Foreign Bank Account Report. It is meant to prevent people from avoiding taxes by hiding their wealth abroad. In practice this means declaring foreign bank accounts by filing FinCEN form 114.
Anyone with one or more foreign financial (such as brokerage) or bank accounts that have an aggregate total balance of over $10,000 in them at any time during the tax year, or anyone with control over such an account or accounts for example as a signatory, is required to file an FBAR. FinCEN form 114 should be filed each year that qualifies.
When is the filing deadline?
For 2015 and previous tax years, the deadline is June 30th of the following year. However for 2016 and subsequent tax years, the filing date will align with federal income tax return filing dates, so April 15th of the year following the tax year if you live in the US, or June 15th if you live abroad. For Americans living abroad, a further filing extension will be available upon request until October 15th.
What are the penalties for not filing?
Penalties for not filing FBARs are more stringent than those for not filing tax returns. There are several levels of penalties, depending on whether the IRS (which has the delegated authority to enforce FBAR violations) considers that failure to file was willful or non-willful.
The lowest level penalty for non-willful failure to file is $10,000 for each year that an FBAR wasn't filed. If the IRS deems that failure to file was willful on the other hand, the penalty is $100,000 or 50% of the balance of the account at the time of the violation. A possible prison sentence may also apply. The penalties are the same for knowingly and willfully filing a false FBAR.
What exactly is the difference between willful and non-willful?
If prosecuting, the IRS has to prove that failure to file (or incorrect filing) was willful, which means proving that someone knew they were meant to file. An example of this might be that they had filed one previously, or if the IRS finds emails in which FBAR was mentioned.
“All in all, then, as tempting as it sounds, just closing your foreign account isn’t a solution. A voluntary disclosure under the IRS program is best.”
- Robert W Wood, Forbes
Yes. The FATCA law, passed in 2010, came into effect in 2014 and obliges foreign banks to report their American account holders to the IRS including their bank balance. As of June 2016, 197,000 foreign financial institutions were signed up to comply. This means the IRS knows about more or less all American financial and bank accounts abroad, including their balances, along with the name and address of their account holders. It can simply cross-reference this data with FBAR filing data.
I didn't know I was meant to file an FBAR. What shall I do?
There is a voluntary disclosure program for Americans living abroad called the Streamlined Procedure that allows people who weren't aware of their filing obligations to catch up with their filing (for both tax returns and FBARs) and pay any back taxes owed without facing penalties. You simply need to file your last three returns and your last six FBARs, and self-certify that your prior non-compliance was non-willful.
The Streamlined Procedure provides a great opportunity for the millions of expats who aren't up to date with their filing to get compliant before the IRS come to them.
If you have any doubts about your situation, or you would like to find out more about the Streamlined Procedure, get in touch and we'll be happy to offer some advice.
With clients in over 150 countries, Bright!Tax is a leading US expat tax services provider for the 9 million Americans living abroad. If you have any questions regarding your tax situation, don't hesitate to get in touch for some advice.