Understanding FBAR Penalties
Becoming an expat can enhance your life in many ways. For many, it may mean you’re no longer beholden to a standard 9 to 5 schedule, and instead free to explore different cities and countries, on your schedule. But, while working remotely offers more flexibility and freedom, it also comes with some important tax reporting responsibilities.
Filing an FBAR every year (if eligible) is one of those requirements. Knowing when and if you’re expected to file this report can help you avoid FBAR penalties. It can also prevent an unwanted dialogue with the US Treasury Department.
Not sure if you’re required to submit an FBAR filing? Don’t worry. We’ll walk you through the basics of what an FBAR is and help you understand if you’re required to file and when, so you can avoid FBAR penalties.
What is the FBAR?
The FBAR stands for Report of Foreign Bank and Financial Accounts. It’s a form some US expats must submit each year if they hold foreign bank accounts over a certain amount. It’s a separate filing from your US tax returns (which many US expats must also file), and has different requirements and deadlines.
Why are US expats required to file an FBAR? For US taxpayers living and banking in the US, the IRS has immediate access to information about their banking, and therefore income, history. This allows the IRS to keep an eye on any potentially unreported income. On the other hand, for US taxpayers living abroad, the IRS doesn’t have the same visibility and uses the FBAR report as a means to obtain similar oversight. The FBAR captures your foreign bank account information, to ensure you’re paying the appropriate US taxes. It’s primarily required to prevent tax evasion – but not every US expat will need to file one.
If you do need to turn in an FBAR, you’ll fill out and submit FinCEN Form 114 online. The US Financial Crimes Enforcement Network, also known as FinCEN, oversees the electronic FBAR filing process.
Am I required to file an FBAR?
Great question. While nearly all US expats must file US tax returns, FBARs have different qualifications. In general, you need to file the FBAR if you meet these two criteria:
- You have a financial account outside of the United States AND
- This foreign financial account had an account balance of $10,000 or more during any point in the previous year
For example, let’s say you’re a US expat with a bank account in Italy that had $12,000 in the account last September. In this situation, you do need to file an FBAR.
The account balance rule also applies to multiple foreign bank accounts. If the total of your foreign accounts was over $10,000 – say, you had two bank accounts in France with $6,000 in each – then you’re required to file an FBAR this year because you held a total of $12,000 in financial accounts abroad.
You’re required to submit a FBAR for any foreign financial accounts including bank accounts, brokerage accounts, and pension accounts that have more than $10,000 throughout the tax year.
There are a few exceptions to this requirement. If your account is a foreign retirement account, like an IRA, for instance, you may be exempt from filing the FBAR. In addition, if a foreign government owns your foreign bank account or the account is a nostro account, you do not need to file.
Some of the requirements and exemptions for filing your FBAR can be murky, so we recommend chatting with a Bright!Tax CPA if you have any questions. Our CPAs can help you avoid FBAR penalties by finding out if you’re required to file, helping you file on time or helping to catch up if you’re behind.
When is the FBAR deadline?
The FBAR deadline is technically April 15th (this year it was April 18th), but US expats have some breathing room. If you haven’t filed your FBAR yet, you have until October 15th, 2022. This extension is automatic – meaning, you don’t have to file a form or request it – and you won’t incur penalties as long as you file by this date.
Bright!Tax can work with you to make sure you meet the FBAR deadline to avoid penalties. If you need an extension, connect with one of our CPAs to file one ahead of the deadline.
How does the US government know if you have a foreign bank account?
You may be wondering how likely it is for the US to even find out you have a bank account outside of the country. But it’s actually easier than you might think, thanks to FATCA. The Foreign Account Tax Compliance Act, passed in 2010, requires foreign financial institutions to report accounts of US citizens and expats to the US government. There are steep penalties for foreign financial institutions that do not comply when they trade in US markets.
It’s likely that your foreign financial institution is reporting your bank account to the US government each tax year. That means, the US knows you have a foreign bank account and if you carry a balance of more than $10,000, you’ll need to file a FBAR. Not filing could also result in individual penalties. We recommend getting ahead of any potential penalties by filing on-time. If you’re not sure if you need to file, one of our Bright!Tax CPAs can help.
What are FBAR penalties?
If you owe the US a Foreign Bank Account Report and you do not submit it, the US may charge you penalties. Penalty amounts can vary and often depend on whether you willingly or unwillingly did not file. Typically, the US government charges higher penalties if you willingly fail to file. But, even if you weren’t aware of the filing rules, the US still charges penalties for late or missing FBARs.
Typically, the standard non-willful penalty is $10,000 per missed tax year. Willful penalties can run much higher, costing hundreds of thousands of dollars. But ultimately, the penalty amount depends on your particular case. The good news is, thanks to tax amnesty programs, you can catch up on past-due FBARs, to get proactive and avoid expensive potential penalties.
Tax amnesty programs for filing past-due FBARs
If you suspect you owe the US government an FBAR for a prior filing year, there are tax amnesty programs in place. US expats could avoid penalties and catch up on past-due FBARs through the Streamlined Procedure or the Delinquent FBAR submission procedure.
If you haven’t filed FBARs or tax returns, follow the Streamlined Procedure
The IRS launched the Streamlined Filing Compliance Procedures more than a decade ago to help US expats catch up on their past-due tax returns and FBARs without fear of penalty. Many US citizens traveling the world aren’t even aware they owe the US government tax returns and FBARs. This process makes it easier to come forward and catch up – a win-win for everyone.
The Streamlined Procedure is a tax amnesty program that’s usually best for US expats who are behind on their tax returns. It also allows you to file past-due FBARs.
Here’s how the Streamlined process works:
First, you must truthfully state that your reason for not filing an FBAR (or tax return) was due to non-willful negligence. In other words: you simply didn’t know you needed to file. Then, you can file up to three past-due tax returns and six FBARs (if applicable) without worrying about penalties and fines. You’ll need to pay any taxes you owe, of course, but you can apply eligible deductions and credits to your tax bill to reduce the total amount you’re on the hook for.
The IRS offers a webinar on how to complete your forms using the Streamlined Procedure that walks you through each step of the process. Bright!Tax can also help you navigate the Streamlined Procedure, while answering questions you have along the way.
Lastly, if the IRS has reached out to you regarding FBAR penalties or missing tax filings or bills, you may no longer qualify for the Streamlined Procedure. In this case, we recommend chatting with a Bright!Tax CPA to discuss the best option for your particular tax situation.
If you only owe FBARs, follow the Delinquent FBAR Submission Procedure
If your tax returns are up-to-date, but you think you may owe the US government past FBARs, you can avoid penalties through the Delinquent FBAR Submission Procedure. This process is best for US expats who do not need to file past tax returns but do need to submit previous FBARs.
You only qualify for this tax amnesty program if you’re behind on your FBAR filing because of non-willful compliance. This means you did not know you had to file a past dueFBAR.
To get started, you’ll write a statement explaining why you’re behind on your FBAR filings. Then, you must file any previously owed Reports of Foreign Bank and Financial Accounts online with FinCEN. You can file by mail in some cases, by writing to the Financial Crimes Enforcement Network and requesting a mail-in form. However, filing electronically is easier and typically faster.
You won’t owe any late penalties, as long as your previous tax returns were correct and show you paid US taxes on any income earned and stored in your foreign financial accounts. Bright!Tax can help you navigate the delinquent FBAR submission procedure and file any past due FBARs.
Like the Streamlined Procedure, if FinCEN previously contacted you regarding missed FBAR filings, you may not qualify for this tax amnesty program. Don’t worry. Chat with a Bright!Tax CPA to get advice on the best way to move forward.
Filing your FBAR to avoid penalties
Whether you’re filing previous FBARs or your 2021 FBAR, the online process is very straightforward. First, you should gather your bank statements and tax paperwork for all foreign accounts qualifying for FBAR filing. Then, you’ll log onto the FinCEN website to file your FBAR. You’ll attach your account paperwork, along with the name on your account, balance information, the account number, and the name and address of the foreign bank.
From there, you’ll sign and submit your form. If you’re married, you can file a joint FBAR for the accounts you and your partner hold. Only one partner needs to submit this consolidated report – though you will both sign this form.
If you have questions or want help filing your FBAR, through one of the tax amnesty programs or the normal process, a Bright!Tax CPA can assist. Reach out today to get started.
Bright!Tax can help prevent FBAR penalties
No one wants to get stuck with penalties or fines for not adhering to tax and other reporting requirements. As a US expat, your reporting requirements are a bit more complicated than typical citizens. Get ahead of the FBAR filing deadline and find out if you’re required to file this year (or for previous years) to prevent filing penalties from accruing.
As a digital nomad, Bright!Tax knows you have a lot on your plate. From travelling to managing your own contract or small business, we know digital nomads work hard. That means, you may not always have the time to handle US reporting on your own. One of our Bright!Tax CPAs can help you better understand your reporting requirements as a US digital nomad. Reach out to us today to learn more and prevent FBAR penalties.