5 FinCEN Form 114 (FBAR) Foreign Account Violations To Know
5 FinCEN Form 114 (FBAR) Foreign Account Violations To Know
When it comes to the FBAR, otherwise known as FinCEN Form 114, one of the main issues U.S. taxpayers come across is that when they are out of compliance, they are at risk for significant foreign account fines and penalties. While there are many different types of international information reporting forms that a taxpayer may have to file each year to report their foreign accounts, assets, and investments, the FBAR is the most common (since it is the most ‘general’ form and includes several different types of foreign accounts, assets, and investments). For taxpayers who are out of FBAR compliance, there are many different types of violations the taxpayer should be aware of if they are filing a late or delinquent FBAR.
Let’s look at 5 common FBAR/foreign account violations and notices.
FinCEN Form 114 Warning (Letter 3800)
If a taxpayer is out of compliance, they are at risk of fines and penalties, but not all taxpayers who are out of compliance will ultimately be penalized by the IRS (even though the FBAR is a FinCEN form, the IRS is tasked with FBAR enforcement). Instead, some taxpayers will receive a letter 3800, which is essentially a warning letter informing the taxpayer that they have missed an FBAR filing requirement and they should get back into compliance.
FBAR Audit
When a taxpayer receives an FBAR audit notice, it is generally because a foreign financial institution reported them to the IRS, and the IRS does not have an FBAR in its records reflecting that specific foreign financial institution account information. It could be because the FBAR was filed, but is missing accounts, or it could also be because the FBAR was not filed at all. Sometimes, the IRS learns about missing FBAR because a whistleblower or other third party submits to an offshore disclosure program and alerts the IRS — but once a taxpayer is under FBAR audit, they lose the opportunity to submit to one of the amnesty programs.
Civil FBAR Non-Willful Violation
When the taxpayer is subject to a civil non-willful violation, the IRS is limited to a $10,000 per year penalty, noting that the $10,000 a year is adjusted for inflation and is currently closer to $17,000. In prior years, the IRS would often try to go after taxpayers for penalties based on each account and not just the form itself, but based on the 2023 Supreme Court case in Bittner, the IRS is now limited to a per-form non-willful FBAR penalty each year and not based on the number of accounts.
Civil FBAR Willful Violation
A civil willful violation is much more serious than a non-willful violation, and the penalties represent the more serious nature of the violation. The IRS can go after taxpayers for penalties upwards of 50% value of the unreported foreign accounts in a single year for a total value of 100% in a multiple year penalty scenario (it was previously 300%, which reflects a 50% penalty per year for the six year statute, but that was scaled back a few years back and is now capped at 100%.) The IRS also reserves the right to penalize taxpayers a minimum of $100,000 per year for the violation, even if that value exceeds the ‘50% maximum value.’ It should also be noted that the $100,000 adjusts for inflation — and is closer to $170,000.
Criminal FBAR Violations
Some taxpayers may become subject to criminal penalties, which can include incarceration and fines. As with most criminal cases, the IRS has to prosecute the case, and the taxpayer must be found guilty. In other words, the IRS cannot take a civil violation and then turn around and use those facts to prosecute a criminal violation unless they go through all the requirements to criminally prosecute the individual.
*Criminal FBAR violations are pretty uncommon it typically only arise in situations where the taxpayer committed other violations, such as tax fraud, tax evasion, money laundering, structuring, etc.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Late-Filing Disclosure Options
If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.
*Below please find separate links to each program with extensive details about the reporting requirements and examples.
Streamlined Filing Compliance Procedures (SFCP, Non-Willful)
The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.
Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)
Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.
Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)
Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.
Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)
Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.
Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)
Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.
IRS Voluntary Disclosure Procedures (VDP, Willful)
For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).
Quiet Disclosure
Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.
Current Year vs. Prior Year Non-Compliance
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.