What is the Penalty for Failure to File an FBAR?
Similarly to failing to file tax returns, there are a number of potential penalties in Foreign Bank Account Report (FBAR) failure-to-file cases. In this post, we'll take a closer look at the potential penalties in FBAR failure-to-file cases, as well as the thought process the Internal Revenue Service ("IRS") uses before it pursues a case.
Who Must File an FBAR?
Briefly, if a United States person has signature authority over a foreign bank account or a financial interest in a foreign bank account that has a cash value of over $10,000 at any time during the tax year, that person must file a Report of Foreign Bank and Financial Accounts.
Neither of these elements are as straightforward as they seem. Signature authority exists if the bank will act based upon your signature, even if the funds are not yours. Also, you must add up the balances in ALL your foreign financial accounts. If collectively they exceed $10,000, even for one day, an FBAR is required. You can read more about the FBAR filing threshold in another one of our FAQ's linked here.
At up to $12,459 per violation, i.e. per year, the entry-level penalty is quite severe. In fact, the FBAR failure-to-file penalty can be much higher than the 1040 failure-to-file penalty, especially when the tax due is minimal.
Financially, there is a huge difference between willful and non-willful FBAR violations. If the failure-to-file was intentional, the maximum penalty is the greater of $124,588 or 50% of the account's value. Each failure-to-file year is a separate violation, so that could be a lot of money. For example, an account with only $50,000 in it could trigger a penalty of almost $125,000!
In FBAR cases, the IRS looks at willfulness a little differently than the average person. For example, the IRS tends to assume willfulness based upon failure to give complete information to the tax preparer, or failure to read the tax return disclosures that warn of the requirement to report foreign financial accounts. Your behavior may be willful even though you don't think so. It's best to let a tax expert knowledgeable in FBAR matters decide. The wrong call could have dire consequences.
If you thought the civil FBAR willfulness penalty was bad, you should probably sit down before you read about criminal FBAR failure to file violations. In most criminal tax cases, the maximum penalty is $500,000 and/or five years in prison. If the FBAR violation was part of other fraudulent tax activity, and it usually is, the maximum prison term goes to ten years. Additionally, if the IRS assesses a civil FBAR failure to file penalties, it may still initiate a criminal prosecution.
It can be hard to distinguish between a civil and criminal tax violation in any context, including FBAR non-filing. For that reason, a good strategy is to get to the IRS before they come to you. It is rare for the IRS to prosecute a true voluntary disclosure. The civil penalties may just be the price one has to pay to avoid time in jail.