Tax laws and financial reporting requirements can be confusing, particularly when you are an American living abroad. It can be very easy to miss deadlines, file the wrong forms, or to fill out the forms incorrectly. The requirements and instructions for late FBAR forms are frequently unknown or misunderstood.
What Are FBAR Forms?
FBAR refers to Foreign Bank and Financial Accounts Reporting. The forms were designed to prevent people from putting money in offshore banks to evade paying taxes. One of the primary forms is not filed with the Internal Revenue Service, but with the U.S. Treasury Department’s Financial Crimes and Enforcement Network, also known as FinCEN. Money in any foreign financial institution must be reported on FinCEN Form 114.
However, bank accounts aren’t the only asset that may be subject to reporting on Form 114. The following must also be included:
- Stock held by a foreign financial institution
- Assets held in a foreign branch of a U.S. financial institution
- Other foreign financial assets like mutual funds, life insurance or an annuity contract
Other forms are filed with your tax return to the IRS. They include Schedule B Part III of your tax return and possibly Form 8938. Schedule B asks for the country where each account is located. Form 8938 is for specified foreign financial assets when the total value of the assets exceeds certain thresholds.
Who Is Required to File FBAR Forms?
If you meet any of the following criteria, regardless of where you reside, you are subject to filing a FinCEN Form 114:
- You are a U.S. citizen, green card holder or resident alien.
- You are the owner or beneficiary of an account, or you have control of the distribution of funds in the account.
- Your combined balance in your foreign accounts exceeds $10,000 at any point during the calendar year.
If you just realized that you meet the criteria but have not yet reported your foreign assets, you can still rectify your mistake. You can file a late FBAR form, whether it is days or years past due.
What Are Some Common Filing Mistakes?
Many people are not familiar with the FBAR regulations or qualifications, and therefore fail to file. Others may be familiar with them but may have qualified at some point in the year and not realized it. Two prevalent misconceptions lead to mistakes. One is that the $10,000 limit is not just for one account but the combination of all accounts. The other misconception is that life insurance policies, pension funds or inheritance are not subject to reporting requirements.
What Are Some Penalties Associated With Late FBAR Forms?
Even though Form 114 is filed with FinCEN, penalties are assessed by the Internal Revenue Service. The penalties could vary based on whether the failure to file was willful or non-willful. If you knew that your legal duty was to file, but you did not, you are in willful violation. If you were unaware of the filing requirement, you must prove to the IRS that your failure to file was non-willful.
There is no penalty for filing a late FBAR form. However, if you have not submitted your forms by the deadline, you can be assessed a non-filing penalty. The magnitude of the penalty can be up to 50% of the value of the accounts on the date of the missed deadline, based upon the combined account balances. In other words, the more money was not reported, the higher the penalty up to a maximum of $10,000 per non-willful violation or $100,000 for each willful violation.
How Do I File Late or Corrected Forms?
Even if you have reported your foreign assets on your tax return, you are still required to file Form 114. However, you will not be subject to penalties in that case. When you have missed the filing deadline, you can file a late FBAR form if you meet the following criteria:
- You have not yet filed an FBAR FinCEN Form 114.
- You are not currently subject to a civil examination or a criminal investigation by the IRS.
- You have not yet received a late FBAR notice from the IRS.
There are two options for filing a late FBAR form. You can submit them online yourself via BSA’s online filing portal, or you can use streamlined filing compliance procedures. The former is the simplest, but you must meet the criteria to use the online filing option.
BSA’s Online Filing Portal
Three criteria qualify you to file online with the IRS. If any of the following applies, you may submit your late FBAR form on BSA’s online filing portal with little chance of penalty:
- If you were unaware of your obligation to file FBAR forms, or if there is a legitimate reason why you did not or could not file
- If you have already reported your financial accounts and paid taxes on your U.S. tax returns that should have been reported on the FBAR form
- If you’ve not yet been contacted about a late form and you are not under civil examination or investigation by the IRS
Streamlined Filing Compliance Procedures
Streamlined filing compliance procedures are available for those who have a more complex set of circumstances. If you meet any of these criteria, you may qualify:
- Your mistake was unwilling and unknowingly made
- You have made FBAR filing mistakes in the past
- You have not yet filed all your U.S. tax returns or paid all the tax due on your foreign assets
With this method, you can file up to three years of late tax returns and six years of FBAR statements without incurring a non-filing penalty. The process is complicated and may be best handled with the help of a tax professional experienced with late FBAR filings.
Tax Help for Owners of Offshore Assets
Silver Tax Group specializes in dealing with tax issues relating to offshore assets. Our experienced team has over 40 years of federal tax defense experience. If you have questions about your federal filing obligations or need help with tax issues, please contact us today.