Foreign Bank Accounts: Penalties for Tax Reporting Violations

U.S. taxpayers with foreign bank accounts must be aware of IRS reporting requirements for these “offshore” accounts. For offshore bank accounts or other foreign financial accounts, the taxpayer will likely need to file a Foreign Bank Account Report (FBAR). Please note that the penalties for failing to file an accurate FBAR can be extremely steep.

An offshore account holder who is accused by the IRS of FBAR violations is facing a serious issue. Not only are the potential financial penalties severe, but they could also face criminal liability for willful violations.

What is an FBAR and Who Must File One?

FBAR is the common shorthand term for FinCEN Form 114, Report of Foreign Bank and Financial Accounts. The FBAR form is filed with the Financial Crimes Enforcement Network (FinCEN), a bureau within the Treasury Department. 

The information that must be disclosed in the FBAR includes the following:

• Foreign bank account balances
• Foreign mutual funds
• Foreign-issued life insurance or annuities
• Financial accounts at foreign branches of U.S. banks
• Foreign stocks or securities held in foreign financial institution accounts

An FBAR must be filed by any U.S. citizen with combined foreign account balances of $10,000 or more at any time during the tax year. The FBAR requirement applies to a person with full ownership, joint ownership, or signature authority over the account. Signature authority means authority to control the account by direct communication with the financial institution. If you have questions or concerns regarding your specific situation, please contact Washington DC tax lawyer Kevin E. Thorn as soon as possible.

FBAR Penalties: Willful v. Non-willful Violations

A taxpayer can incur FBAR penalties for failing to file an FBAR. The type of FBAR penalties will depend on whether the FBAR violation is willful or non-willful. Willful FBAR violations are subject to much stiffer penalties.

Non-willful FBAR Violations: A failure to file an FBAR is considered non-willful if the taxpayer did not know of, and had no reason to know of, their obligation to do so. The penalty for a non-willful violation is $10,000 per annual violation, i.e., $10,000 for each unreported account.

Willful FBAR Violations: The violation is considered willful if the taxpayer intentionally avoided filing the FBAR. The penalty for a willful violation is the greater of (1) $100,000 or (2) 50% of the account value. This penalty is owed for each account, and for every year the FBAR was not filed. The maximum penalty is 100% of the account balance.

Standards for Determining Whether a FBAR Violation is Willful

An FBAR violation can be deemed willful in one of the following ways.

• Lack of Intent or Knowledge: This is the most generally understood meaning of the term “willful.” The taxpayer did not know of the FBAR requirement and did not intend to hide foreign financial assets.
• Willful Blindness: This refers to a situation where the taxpayer did not know of the FBAR requirement, yet they should have known. The taxpayer is said to have remained “willfully blind” to their FBAR filing requirement because they did not want to know of it.
• Reckless Disregard: This standard arises where a taxpayer did not believe an FBAR needed to be filed, but their belief was sufficiently ridiculous to be considered reckless.

Consult a Washington DC Tax Lawyer at Thorn Law Group About Your Potential FBAR Violations

Foreign account holders charged by the IRS with FBAR violations should contact the Thorn Law Group to see how a Washington DC tax lawyer can assist. To schedule a consultation, contact Managing Partner Kevin E. Thorn at 202-349-4033 or ket@thornlawgroup.com.