Our offices have handled many cases of U.S. taxpayers, expatriates, and foreign nationals and spouses who live and work in the United States, with offshore accounts, assets, investments, business interests, or income. Many were not aware the U.S. taxes all income, worldwide. U.S. taxpayers are required by law to understand and comply with all taxation-related requirements, including the FinCEN Form 114 (FBAR) and many IRS disclosure forms. Unfortunately, ignorance of FBAR reporting and worldwide income disclosure requirements is no excuse for a U.S. taxpayer.
Key Takeaways of Ignorance of FBAR Reporting and Worldwide Income Disclosure is No Excuse for a U.S. Taxpayer:
- Many U.S. taxpayers assume that if they did not know about a reporting requirement, they cannot be penalized for failing to comply. That assumption is both erroneous and financially dangerous.
- The United States taxes its citizens and qualifying non-citizen residents on their worldwide income, regardless of where they live or where income is earned or realized.
- Foreign financial accounts must be reported on the FinCEN Form 114 (FBAR) if aggregate balances of all financial accounts exceed $10,000 at any time during the year, even for a single day.
- The Internal Revenue Service has established guidelines, patterns, and other actions that distinguish the potential line between non-willful conduct and willful violations.
Many U.S. Taxpayers Believe Ignorance or Misunderstanding is a Valid Excuse
Many U.S. taxpayers assume that if they did not know about a reporting requirement, they cannot be penalized for failing to comply. That assumption is both erroneous and financially dangerous. Under U.S. federal law, ignorance of FBAR reporting and worldwide income disclosure does not protect a U.S. taxpayer from serious legal and financial consequences. U.S. taxpayers are required by law to understand their reporting and filing obligations under those laws.
The United States taxes its citizens and qualifying non-citizen residents on their worldwide income, regardless of where they live or where income is earned or realized. In addition to filing an annual tax return, qualifying taxpayers must also disclose foreign financial accounts on the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR (FinCEN Form 114). Failure to comply with FinCEN FBAR reporting requirements can trigger significant civil penalties, as well as potential criminal exposure.
Taxpayers should understand several key principles:
- U.S. citizens are taxed on worldwide income, even if residing abroad
- Lawful permanent residents (green card holders) are subject to the same worldwide reporting rules.
- Foreign nationals who live or work in the United States, or qualify as U.S. taxpayers, are also subject to these requirements.
- Foreign financial accounts must be reported if aggregate balances of all financial accounts exceed $10,000 at any time during the year, even for a single day.
- Signature authority over an offshore account can trigger reporting obligations, even if the funds are not personally owned.
Misunderstanding FinCen FBAR Reporting Requirements is Unfortunately Quite Common
The $10,000 FBAR reporting threshold is frequently misunderstood. The requirement applies to the combined aggregate value of all offshore accounts. If the total value exceeds $10,000 on any single day during the calendar year, an FBAR filing with FinCEN is required. Many taxpayers mistakenly believe that each account must exceed $10,000 individually. That is incorrect.
Consider a common scenario. A worker or soon-to-be spouse relocates to the United States from Europe, while retaining several bank accounts in their native country. In addition, that individual may have signature authority over accounts belonging to their parents or other family members. Account balances fluctuate over time. Without realizing it, the aggregate value crosses the reporting threshold. Years pass without required FBAR filings. When discovered, the consequences can be substantial.
Civil FBAR penalties can include:
- Non-willful penalties assessed per violation
- Willful penalties that may reach the greater of $165,353 or 50% of the account balance per violation. Non-willful violations usually result in a penalty of $16,536 per FBAR report violation.
- Interest on unpaid tax liabilities
- Accuracy-related penalties
- Potential referral for criminal investigation in egregious cases
Is the Failure to Report Income Willful or Non-Willful?
The Internal Revenue Service has established guidelines, patterns, and other actions that distinguish the potential line between non-willful conduct and willful violations. Under the concept of “willful blindness,” a taxpayer who consciously avoids learning about reporting requirements may still face severe penalties. Ignorance of FinCEN FBAR reporting and worldwide income disclosure is not a defense when the IRS believes a taxpayer has not complied with clear obligations under the law.
Some taxpayers attempt to resolve noncompliance through the Streamlined Filing Compliance Procedures. These programs are designed for individuals whose failure to report was non-willful. Associated submissions must be structured in a specific manner, and the U.S. taxpayer must certify the non-willful nature of their conduct under penalty of perjury. IRS acceptance is not required, and the agency carefully reviews each submission. Failure to fully meet program requirements carries significant financial and even legal risk.
Key considerations when considering the streamlined procedures include:
- Analysis to determine whether prior returns were accurate and complete.
- Ensuring income from foreign accounts was properly reported.
- The number of years of noncompliance.
- The source and documentation of foreign funds.
- The taxpayer’s knowledge and intent during the period in question.
Seek the Experienced Insight and Recommendations of an Experienced International Tax Attorney
For U.S. taxpayers who are concerned about potential criminal exposure, the guidance of our experienced international tax attorney, Janathan L. Allen, can help to determine the best path to resolution. Be sure to ask about the protections of the attorney/client privilege. There is often a framework for disclosure in exchange for reduced risk of prosecution, however, financial penalties can be substantial. Choosing the correct approach depends on the specific facts, financial history, and level of risk.
It is also important to recognize that FinCEN FBAR obligations are separate from IRS and other international reporting requirements. Forms such as the IRS Statement of Specified Foreign Financial Assets (Form 8938) or IRS Form 3520 or 3520-A may apply in addition to FBAR filings. Overlapping reporting obligations increase the complexity and the potential for penalties.
The central issue is this: Ignorance of FBAR reporting and worldwide income disclosure is no excuse for a U.S. taxpayer. U.S. tax law expects full disclosure of foreign financial accounts and worldwide income. The IRS has substantially increased its ability to obtain information from foreign financial institutions through international agreements and data sharing. What used to be an onerous human investigative task is now an easy process due to the agency’s implementation of advanced data processing systems and Artificial Intelligence applications. The likelihood of undisclosed accounts remaining hidden has all but evaporated in the past few years.
If you, as a U.S. taxpayer, have offshore income, foreign accounts, signature authority over overseas funds, or unreported foreign income, take proactive steps to resolve the issue(s) at hand before matters become much worse. Waiting for a notice from the IRS limits available options and can increase financial and even legal exposure.
Early assessment allows for planned, structured, and strategic correction and compliance.
Ignorance of FBAR reporting and worldwide income disclosure may explain how a problem arose, but it does not eliminate liability. Careful review of your situation, based on an accurate reconstruction of financial history, and the experienced guidance of an experienced international tax attorney can help determine the appropriate path toward compliance while minimizing unnecessary risk.
Ignorance of FBAR reporting and worldwide income disclosure requirements is no excuse for a U.S. taxpayer. We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Janathan L. Allen, APC and Allen Barron, Inc. and contact us or call today to schedule a free consultation at 866-631-3470. Gain peace of mind and the knowledge of your responsibilities as a US taxpayer, and how to reduce your exposure to an IRS audit or the potential for criminal tax evasion charges.
