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IRS FBAR Penalties for Willful and Non-Willful Conduct

If you have a combined total of more than $10,000 in offshore bank accounts, assets or investments you are required to file an FBAR or Foreign Bank Account Report with the IRS each year.  The failure to do so is considered tax evasion, and the IRS has undertaken substantial efforts to work with the US Justice Department under FATCA to force foreign banks, investment houses and tax agencies to disclose all information about US taxpayers.

The list of foreign banks providing direct reporting about US taxpayer accounts to the IRS grows every month, and over 100 Swiss financial institutions alone have already agreed to disclose information on US taxpayers, their accounts and financial activity.  It is simply a matter of time before the IRS has all of the information about your overseas accounts and transactions, no matter where you bank or do business around the globe.

Why Should You Come Into Compliance with IRS FBAR Regulations?

The failure to come into FBAR compliance and report any and all foreign bank accounts, investment accounts, assets and real property to the IRS will result in substantial penalties, fines and interest, and in many cases exposure to criminal tax evasion charges and the genuine prospect of jail time.  The core issue in this discussion is:

willful versus non-willful conduct on the part of the US taxpayer

If the IRS (in its own manner and subjective point of view) determines that you willfully attempted to avoid paying US taxes by secreting money offshore you facea penalty of 50% of the highest aggregate point of all accounts and assets at any point in the year, for six years!  It doesn’t matter how much is in the account today, the IRS will simply use the highest aggregate balance for all of your assets at any point in the 6 year window, and apply a 50% penalty.  In many cases this amount will exceed the present value of the accounts.

Your options are to come into compliance with the IRS through one of two voluntary disclosure options:  OVDP or the Streamlined Option.  Both programs require you to make a “full, honest, complete and transparent” disclosure of all foreign accounts and assets.  The Offshore Voluntary Disclosure Program or OVDP requires you to pay a 27.5% penalty for all previously non-disclosed bank accounts, unless they are on the list of banks the IRS has deemed to have actively worked to help US taxpayers to avoid paying taxes.  If your bank or financial institution is on this list, the penalty is 50%.  Filing under OVDP also relieves the taxpayer of any criminal tax liability (jail time).

Non-willful conduct can be reported using the Streamlined Domestic Offshore Procedures, and limits your exposure to a 5% penalty, or $10,000 per account per year.  If the taxpayer made an honest mistake, or transposed a number incorrectly the IRS may consider ommissions to be non-willful.  A pattern over a number of years will be highly suspect, and the risk of filing using the streamlined option is that the IRS doesn’t accept your “non-willful” status, and you will face the full penalties as if you never made a disclosure, as well as criminal charges that will result in a potential jail sentence.

These risks are serious, immediate and each passing day limits options for hundreds of thousands of US taxpayers.  Once a bank is added to the list your penalty jumps from 27.5% to 50% unless you have filed a disclosure.  If you have offshore assets or bank accounts we encourage you to contact us for a free and substantive consultation at 866-631-3470.

The vast majority of US taxpayers who have hidden money offshore will not qualify for the streamlined program.  Hope is not a strategy.  The IRS has already completed technological data sharing with hundreds of entities around the world, and they have more information on US taxpayers and their offshore activities than we can imagine.  The time to act is now.