It is common for a US taxpayer to ask “what happens if you don’t file an FBAR or a Form 8938, Statement of Specified Foreign Assets with the IRS? Why do I have to worry about filing an FBAR in San Diego or anywhere in the US, and what happens if I don’t?”
In many cases, these questions come from Ph.D.’s and highly educated foreign nationals working here in the United States. They still have homes, property and other investments in their native country, as well as bank accounts. Most are surprised to learn they are required by US law to file an FBAR – even if they’ve owned these assets and accounts for several years before coming to the US.
Many Americans believed offshore investments and bank accounts helped to hide income and assets from the IRS. The concept of the “Swiss Account” was legendary until the beginnings of FATCA enforcement in 2014. The Swiss banks were the first to face the legal and financial wrath of the US Department of Justice. Since then, the world has changed.
What happens if you don’t file an FBAR with FinCEN or an IRS Form 8938 with the IRS to disclose offshore accounts, assets, and investments? What’s the worst thing that can happen? Why should you be concerned about disclosing offshore financial accounts, assets and even cryptocurrency holdings?
The IRS presently receives a trove of electronic information regarding US taxpayers’ financial accounts and transactions worldwide. Banks, investment houses, cryptocurrency exchanges, and financial institutions worldwide must provide extensive electronic reporting directly to the IRS about US taxpayers’ accounts.
Previously, the IRS did not have the resources to comb through this vast field of data and information. However, the agency has recently upgraded data processing equipment and deployed Artificial Intelligence to assist with mining this trove of information and tying each piece of information back to a unique US taxpayer ID or social security number. The next step is to compare that information with what the taxpayer has reported on their tax returns for the past several years. If there is any discrepancy – in the disclosure of accounts, transactions, account balances, or asset ownership – expect an intense IRS audit.
US taxpayers must report worldwide income from any source and pay taxes on income regardless of where it is earned. If you are a US taxpayer and had any foreign bank or investment account, or any combination of offshore accounts that have had an aggregated balance (even for 5 minutes) of $10,000 or more in the past several years, they were required to report all qualifying accounts to FinCEN on an FBAR, and to the IRS on Form 8938 each year.
A recent case in the US Supreme Court (Bittner v United States; 02/23) helped to soften the cost of failing to report offshore accounts in “non-willful” cases. The maximum penalty for unreported offshore accounts is still $10,000 per year (regardless of how many accounts were unreported) if the taxpayer can prove the reason for noncompliance was inadvertent or “non-willful” behavior. That’s still $10,000 per year for failing to file an FBAR, best case scenario.
However, if the IRS believes the actions of a US taxpayer are “willful” the penalties quickly become draconian.
If the agency (and the Courts) find the activities of the taxpayer are willful, the IRS will assess penalties of at least 50% (or more) of unreported account values for each year. The amount of penalties and interest can actually exceed not only the value of the account at the time but the present balance in associated accounts.
There is no clear test to establish whether the actions of a taxpayer were willful or non-willful. US taxpayers are required by law to understand their responsibilities as taxpayers. Therefore, it will not suffice to claim ignorance in these cases. The agency’s response is usually a finding of “willful blindness” or “reckless disregard” and a stream of harsh penalties and interest as well as potential exposure to criminal tax evasion charges.
In addition, many types of foreign investments worldwide do not report gains resulting in a taxable event until the disposition of an asset within the account has occurred. As such, the documentation associated with these investments is much less detailed than what is necessary to complete tax returns involving these types of investments.
The Generally Accepted Accounting Principles (GAAP) here in the US require accounting standards different than those in Europe and most of the world. US Taxpayers must report valuations at the beginning and end of a given tax year for most investments within their portfolio. However, offshore accounting and reporting for those assets is based on a different standard and does not provide the information necessary to complete US tax forms and pay appropriate taxes.
In many cases it is necessary to reconstruct the valuations of the various interests held within the offshore investment to determine whether there is a capital gain or loss for the purposes of US tax reporting. If the investment at hand qualifies as a Passive Foreign Income Company (PFIC) there will be substantial additional US taxation on it
If you have used foreign bank accounts, trusts, investments, foreign corporations or any other entity or financial account to shield income or assets from the IRS, you should give serious consideration to filing an FBAR and making a full disclosure through the IRS voluntary disclosure program. Simply “forgetting” to list an account or two could land you in serious trouble with the IRS, not to mention severe financial exposure and potential criminal prosecution.
What happens if you don’t file an FBAR or Form 8938, Statement of Specified Foreign Assets, with the IRS? Why should a US taxpayer worry about filing an FBAR anywhere in the US, and what happens if they don’t?”
Best case scenario: $10,000 per year for openers for the failure to file an FBAR for non-willful violations. All others will face harsh, draconian penalties of 50% or more of your highest aggregated balance of all accounts for each year and the serious risk of criminal tax evasion exposures. If you are a US taxpayer with offshore accounts, investments, and/or assets, or who has inadvertently or otherwise omitted information from past tax filings and failed to file an FBAR or IRS Form 8938, you need the advice and counsel of an experienced tax attorney.
We invite you to learn more about the integrated tax, legal, accounting and business consulting services of Allen Barron and contact us or call today to schedule a free consultation at 866-631-3470.
Learn more about coming into compliance with the IRS as well as the transactional planning and international tax planning experience of the attorneys and staff at Allen Barron. Ask about the protections of the attorney-client privilege.
