Taxes are one of the certainties of life – but the laws surrounding FBAR forms and foreign bank accounts are in flux right now.
In fact, they’re under review by the Supreme Court. That’s thanks to the case of Bittner v. United States, in which a dual Romanian – U.S. citizen was found to violate FBAR requirements more than 270 times, resulting in aggregate penalties of more than $2.7 million.
Filing your FBAR forms late can run up gut-wrenching penalties.
Keep reading to learn the fundamentals of late filings and understand the gravity of your own situation. You might be better off than you think.
What are FBAR Forms?
In simple terms, Foreign Bank and Financial Accounts (FBAR) forms concern your offshore assets. They’re submitted when filing taxes if you have more than $10,000 in foreign accounts. There are many exceptions to this rule of thumb, but it’s a good guideline.
If you’re unsure about your own status, consider speaking with an international tax firm that can advise you regarding the specifics of your situation.
Who Has to File FBAR Forms?
Businesses and individuals file FBAR forms to report their financial interests outside of the United States – or their authority over them – if the aggregate value of those accounts exceeds $10,000 at any time during a calendar year.
Aggregate value refers to the total of all accounts. Any account with any financial institution outside the U.S. is a foreign financial account. However, there are exceptions. FBAR requirements don’t apply if:
- You share foreign accounts with your spouse, who filed relevant FBAR documents for a given year
- All financial accounts are consolidated on a single FBAR form
In addition, accounts that fall into the following categories don’t need to file as foreign accounts (but may otherwise be required in other tax forms):
- Accounts owned by governmental entities
- Accounts owned by international financial institutions
- IRA accounts
- Retirement plan accounts
- Trust accounts that benefit you, as long as a United States-based individual files FBAR forms on behalf of the trust
When To File FBAR Forms
According to the IRS, all your tax forms for the previous year (including FBAR forms) are due on April 15, unless that date would fall on a Saturday, Sunday, or a public holiday – in which case, the due date is the following business day.
It’s the same date that your regular tax returns are due.
However, in the interest of leniency – and given the nature of the penalties for failing to file (explored below) – U.S. residents who fail to file their forms on time receive an automatic extension until October 15 of the same year. That amounts to an extension of up to six months, and it’s assumed in the event of a non-filing.
So, generally speaking, filing your FBAR forms late won’t be a problem, unless:
- You fail to file before October 15 following the due date, or
- You demonstrate a pattern of willful or malicious negligence
Extenuating Circumstances
You may be granted an extension on your due date for tax forms in the event of natural disasters affecting your ability to file your tax returns.
The most recent example of a natural disaster resulting in a later filing date was Hurricane Ian (affecting Florida, North Carolina, and South Carolina), as well as flooding in Alaska.
U.S. residents were granted a grace period of an additional four months. This four-month period was added onto the final October 15 due date, resulting in a terminal due date of February 15.
We’ll explore other extenuating circumstances later on in this article.
Required Data for FBAR Forms
Your FBAR forms need to be backed up with verifiable data that relates to your foreign accounts. Regulations surrounding such data are flexible but as a rule of thumb, it’s best to keep a record of any official documents and bank statements.
You’ll need to keep these documents for at least five years, and the minimum information required includes:
- Names of account holders, type of account, and account numbers
- Details of foreign institutions
- The maximum aggregate value of accounts
How to File FBAR Forms
Your FBAR forms are filed separately from the rest of your tax returns.
Unless you’d prefer to file paper documents, you can file your FBAR forms online through the Bank Secrecy Act (BSA) electronic filing system. The BSA system is secure, and confidential, and streamlines the process of submitting your returns.
It’s also possible to file physical (paper) copies of your FBAR. To do so, you’ll first have to gain approval from FinCEN, who will advise you on how to mail your forms to the IRS directly.
In the event that you are filing on somebody’s behalf, you’ll need to document your authorization to do so, which includes the signature of the spouse, entity, or person on whose account you’re filing.
What Should I Do if I’m Filing Late?
If you’re filing after the February 15 deadline but within the six-month grace period, you don’t need to worry. It’s once you overshoot the October 15 deadline that your situation becomes more complicated.
Even so, if that’s the situation you’re in, take a deep breath and don’t fret. Penalties can still be avoided, and consulting with a professional will help you understand your position and avoid any nasty shocks.
Penalties for Late Filings
If you’re past due the FBAR date, the potential penalties for filing late depend primarily on whether your tardiness is found to be willful or non-willful.
In other words, whether or not it was your fault.
While non-willful filings are supposed to cover circumstances that are out of your hands, it’s possible to demonstrate that an oversight (and resulting late filing) was down to a lack of knowledge about the tax system.
There are no ways of putting it mildly, though: Willful non-filings of FBAR forms can result in major penalties. In some cases, criminal charges may be brought against the offending party in the event the non-compliance is evidenced to be malicious and recurring.
The penalty for non-willful late filing is up to $10,000, while the penalty for willful late filing is up to $100,000, or up to 50% of the value of aggregate assets (whichever is higher).
The assets in question aren’t simply the total sums of your foreign bank accounts. The definition extends to include inherited funds, pension funds, life insurance policies, and more.
And these penalties are per foreign account per year. Failing to file for two years running results in twice the penalty.
On top of that, these guide figures must be adjusted for inflation. So, in 2023, the penalties amount to more than $14,000 or $140,000, respectively.
These are both worrying sums. But they can be avoided with the right strategy, which we’ll explain next.
When Can Penalties Be Avoided?
There are multiple IRS amnesty programs available to resolve non-compliance with FBAR regulations in addition to the extenuating circumstances we talked about above. These are:
- Voluntary Disclosure Program
- Streamlined Filing Compliance Procedures
- Delinquent FBAR Submission Procedures
The Voluntary Disclosure program is a “good faith” arrangement between taxpayers and the IRS. It’s sometimes recommended to avoid the possibility of prosecution resulting from malpractice.
The second program, available since 2012, is available to non-willful non-compliance in filing FBAR returns. Requirements for acceptance are strict, but the program is intended to offer taxpayers a way to avoid penalties for non-compliance. Specifically, acceptance into this program helps you to avoid:
- FBAR penalties
- Failure-to-file sanctions
- Failure-to-pay sanctions
- Accuracy penalties
The Streamlined Compliance program does, however, involve other miscellaneous penalties for offshore assets. This amounts to 5% of offshore assets that should have been reported in the prior six years.
It can also include other penalties amounting to 5% of various other foreign assets.
Finally, the Delinquent FBAR Procedures are available to taxpayers who don’t fall into either of the other two categories above. Delinquent (i.e. late) FBAR forms are filed electronically – along with a statement explaining why a taxpayer is filing late.
There’s still a chance to avoid late FBAR penalties in even the case of a Delinquent FBAR filing. Notably, if your regular U.S. tax returns reported the status of your accounts (and assuming you paid the appropriate taxes) and you have not previously been contacted by the IRS about filing your FBARs.
Each of these three programs is comprehensive and nuanced, and taxpayers shouldn’t enter into them without prior consultation with a tax professional.
Willful vs. Non-willful Late Filings
In the event that paying penalties is unavoidable, the difference between willful and non-willful late FBAR filings makes all the difference – willful late filings are penalized with figures that are ten times higher than non-willful late filings.
Willful non-compliance means you knew that you were supposed to file FBAR forms but chose not to. Non-willful non-compliance amounts to negligence.
The IRS determines when a failure to file is willful. They decide this based on factors including:
- Your bank statements
- Tax returns from previous years
- Your history of correspondence with the IRS
- Interviews conducted with the entity or individual (if available) who processes your tax returns
Best Practices for Late FBAR Filings
Continuing to neglect your tax forms after being made aware of them runs the risk of qualifying as willful neglect. So, when filing late and under the threat of penalty, you need to act quickly.
You may need to prepare a formal statement, and you should carefully consider whether to turn to a professional tax accounting firm.
Don’t Put It Off
The worst thing you can do if you forget to file FBAR forms is to put the process off until later.
We’ve already spoken about the difference between willful and non-willful compliance – and realizing you’re filing late, only to procrastinate can land you in deeper trouble and far steeper penalties. It’s always worth filing quickly and explaining your situation even if you’re still filing before the October 15 grace period.
Displaying a pattern of recurring negligence will negatively affect your situation.
Prepare a Statement Explaining Your Circumstances
Should you need to prepare a formal statement outlining your circumstances, it’s always best to seek legal help. Tax professionals will identify valid reasons for non-compliance with tax regulations and present them alongside formal, vetted evidence that demonstrates you were not acting in bad faith.
In addition, they are able to advise you on how to proceed with a late FBAR filing, including which path to take to have the best chance at avoiding penalties.
Speak With Qualified Professionals
Fundamentally, if you’re filing your FBARs late, you have the three alternatives available to comply with the IRS. But it’s easy to get lost at sea amid a mountain of tax forms and a library of legal jargon.
Under the threat of hefty penalties, it’s even easier to make a mistake.
A qualified and experienced tax professional is capable of more than mere advice. They will consider your case carefully, review and audit your evidence, and advise you on how to protect your assets and stay out of the crosshairs of the IRS.
And, crucially, they will do so while keeping your information confidential and your privacy protected.
Avoid Penalties for Late FBAR Forms
Filing your FBAR forms late doesn’t have to complicate your life – or result in your being slapped with hefty penalties for non-compliance. The best thing to do is to act quickly and decisively to protect your interests, your mental well-being – and your bottom line.
If you could benefit from international tax attorney services, tax preparation, or foreign account reporting, we can help. At ITC, we provide independent tax advice for businesses, individuals, entities, and offshore providers. Click here to get in touch.