It is becoming increasingly common for taxpayers to use foreign bank accounts or financial accounts for many reasons. Those who have such accounts need to know that the US government taxes them on all offshore income earned and deposited. Tax is also imposed on any investment income you have earned on offshore capital.
Therefore, owners have certain obligations if they own or control foreign bank accounts. If you fail to disclose your foreign bank account that you have signing authority over and that has a balance of more than $10,000, you could face severe penalties. If the non-disclosure was a genuine mistake and you accidentally committed a foreign bank account reporting violation, you can still face consequences such as civil or criminal exposure.
Necessary Requirements for Foreign Bank Account Reporting
The law requires foreign bank account reporting (FBAR) for anyone with authority over a foreign bank account. Like, legal entities, corporations, citizens, and residents of the US. Are bound to the FBAR under the following conditions:
- You have control, interest, or signatory authority over a bank or financial account outside of the United States.
- The funds in the account exceed $10,000 at any time throughout a calendar year. Foreign stock accounts, investment accounts, foreign life insurance accounts, EFT accounts, and mutual funds also fall in this category.
You have to file the FBAR along with your income tax by April 15th of a calendar year. You get an automatic extension for your income tax return till October 15th. And this allows you to file your FBAR with it in this time period. However, it is possible to further extend your FBAR deadline. For example, if you are a victim of a natural disaster such as an earthquake or wildfire.
How to Determine if FBAR Violation is Accidental
If an individual did not file their FBAR between the April 15th to October 15th period, the Internal Revenue Service (IRS) would consider it a non-willful violation. After considering certain steps, the law will see a late or unfiled FBAR as an accidental violation. Simply claiming that you missed the deadline is not enough. In fact, you will need evidence to back your claim.
The IRS does not have specially laid down rules indicating the FBAR violation was willful or not. The IRS considers the individual’s overall circumstances. Before they decide whether to penalize the taxpayer for the violation they committed or not. Certain factors that influence this decision include:
- The total value of all your foreign bank accounts and how much foreign income have they earned.
- If the taxpayer has the status of a US tax resident
- If the taxpayer has a history of timely filing all tax returns or if he/she is usually late.
- When the taxpayer became aware of their obligation to report offshore taxable income and FBAR penalties.
However, these are not the only factors considered to determine an FBAR violation. If the taxpayer shows a pattern of negligence. As well as, has previously shown willful blindness towards filing tax returns and FBAR policies. This issue could develop into a serious crime.
What Consequences to Expect if You Fail to Disclose Your Foreign Bank Account
Whether you fail to disclose your foreign bank account or are out of compliance with FBAR reporting rules, you can expect to face certain charges. You might face charges whether this violation was accidental or on purpose.
1. Criminal Charges
If you try to hide your foreign bank accounts from the IRS, they can charge you with tax evasion. In addition, a tax evasion charge faces $250,000 in penalties and a five-year sentence in prison. And, if you do not file your tax return on time or file a false tax return. You will face a $100,000 fine and up to three years in prison.
2. Civil Penalties
If the IRS decides your FBAR violation was accidental, your non-compliance could cost you and all signatory authorities of the bank account $12,500 each. In case a civil violation is willful, you have to pay 50% of your account balance. Or $100,000, whichever amount is larger. If they consider your violating actions as fraud, you might be liable to pay 75% of your account balance.
3. The IRS Amnesty Program
If you fail to disclose your foreign bank account information, you can voluntarily come forward and disclose your account without the risk of being charged with severe penalties. This can be done through the Offshore Voluntary Disclose Program, which is one of the IRS Amnesty Programs. This program has different requirements, so it’s always best to discuss with your tax advisor if you are eligible for an amnesty program or not. But if the IRS has already discovered your account, you will not be eligible.
Foreign bank account reporting violations is a complicated matter, and if you are guilty of such an act the IRS will not be backing off anytime soon. Even small missteps cost individuals greatly. If you ever feel you might be subjected to FBAR rules, do discuss it with your tax advisor and take all necessary steps.