Fbar penalty per account

What is fbar and why is it important?

FBAR stands for Report of Foreign Bank and Financial Accounts. It's a report that United States persons (citizens, residents, and entities) must file annually to report financial accounts held in foreign countries. The purpose of FBAR is to help the U.S. government combat money laundering, tax evasion, and other illegal activities.

The requirement to file an FBAR is triggered when the aggregate value of all your foreign financial accounts exceeds $10,000 at any point during the calendar year. This includes bank accounts, securities accounts, and other types of financial accounts.

Reporting requirements are stringent, and failure to comply can result in significant penalties, including the dreaded "fbar penalty per account" which can quickly become substantial if multiple accounts are involved.

Understanding the fbar penalty per account structure

The fbar penalty per account is structured differently depending on whether the violation was willful or non-willful. A willful violation means that the person knowingly and intentionally failed to file the FBAR or made a false or fraudulent filing. A non-willful violation, means that the failure to file was due to negligence, inadvertence, or mistake.

Non-willful violations:

For non-willful violations, the penalty can be up to $10,000 per violation. However, the IRS often considers the circumstances surrounding the violation and may impose a smaller penalty or waive it entirely if reasonable cause is shown. For example, if someone can demonstrate they genuinely didn't know about the FBAR filing requirement, and took reasonable steps to comply with U.S. tax laws, the IRS may offer leniency.

Willful violations:

Willful violations carry much steeper penalties. The penalty can be the greater of $100,000 or 50% of the balance in the account at the time of the violation. This penalty is assessed per account, per year. This means that if you have multiple foreign accounts and willfully failed to report them for several years, the penalties can quickly add up to a significant portion, or even exceed, the total value of your foreign assets. For example, if you have three accounts totaling $500,000 and the IRS determines you willfully failed to report them, you could face a penalty of $250,000 (50% of the total balance) per account, potentially reaching $750,000.

How the irs determines willfulness

Determining whether a violation is willful or non-willful is crucial in calculating the penalty. The IRS uses various factors to assess willfulness, including:

• The person's knowledge of the FBAR filing requirement.
• The person's efforts to comply with U.S. tax laws.
• The person's awareness of the existence of the foreign accounts.
• Whether the person concealed the existence of the foreign accounts.

Simply claiming ignorance of the FBAR requirement is usually not enough to avoid a willful penalty. The IRS expects taxpayers to exercise reasonable diligence in understanding and complying with U.S. tax laws. They often look for "badges of fraud" - evidence of attempts to conceal foreign accounts, such as structuring transactions to avoid detection or using nominee accounts.

The burden of proof is generally on the government to demonstrate willfulness. However, the taxpayer has the burden of proof to show reasonable cause for a non-willful violation.

Avoiding fbar penalties: best practices

The best way to avoid fbar penalty per account is to comply with the FBAR reporting requirements. Here are some best practices:

• Know the Rules: Familiarize yourself with the FBAR filing requirements and deadlines. The FBAR is filed electronically through the FinCEN BSA E-Filing System.
• Maintain Accurate Records: Keep detailed records of all your foreign financial accounts, including account numbers, names of financial institutions, and maximum account values during the year.
• Disclose All Accounts: Report all foreign financial accounts that meet the reporting threshold, even if they are jointly held or held in the name of a trust or other entity.
• File on Time: The FBAR is due annually on April 15th, with an automatic extension to October 15th. Don't wait until the last minute to file.
• Seek Professional Advice: If you are unsure about your FBAR reporting obligations, consult with a qualified tax professional.

For example, consider a US citizen living abroad. They might assume their foreign income and accounts are not subject to US reporting. However, as a US citizen, they are required to file both US income taxes and an FBAR if their foreign accounts exceed the $10,000 threshold. Seeking professional advice can ensure they meet their obligations.

What to do if you receive an fbar penalty notice

If you receive a notice of proposed FBAR penalty from the IRS, it's crucial to take action promptly. Here are the steps you should take:

1. Review the Notice Carefully: Understand the reason for the penalty and the amount being assessed.
2. Gather Documentation: Collect all relevant documents, including bank statements, account records, and any correspondence with the IRS.
3. Consult with a Tax Attorney: Seek legal advice from a tax attorney experienced in FBAR matters. They can help you understand your rights and options.
4. File a Response: Respond to the IRS notice within the specified timeframe. You can argue that the penalty is unwarranted or that you have reasonable cause for the violation.
5. Explore Mitigation Options: Your attorney can help you explore mitigation options, such as the IRS's voluntary disclosure programs, which may allow you to reduce the penalty amount.

For instance, if you genuinely made an honest mistake and can provide evidence to support your claim, your attorney can present a strong case for penalty abatement based on reasonable cause. Documentation is key in these situations.