Willful and Non-Willful Failure to File FBAR Penalties

April 8, 2024 | FBAR | Tax Audits | Tax Compliance

FBAR Penalties: What to Expect If You Don’t Report Foreign Bank Accounts

Nothing’s quite as alarming as finding out you’re in violation of a law that you didn’t know existed. If you have foreign bank or financial accounts, you may be required to file an FBAR every year. Failing to do so could mean paying tens of thousands of dollars in penalties. However, you do have options. Depending on your circumstances, how far behind you are in your filings, and whether or not you paid all required taxes on your foreign assets, you may be able to limit your losses substantially. Of course, having the right legal team guiding the way and fighting for your interests can make a big difference. If you’re worried about FBAR penalties, it’s time to talk to the team at Timothy S. Hart Law Group. Call us at 518-213-3445 or (917) 382-5142 to set up a consultation right away.

What is the FBAR?

The FBAR, which is short for the Report of Foreign Bank and Financial Accounts, is an annual form required under the Bank Secrecy Act. U.S. persons with foreign bank accounts, brokerage accounts, mutual funds, and other types of accounts are required to file the FBAR if the total value of their accounts ever exceeded $10,000 during the year. Although the FBAR is similar to Form 8938, which is required by the IRS for individuals with foreign bank accounts or other specified foreign assets, the FBAR is not actually a tax form. It is filed with FinCEN, the Financial Crimes Enforcement Network. Those who are required to file must file by April 15, but if you miss this deadline, there’s an automatic extension until October 15.

Individuals Required to File an FBAR

Per the IRS, U.S. persons with foreign bank accounts may be required to file an FBAR. The definition of a “U.S. person” includes a citizen, resident, corporation, LLC, partnership, trust, or estate. If you have at least one foreign account with an aggregate value of $10,000 or more at any point during the year, you must file the FBAR. To get the aggregate value of your accounts, you take the maximum value for each account during the year. Let’s say you have an account with a maximum value of $5,000, one with a maximum value of $4,000, and one with a maximum value of $2,000. Even if they hit their max values at different points during the year, your aggregate total is more than $10,000 and you must file. Most accounts do need to be reported. Those exempt from reporting requirements include those owned by governmental entities, held in an IRA, maintained on a U.S. military banking facility, or held in a retirement plan that you are a beneficiary of. Filing the FBAR is fairly simple and straightforward. FinCEN’s BSA E-Filing System allows you to file everything electronically. Be prepared to provide the account number, name on the account, name and address of the bank, type of account, and maximum value during the year for each account. This includes those that don’t have any money or that you are not currently using.

Penalties for Failing to File an FBAR

The United States has agreements with many other countries that allow them to access information on U.S. persons with accounts at foreign financial institutions. If you have never filed an FBAR but have been required to, it’s best to address this issue quickly and proactively to avoid massive fines and even criminal penalties. The way in which your violations are handled depends largely on whether the government considers them to be willful or non-willful violations. We’ll explore what that means now.

Willful Violations

A willful FBAR violation occurs when the filer knew or should have known that they would be required to file an FBAR. There is a lot of gray area here, because it’s difficult to say who could be expected to know FBAR requirements. The IRS makes these determinations based on the totality of the circumstances. Basically, that means they take all of the information available to them and determine if a violation is willful. An individual’s professional standing, previous financial filings, and education may all play a role in whether or not they willfully broke the law. Consider, for example, someone who filed an FBAR for several years and then abruptly stopped, even though the value of their accounts remained roughly the same. The IRS would have reason to believe that the individual should have known that they still had to file an FBAR and simply chose not to. If a filer worked in international business or had a professional financial background, the likelihood of them being familiar with the FBAR would be far higher than it would be for someone who worked in another field. In this scenario, the IRS may consider their failure to file a willful violation.

Non-Willful Violations

A non-willful FBAR violation happens when an individual did not know and could not have been expected to know that they were required to file. Again, this determination is based on the totality of the circumstances. Imagine someone with a few foreign accounts in their name. Those accounts were opened by their parents. Perhaps they knew about the accounts but didn’t know how much was in them, nor had they ever encountered the term “FBAR.” In this situation, they were still legally required to file an FBAR—but the IRS would likely consider it a non-willful violation. The majority of FBAR violations are considered non-willful by the IRS. However, nothing is set in stone. Even given the examples above, it’s possible for multiple IRS agents to look at the same circumstances and come to different conclusions.

Financial Penalties for FBAR Violations

As you may imagine, the financial penalties for willful and non-willful violations vary significantly. The penalty table for FBAR violations and similar civil violations is adjusted every year to account for inflation. Non-willful violations have a base penalty rate of $10,000, which is $16,117 for penalties assessed after January 25, 2024. Willful violations lead to penalties as high as $161,166 adjusted or half of the value of the non-disclosed accounts.

Criminal Penalties

In some cases, those who fail to file an FBAR may face criminal charges. The IRS chooses to do this in very rare cases. When this occurs, the individual may face further fines as high as $250,000 and up to five years in prison. Remember that when there are criminal charges on the table, the burden of proof is much higher than it is with civil penalties. The government must be ready to prove beyond any reasonable doubt that the individual in question willfully broke the law by not filing an FBAR. This is a very rare outcome.

Common Misconceptions About the FBAR

Unfiled FBAR penalties are often the result of common misconceptions. Clearing these up and ensuring that the FBAR becomes common knowledge can help filers know their obligations and avoid unnecessary penalties. Here are some common myths about the FBAR and the truth behind them:
  • You don’t have to file the FBAR if you do not live in the United States. This is perhaps one of the biggest myths surrounding the FBAR. FBAR requirements apply to all U.S. persons, including residents and citizens—even if they live abroad. Whether you live in the U.S. or abroad, if you fit the definition of a “U.S. person,” you may have to file an FBAR.
  • You don’t have to file if you don’t have more than $10,000 in one account. FBAR requirements are based on the aggregate value of accounts. If the maximum total value of all of your foreign accounts ever reached $10,000 during the year, you must file—even if all of your accounts are less than $10,000 each.
  • The FBAR is only required for wealthy individuals. People often mix up the FBAR with Form 8938, which has much higher filing thresholds. Depending on the tax filing status and residency status, an individual may not have to file Form 8938 until they have $600,000 in foreign bank accounts. With the low total limit of $10,000, the FBAR applies to many more individuals.
  • The FBAR is an individual filing requirement only. FBAR requirements apply to all U.S. persons, including corporations, LLCs, partnerships, and trusts.
When you pay a tax pro to file your individual tax return, they are supposed to ask you about your foreign bank accounts. If you file your own tax return, you will tick a box about whether or not you need to file an FBAR. Then, if you are required to file, you will need to submit an FBAR return separately from your main tax return.

How to Avoid FBAR Penalties

If you’re reading this with a sinking feeling in your stomach as you realize that you should have been filing FBARs for several years. The good news is that there are legal options—the government simply wants to collect what it’s owed and ensure that people are filing their documents on time, so they provide several ways for individuals to get caught up. We’ll explore those below. Note that if the IRS has already initiated a civil examination of your tax returns or notified you of your missing FBARs, these options will not be available to you, but a tax pro can help you figure out the best way forward.

Delinquent FBAR Submission Procedures

If you have been filing your taxes on time and paying all taxes owed—including those owed on any money earned in your foreign accounts—you may be able to go through the simple Delinquent FBAR Submission Procedures. This involves verifying that your failure to file was non-willful and filing your delinquent FBARs. You will need to make a note on each delinquent FBAR indicating why you are filing late.

Streamlined Compliance Procedures

For those who have not paid taxes on their foreign assets or filed FBARs, the Delinquent FBAR Submission Procedures are not enough. You must also pay the taxes owed on those assets to avoid further penalties. This is a viable option for those who have failed to file tax returns and pay the taxes they owe, which is often the case for those who live overseas and mistakenly believed that they no longer had to file U.S. tax returns. You will need to confirm that your failure to file was a misunderstanding, not a willful violation of the law. You then file the past three years of tax returns and the FBAR for the previous six years. This program coordinated with the OVDP when it was still functional.

Criminal Investigation Voluntary Disclosure Practice

What if you fear that your failure to file was caused by willful conduct? In that case, you should talk to an attorney about the IRS Criminal Investigation Voluntary Disclosure Program. This is an option for those who fear being criminally liable for willful misconduct or being forced to pay heavy financial penalties. Don’t wade into this program without professional assistance.

When Is it Time to Talk to a Tax Professional?

While the IRS provides options for U.S. persons to get caught up on FBAR and tax return filings, we understand that those options can be confusing and overwhelming. When you see penalties ranging from $10,000 up to $250,000 and imprisonment, it’s easy to do nothing out of fear of making the wrong decision. The best time to talk to an attorney is the very first time you start to think you are in over your head. Foreign asset reports and taxes involving foreign assets are complex matters, and it’s easy to miss deadlines or leave out important information. The sooner you turn to a tax attorney, the sooner we can do a thorough review of your finances and help you get back on track. When you’re ready to talk more about your delinquent FBARs and how to get caught up, Timothy S. Hart Law Group is here for you. We know that tax challenges can be mentally draining and anxiety-inducing, but you don’t have to go through it alone. Call us at 518-213-3445 or (917)382-5142, or schedule a meeting with us online to get started.

Attorney Timothy Hart

Timothy S Hart, the founding partner of the tax law firm of Timothy S. Hart Law Group, P.C. is both a New York Tax Lawyer & Certified Public Accountant. His area of expertise includes innovative solutions to solve your Internal Revenue Service and New York State tax problems, including tax settlements through the Federal and New York State offer in compromise programs, filing unfiled tax returns, voluntary disclosures, tax audits, and criminal investigations. [ Attorney Bio ]