What Civil Penalties Might Apply If I don’t Disclose My Foreign Assets And The IRS Examines Me?

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Failing to file an FBAR can result in significant civil penalties. IRS civil penalties for intentional acts can be up to $100,000 or 50 percent of the total balance of foreign financial accounts for each violation. If the IRS finds non-willful violations, penalties can still be imposed.

FBAR Filings

According to United States tax laws, U.S. permanent residents and certain other people must report all financial interests in foreign accounts each tax year. Direct or indirect signature authority or financial interest in any financial account that’s maintained with a financial institution located in a foreign country must be reported if the total value of all financial accounts exceeds $10,000 at any time during a calendar year. A person who willfully fails to file an FBAR (Report of Foreign Bank and Financial Accounts) per these requirements faces IRS civil penalties up to $100,000 or 50 percent of the total balance in foreign accounts.

In 2011, the U.S. started imposing civil penalties on taxpayers for willful nondisclosure of financial interests in foreign accounts. Such accounts include bank accounts, mutual funds, brokerage accounts, securities, and other foreign assets and entities. The civil penalty for failure to file the required tax form to report such financial interests is $10,000 per return. Once a taxpayer is notified of a delinquency, he/she has 90 days to pay the civil penalty. If not paid within 90 days, an additional $10,000 per month is imposed on each tax return due. Civil penalties can reach a maximum of $50,000 per return.

FBAR filings can be complex, especially if a person has varied financial interests in different types of foreign accounts. An FBAR attorney can make sure that proper tax forms are filed on time and tax returns reflect accurate financial interests. If returns are inaccurate or show an underpayment, a penalty from 20 percent to 40 percent may be imposed. If failure to file a return or underpayment is due to fraud, a taxpayer may be liable for civil penalties that amount to 75 percent of the unpaid tax.

The Offshore Voluntary Disclosure Program

The Offshore Voluntary Disclosure Program (OVDP) is an IRS program that’s designed to help taxpayers who owe civil penalties on foreign accounts. The program works with taxpayers who may be eligible for reduced penalties. It focuses on taxpayers who may face substantial civil penalties and/or criminal liability due to willful failure to report foreign financial assets and pay all taxes due. OVDP provides protection from criminal liability and terms for resolving civil tax penalties owed.

The OVDP began in 2012. Although it has higher penalty rates than previous years, it offers benefits and encourages taxpayers to get current on FBAR taxes through an FBAR attorney who can help them understand how to bring returns up to date. In 2014, modifications were made to OVDP that may impact civil penalties. Any taxpayer who submitted OVDP paperwork prior to 2014 may elect to have his case considered under the 2014 modification. For a case review, a taxpayer or his/her FBAR attorney must request a review in writing to the IRS examiner assigned to his/her case and provide all required information and documents.

Taxpayers with undisclosed foreign accounts and assets are encouraged to use OVDP to become compliant on taxes to avoid substantial civil penalties or criminal prosecution for failing to file FBARs. Taxpayers who file through Streamlined Filing Compliance Procedures or amended returns do not eliminate the risk of criminal prosecution. Taxpayers who do not submit a voluntary disclosure run a high risk of IRS audits and substantial penalties, including penalties for fraud and criminal prosecution.

Tax Evasion and Criminal Charges

In addition to civil penalties for failure to file an FBAR, criminal charges can be filed for failing to file a tax return, filing a false tax return, and tax evasion. Intentionally failing to file an FBAR and intentionally filing a false FBAR are both violations that are subject to criminal penalties. Additional possible criminal charges include conspiracy to defraud the government with respect to claims and conspiracy to commit offense or to defraud the United States- serious offenses that require legal advice from an FBAR attorney. A taxpayer convicted of criminal charges faces serious consequences:

  • Failing to file an FBAR can result in a prison term of up to 10 years and criminal penalties of up to $500,000.
  • Filing a false return can result in a prison term of up to three years and a fine of up to $250,000.
  • If convicted of tax evasion, a person is subject to a prison term of up to five years and a fine of up to $250,000.
  • If convicted of conspiracy to defraud the government, a person is subject to a prison term of up to 10 years and a fine of up to $250,000.