The information below is not intended to be legal advice but rather to give the visitor an idea regarding the basics of foreign bank account reporting. David has represented numerous taxpayers, many with different facts and circumstances. There is no one size fits all solution. Please contact David for questions about your particular situation.
The FBAR is the "Foreign Bank Account Report", otherwise known by its IRS form TD F 90.22-1. In short, any U.S. taxpayer that has an interest in a foreign financial account (or accounts) that had a highest aggregate balance of $10,000 at any time during a calendar year MUST report that interest in the foreign account.
Contrary to public perception, the FBAR is a creature of the Bank Secrecy Act and not the Internal Revenue Code. The requirement to report foreign accounts stretches back to the early 1970s. The initial purpose was to prevent (or make it more difficult) to launder money.
Fast forward to the post 9-11 world: The government, rightly, surmised that foreign bank accounts were being used to promote terrorist acts. The thinking was that if the government could learn who had interests in foreign accounts, the government may be able to stop terrorists by cutting off their financial support.
As a result, Congress delegated enforcement and management of the FBAR to the IRS. The IRS, being far more effective than other government agencies at getting the general public's attention, began publicizing the FBAR reporting requirement and aggressively going after those who failed to report.
This reporting requirement came as a great surprise to many U.S. taxpayers. Some folks inherited money from overseas relatives and kept that money in the foreign account. Others opened accounts prior to immigrating to the U.S. and would send money "home" from time to time to provide for relatives. Nevertheless, if these accounts had a balance of over $10k, many taxpayers suddenly found out they had run afoul of the law.
In 2009, the IRS offered what it initially referred to as a "once in a lifetime opportunity" via a Offshore Voluntary Disclosure Program. In exchange for paying various penalties, taxpayers could come into compliance with their reporting requirements.
The "once in a lifetime opportunity" proved to be a significant revenue generator for the IRS. Ultimately, the IRS has offered two sequels to the program. The current program, announced in June 2012, has no expiration date and could be stopped by the IRS at any time.
On June 18, 2014, the IRS made significant changes to the program which, while not officially a new program, might as well be referred to as the 2014 OVDP. Whereas the program previously made no distinction between a "willful" failure to file FBARs versus a "non willful" failure, the program now is designed for "willful" violators. "Non willful" violators are now eligible for a reduced penalty through a new program, the Domestic Streamlined Compliance Program. For more information about the new program, please click here.
Simply put, it may be the best (and least expensive) opportunity for willful violators to "come clean". And, if the IRS finds you before you find them, the penalties could be enormous. In fact, the civil penalty could far exceed the highest value that was ever in the account. Add to that, there is also the risk of criminal penalties.
How is it possible that one could get higher penalties? The answer is relatively straightforward: The Offshore Voluntary Disclosure Program is an alternative to the "statutory" penalties that could otherwise be imposed. Those penalties are enormous. For example, a taxpayer that failed to file an FBAR for the past 6 years for an account that had a highest balance of $1M has at least 6 violations under the statute. With $1M, the maximum penalty could be 50% of the balance for each violation. $500k times 6 violations is $3M, three times the account balance. Suddenly, the highest penalty in the program of 27.5% of the highest account balance seems much more attractive, e.g. $275,000.
A couple years back, Congress instituted new requirements on foreign banks. Basically, if a foreign bank takes any profits out of the U.S., that bank either must agree to report the identity of its U.S. clients or face a withholding tax of 35% on its U.S. sourced profit. It is unlikely that many banks will sacrifice that kind of revenue. In fact, on a fairly regular basis, it is announced that banks are entering into agreements to provide this information.
If you still are not convinced, here's another consideration: if you have money overseas, moving it to the United States is likely to alert the authorities that you have foreign accounts. Therefore, while you may have several hundred thousand dollars in Spain, you may never be able to use it here.
Whether in the Program or not, the law surrounding the FBAR and its penalties is complex. An attorney can help you understand your options including what penalty you may face in the Program and whether or not your facts and circumstances make the Domestic Streamlined Compliance Program a viable option.
These web pages are for information only. They do not constitute legal advice. These pages do not constitute, nor do they create, an attorney-client relationship between the visitor and the Law Office of David Welch.