Every year, taxpayers who have certain foreign financial accounts must report them. Individuals report by filing a Report of Foreign Bank and Financial Accounts (FBAR) on the Financial Crimes Enforcement Network (FinCEN) Form 114. Those who fail to file face steep penalties.

Individuals who fail to file or keep adequate records, or file late, may be subjected to civil and criminal penalties.

FBAR Penalties

For some taxpayers, avoiding a penalty isn't possible, but they can minimize it. How the IRS classifies a failure to report FBAR can make a sizable difference in assessed penalties. The IRS doesn't have a minimum amount for possible penalties, but does have a maximum. The agency also adjusts penalties annually for inflation.

The IRS classifies a failure to file as criminal or civil. Classification as a negligent violation or negligent activity applies to entities and organizations, not individual taxpayers.

Individual taxpayers can be found to have a non-willful or willful violation. Non-willful violations can result in civil penalties but not criminal penalties. Willful violations may result in both criminal and civil penalties. Non-willful violations have the smallest maximum penalty amount.

Non-willful violations occur when a taxpayer fails to file as a result of negligence, mistake, or ignorance. In other words, a non-willful violation means that the IRS believes that a taxpayer wasn't attempting to hide assets or ignore a known legal duty.

Penalties are assessed per account and for each year. Penalties may exceed an account's total balance.

Delinquent FBARs

One of the easiest ways to avoid penalties is if taxpayers file a delinquent FBAR as soon as possible. Taxpayers can file and potentially avoid penalties when:

• They don't need to use either the IRS Criminal Investigation Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures.
• They haven't filed Form 114.
• They're not under a civil examination or a criminal investigation by the IRS.

and

• The IRS hasn't yet contacted them about the delinquent FBARs.

Individuals can file online. They will need to explain why they are filing late. Individuals can avoid penalties if:

• They properly reported and paid all taxes on foreign financial accounts.

or

• They haven't been previously contacted about an income tax examination or a request for delinquent returns for the years they are submitting the delinquent FBARs.

Other Ways to Reduce Penalties

In addition to delinquent filing, taxpayers may be able to reduce penalties by showing:

• Reasonable cause for failing to file
• Streamlined filing compliance
• IRS Voluntary Disclosure for those who are ineligible for other programs

If you have questions about FBAR, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.