In this article I will focus on the FBAR penalties and fines that can be levied for non compliance and how to avoid them.
If there is one thing you want to avoid in your financial life it is to avoid taking any of Uncle Sam's money. The IRS wants their share of your money and they are not kidding when they say that. There are some crazy hefty fines and penalties for those that don't comply with the FBAR regulations. These include monetary fines and penalties that include jail time.
So although the authority over the FBAR is the US Secretary's office, it has delegated authority to the IRS as well to enforce FBAR compliance. Why? Because failure to disclose all foreign financial activity hurts the IRS. Income not reported is not taxed, therefore less tax revenue for Uncle Sam. So now that you know that the IRS can levy FBAR penalties and fines on you, it is best to fully comply with the FBAR reporting guidelines to avoid such instances.
Historically, individuals and entities that did not comply with foreign bank account reporting requirements were threatened with criminal and civil prosecution. However the actual cases of prosecution were far and few between. This trend will reverse now that the FBAR regulations are more concrete, better defined and regulated.
This is particularly true in light of the September 2001 events in the United States, which gave both to the United States Patriot Act of 2011 that requires the US Treasury Department to evaluate and suggest to the US Congress ways to improve compliance with FBAR requirements. This was around the same time that the Offshore Voluntary Compliance Initiative program (OVCI) which gave FBAR amnesty to those not in compliance with the standards had also expired.
Consulting Professionals to Avoid FBAR Penalties
Many who face FBAR penalties can usually avoid it by consulting professionals such as licensed tax accountants and attorneys. Unfortunately, many individuals and entities open offshore bank accounts without such consultation.
For many of them it is not their fault as they are not aware of what the law is, but like I said earlier not being aware of the law is never an excuse for not complying with it. Many don't think much of opening foreign bank accounts, and while opening an offshore bank account itself is not an issue, individuals and entities who have done so must disclose the activity on an annual basis according to the law.
Again, FBAR penalties can be quite severe. That is why it is increasingly important that you consult with a licensed professional if you are contemplating offshore banking or getting involved in any type of foreign financial account or activity. If you do so, make sure you are aware of the FBAR form reporting requirements.
Severity of FBAR Penalties
Violation of any law can come with hefty fines and penalties. FBAR compliance is no different. If you do not disclose your foreign bank account activity on the proper forms by the deadline each and every year, you may be prosecuted by the IRS in civil or criminal court. Yes, you can face criminal penalties for issues such as tax evasion and money laundering.
If you are prosecuted in a civil case, you may be looking at a penalty over $25,000 USD or the balance you have in your foreign account (if that is greater), up to a maximum of $100,000 per violation. And here is the kick in the pants. You can be subject to criminal penalties even after being convicted in the civil case. The statute of limitations is also quite long, six years in this case. That is the time period within which the US Secretary can decide to bring a civil suit against you. If you are convicted, you have a maximum of two years to pay the monetary fines.
Now that is actually the lighter side of the matter. FBAR penalties if convicted for a criminal violation can be well over $250,000. Alternatively, the government can lock you up for up to 5 years in jail, or both to make matters worse. Now if you are deemed to have purposely done something illegal, then you can face fines up to HALF A MILLION DOLLARS! And 10 years in jail, or both. Surprisingly however, in a criminal FBAR case, the statute of limitations is only 5 years as opposed to in a civil case. This means that you can be convicted up to 5 years after you have committed the violation.
FBAR Non Compliance Conviction Procedures and Guidelines
The authorities must first file a civil suit against one for non compliance. During this time, authorities will attempt to recover FBAR penalties charged to the individual or entity. The individual or entity doesn't have to accept the charges and can contest the FBAR penalties at this stage of the process.
The specific Federal guidelines that govern this law can be found under 31 U.S.C. 5322(a); Federal Sentencing Guideline §2S1.3. Guideline §2S1.3 (b) (2) offers potential reduction of the FBAR penalties through lowering the severity of the offence if the individual or entity can prove that it acted with no reckless disregard while not complying with the law. Also, there are specialty FBAR amnesty programs that are periodically sponsored to encourage compliance.
Calculation FBAR Penalties
Here is how an FBAR penalty is calculated. There are four FBAR penalty levels, which are detailed out in the Federal guidelines mentioned above.
- Level 1 - pertains to non disclosure of accounts with aggregate balances under $20,000 USD.
- Level 2 - pertains to non disclosure of accounts with aggregate balances under $250,000 USD.
- Level 3 - pertains to non disclosure of accounts with aggregate balances over $250,000 USD but under $1 Million USD.
- Level 4 - pertains to non disclosure of accounts with aggregate balances over $1 Million USD.
Curt
Matsen, CPA is the author of the FBAR Filing Guide, a comprehensive
resource that discusses FBAR form requirements, how to avoid fines and
penalties as well as the periodic FBAR amnesty programs sponsored by
governments to encourage voluntary compliance. Read more at: http://www.file-fbar.com
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