By ATTY. CRISPIN CADAY LOZANO
Q. What is FBAR?
A. FBAR means Report of Foreign Bank and Financial Account.
Q. Who are required to comply with FBAR filing?
In order to determine whether or not the FBAR is required, all of the following must apply:
A. The filer is a U.S. person;
B. The U.S. person has a financial account(s);
C. The financial account is in a foreign country;
D. The U.S. person has a financial interest in the account or signature or other authority over the foreign financial account; and,
E. The aggregate amount(s) in the account(s) valued in dollars exceed $10,000 at any time during the calendar year.
The purpose of this article to discuss the likely consequences for not filing an FBAR, which is, the FBAR penalty.
Moreover, there is no such thing as a late FBAR Filing Penalty. The only penalties are for not filing an FBAR form.
Q. How does the FBAR penalty process goes?
This is usually how FBAR penalties will be assessed (outside any offshore tax amnesty). You would be selected for an audit with the IRS. Then the field auditor, once aware of likely FBAR violations, will split the audit into two parts. The first part is the regular audit, which is treated normally. If you disagree with the figures and the bill, all of your standard rights of appeal, including tax court, are there.
The second part is that the IRS auditor will interview you regarding your willfulness about not filing an FBAR penalty.
The auditor will make a report that will be forwarded to an IRS attorney. The IRS attorney will set the penalty amount, typically $10,000 for non-willful violations and 50% of account value for willful non-filing. Here’s an example:
Unfiled FBARs for 2010 to 2014
Average Account Balance: $30,000
• FBAR penalty if non-willful: $50,000 (5 violations @ $10,000 per year)
• FBAR penalty if willful: $75,000 (5 violations @ $15,000 per year which is 50% of $30000 balance of account.)
Q. How does the IRS collects the FBAR penalty?
Once assessed, none of the typical collection or appeals process is followed. The Treasury Department actually has to sue you in order to collect on the FBAR debt. In one sense, this is bad, because traditional IRS appeals allow for cost-effective negotiations. However, because the government must actually sue you, and typically the amounts you are being sued for are so high, the government has a more difficult job to prove their case. If you want, you have a right to a jury trial. In tax cases like these, juries have a hard time following facts, and that can lead to an unfair result.
The bad news is that FBAR litigation attorneys aren’t exactly cheap. A full FBAR defense could cost in the hundreds of thousands of dollars in legal fees. Plus the legal process is a penalty in and of itself. Going to court and dealing with uncertainly is not fun at all. That’s why for many people, it just winds up being easier to enter into the Offshore Voluntary Disclosure Program (OVDP) a program that isn’t exactly fair, but at least creates a known outcome that can be planned around.
There are about 2 million taxpayers (most of those expats) who somehow failed to file an FBAR. The vast majority are not using the OVDP/OVDI.
Crispin Caday Lozano, Esq. is an active member of the State Bar of California. He is a Certified Public Accountant in the Philippines and has been representing clients with problems with the IRS. For a free consultation please call toll free 1-877-456-9266 to set up an appointment.