Ines Zemelman, EAAug-08-2016
There are currently four ways the IRS allows FBAR mistakes to be corrected. It is only permitted to participate in the disclosure programs if the assets in the account(s) came from a source that is legal (not from illegal activities), and assuming the Internal Revenue Service is not currently aware of the violation.
1. Amend the FBAR and File It
The instructions for the FBAR state that if a person finds they gave inaccurate or incomplete information on their FBAR submission, they are required to amend the FBAR. FinCEN Form 114 has a box to check that FBAR is amended and another box to enter BSA ID of the original submission. If the error is discovered after the statute of limitations has expired (six years), it is not necessary for the filer to fix the error.
It is important to carefully consider whether or not to file a delinquent or amended FBAR if it is done outside of the various penalty relief options the IRS provides since it does not provide any protection from penalty. The IRS can still levy penalties if later it is determined that the error was caused by negligence or willful behavior. Conversely, the law does not allow penalties if the mistake was because of some kind of reasonable cause (that is, an honest mistake). Under the penalty guidelines of the Internal Revenue Service, even errors not determined to be reasonable may have only a warning letter issued at the discretion of the IRS.
2. File Using the Delinquent FBAR Submission Procedures
If a person has not submitted an FBAR before, but has filed their federal tax returns with the foreign account income fully reported, they might be eligible to use the Delinquent FBAR Submission Procedures. Under these IRS procedures, “[t]he IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.”
The procedure is easy. The person must e-file their late FBAR which includes a short statement explaining the reason for the late FBAR filing. Although the procedures do not require it, it is recommended that the explanation in the FBAR state that the filing is being made using the “IRS’s Delinquent FBAR Submission Procedures.”
3. Make a Filing Using the Streamlined Filing Compliance Procedures
More commonly called the “Streamlined Offshore Program”, the Streamlined Filing Compliance Procedures can be used by a US person that has mistakenly neglected to submit an FBAR or neglected to report foreign account income on their US income tax return. A taxpayer who is non-resident and neglected to submit a federal tax return (that is, Form 1040), can also make use of these procedures. Generally speaking, the Streamlined Filing Compliance Procedures are available to taxpayers who neglected to submit a tax return or an FBAR mistakenly, not willfully. The program requires participants to file their federal tax returns (as amended, if applicable) for the three years prior, and file their FBARs for the six years prior, including a signed statement (under threat of perjury) that attests to the neglected filing as being mistaken, not a willful choice. A taxpayer who certifies this falsely could be exposed to penalties for civil fraud, penalties for FBAR returns, and even criminal liability.
Usually, the IRS does not enforce penalties on non-resident taxpayers who participate in the Streamlined Filing Program. For resident taxpayers, the IRS enforces (1) a 20% accuracy penalty on the tax that is unreported, and (2) a penalty of 5% of the greatest total balance of the foreign accounts that were unreported during the 6 year period. The IRS website contains a full description of the Streamlined Filing Compliance Procedures. It is important to note that taxpayers who are under examination are not eligible to participate.
4. Apply for Participation in the Offshore Voluntary Disclosure Program (OVDP)
The Offshore Voluntary Disclosure Program (OVDP) is currently intended as a way for taxpayers to return to compliance and escape criminal prosecution if they previously violated tax laws knowingly. Generally speaking, participation in the program requires taxpayers to submit tax returns as well as FBARs for the previous eight years, submit information about their unreported foreign accounts (in detail), pay any taxes due, pay accuracy penalties, pay penalties for delinquency (as high as 47.5% of taxes due), and pay interest on the delinquent taxes for the full 8 year period. Additionally, there is a civil penalty of 27.5% of the greatest amount in the foreign accounts over the 8 years. This penalty increases to 50% if an investigation has been initiated by the DOJ or IRS into the institution where the accounts reside. Still, this program may be a good option for US persons who would otherwise be subject to even larger civil penalties, and even prosecution as a criminal act.
The options described above are not available to those who are already being audited by the IRS, or whose violation has previously been noticed by a governmental agency. So, it is important to correct mistakes with FBARs in a timely fashion, especially now that there are new FATCA requirements for foreign banks that require disclosure to the Internal Revenue Service of their US account holders.