The United States taxes its citizens and residents on their worldwide income. To evade U.S. income tax, U.S. taxpayers were transferring their funds to foreign financial institutions, which are not required to report income generated by the funds to the U.S. Internal Revenue Servivce. Congress responded by enacting the Bank Secrecy Act and its FBAR filing requirement. “FBAR” is short for FinCEN Form 114, Report of Foreign Bank and Financial Accounts. “FinCEN” is short for U.S. Treasury’s Financial Crimes Enforcement Network, which administers the FBAR program.
Every U.S. person who has a financial interest in, or signature authority over, foreign financial accounts with an aggregate balance exceeding $10,000 at any time during a calendar year must report their interests in foreign accounts on an FBAR for that year. An FBAR reports the U.S. person’s name, address, and taxpayer identification number. An FBAR also reports information about the U.S. person’s foreign accounts for the calendar year, such as the name and address of the foreign financial institution, the account number, and the high balance of the account for the year, converted into U.S. Dollars as of the end of the year. An FBAR reports much the same information as Form 8938, Statement of Specified Foreign Financial Assets, filed with the taxpayer’s U.S. income tax return. An FBAR for a calendar year after 2015 is due to be filed by the 15th day of April succeeding close of the calendar year, but FinCEN automatically extends the FBAR filing deadline six months, to the succeeding October 15. No other FBAR filing extensions are available.
FBARs for calendar years before 2016 were due to be filed by the succeeding June 30, and they could not be extended.
“Financial account” includes a bank account, a stock brokerage account, and a mutual fund account. “Financial account” also includes a life insurance policy or an annuity with a cash balance.
“Foreign financial account” is a financial account with a foreign address. It excludes a U.S. branch of a foreign financial institution.
A U.S. person is subject to a penalty of $10,000 for failure to timely file an FBAR. The penalty increases to the greater of $100,000 or 50% of the aggregate high balance of the U.S. person’s foreign financial accounts for the year if the failure to timely file the FBAR was willful (this is called the “draconian” FBAR penalty, and it is rarely assessed). A failure to timely file an FBAR is willful if the U.S. person is aware of the FBAR filing requirement and deliberately fails to observe it. The statute of limitations on assessment of an FBAR civil penalty is six years, and it runs from the due of the FBAR, without extension, whether or not the FBAR was timely filed.
There is no civil penalty for failure to timely file an FBAR if the failure was due to reasonable cause.
Assessment of an FBAR civil penalty does not raise a lien against the taxpayer’s assets. The government will have a lien for the penalty against the taxpayer’s property only if it brings a civil action against the taxpayer, and recovers a judgment.
Willful failure to file an FBAR may also be the subject of a criminal prosecution. A person convicted of such an offence shall be fined not more than $250,000, or imprisoned for not more than five years, or both. A person convicted of willfully failing to file an FBAR while violating another law of the United States, or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, or imprisoned for not more than 10 years, or both. The statute of limitations on a criminal prosecution for willful failure to file of an FBAR is five years, and it runs from the due date of the FBAR, without extension.
Criminal prosecutions for willful failure to file FBARs are extremely rare. Paul Manafort was convicted for willful failure to file FBARs.
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