The FBAR penalty.
FBAR penalty law is constantly changing. Stay up to date with the latest news by visiting our FBAR blog here.
Did you know that the the FBAR penalty is calculated not on your account earnings, but rather, on your account value? For instance, if you have an account that is worth $1,000,000, the IRS, for one year, can asses a $500,000 FBAR penalty. And for two years, the FBAR penalty could be equal to the amount of the account. You see, the IRS is not limited to just two years, the IRS could potentially assess the FBAR for 6 or more years.
So you can see the FBAR penalty can be particularly devastating. So you need great advice on how to best deal with your unique situation.
But did you know there is a way out of this jam?
This is how to beat FBAR penalties:
You need to show the IRS one or more of the following:
• you relied on the advice of a professional tax adviser who was informed of the existence of the foreign financial account.
• you had a legitimate purpose for establishing the unreported account. For instance, you opened the account because you are a dual citizen, or use the money to fund operational expenses overseas, like a rental property.
• you lacked any intentional effort to conceal income or assets related to an unreported foreign account. So despite the non-filing of the FBAR, you took no action to hide the existence of the account.
• you don’t have an outstanding tax bill. Or whatever unreported income you have, you already amended and paid the outstanding taxes before applying for FBAR penalty abatement.
But in order to get the IRS to listen to you, you must use the Offshore Voluntary Disclosure Initiative. The current rules process is here: The 2012 Offshore Voluntary Disclosure Initiative, and subsequently opt-out to obtain lower penalties. In some cases however, especially where there is no unreported income, a OVDI is not necessary. In either case it is best to speak to a qualified offshore tax attorney in order to find the right path for you.
When will the IRS attempt to asses FBAR penalties? When the following factors are present:
• you failed to disclose a foreign financial account to your tax return preparer. That is, you never mentioned the unreported earnings on your tax return.
• your background and education indicate that you should have known of the FBAR reporting requirements. For instance, if you are employed as an international banker, it will be difficult (but not impossible) to claim you did not know about the FBAR filing requirement. The truth is that many Americans do not understand that all income earned globally is subject to US taxes. This is known as universal tax jurisdiction. You can learn about the history of Universal Tax Jurisdiction here.
• a tax deficiency related to the unreported foreign account. If you have an unreported income, be sure to pay the taxes if you are going to dispute the assessment of the FBAR penalty.
In cases where you do not think you have reasonable cause, then it is likely best to utilize the 2012 Offshore Voluntary Disclosure Initiative. Instead of opt-outing of the standardized penalty structure like someone with reasonable cause, someone without reasonable cause would agree to accept the predetermined penalty rate. In this case, the FBAR penalty is 27.5% of the highest account value in the last 8 years. The good news is that it is limited to a one-time application.
No doubt it is a difficult decision to make. Debating between making a full disclosure, or continue to hide, or something in between. Making it more difficult is that in these economic conditions, with the low rates of returns, most taxpayers realize it will take several years to rebound from these penalties. Something that helps many of our clients make their decision is this question: What good is money if you don’t have freedom, or if you are so worried about losing your freedom, your money can’t buy you security?
Contact us to schedule a confidential consultation to discuss your FBAR issue. We’ve helped hundred of people just like you make the decision that was right for them.