What is the IRS FBAR form anyway?
Why is it so dangerous to get it wrong?
The IRS FBAR form is a informational return that any US taxpayer who owns or controls foreign financial accounts that exceed $10,000.00 in total must file with the IRS every June, regardless if an extension to file a 1040 was filed or not. The FBAR is not sent in with form 1040, but rather, to an address in Detroit. The complicated and strange rules of the IRS FBAR form are best explained by explaining the evolution of the form, and law and regulations that changed along the way.
The First IRS FBAR Form
During the late 1960’s, the US government expressed growing concern over international criminal cartels. Congress, thinking if they could hinder criminals from using bank accounts to further their objective passed the Bank Secrecy Act of 1970. Part of the act was a new requirement that instead of reporting foreign accounts to the IRS, taxpayers would directly report those accounts to the using Form 4683. This first ‘FBAR’ was filed with a taxpayers return. Like today, the reporting threshold is $10,000.00
But because of the Watergate scandals and attempted misuse of the IRS, worries that unauthorized political opponents could access the first FBAR, in 1976, the law was changed so that the FBAR was renamed to Treasury Form Report of Foreign Bank and Financial Accounts (TD F 90-22.1).
The Financial Crimes Enforcement Network (FinCEN), which was create by Congress to address international crimes, became responsible for collecting and administering the FBAR. But FinCEN was more interested in catching violent criminals than minding the international transactions of regular US citizens. You have to keep in mind, FinCEN’s objective is not necessarily to catch tax evasion directly, but rather international crimes like money laundering, drug trafficking that only incidentally involved tax evasion (i.e. Al Capone).
So for years, there was a requirement that taxpayers file an FBAR. However, this mandate was often overlooked, because it was not a huge concern of the agency that was responsible for collecting the form.
Post 9-11 enforcement
Everything changed in 2001. The political mood of the United Sates was to give the government as much power as they requested in order to avoid another 9/11. So many things happening simultaneously. First, FinCEN started actually looking at FBARs. But because of increased scrutiny, FinCEN could no longer handle the amount of FBARs being submitted. They were wasting their resources reviewing documents of US taxpayers who were in no danger of breaking any laws. In fact, those filing FBARs at the time were the least likely to break the law.
So FinCEN asked the IRS to take over the administration of the FBAR. And now the IRS went back to administering the form; it began reviewing and assessing FBAR penalties.
Then a huge change occurred.
A monumental change in assessing FBAR penalties
To the detriment of any taxpayer who failed to file an FBAR, the rules were dramatically changed. Everything was switched around. It used to be that IRS had to prove beyond a clear and convincing standard that a taxpayer
- knew about the FBAR, and,
- refused to file one.
The IRS could now assess a 50% FBAR penalty on any taxpayer who had an FBAR filing requirement and simply did not file one. the IRS did not need to prove a state of mind (or mens rea) any longer. It has become the burden of the taxpayer to prove they had reasonable cause. So with the standard 6-year look-back period, the IRS could assess a penalty equal to 300% of taxpayer’s entire net worth, unless the taxpayer can prove then didn’t know they needed to file one or had some other reasonable cause.
Let’s state that again, in equation format:
(FBAR Filing requirement + No FBAR filed) = (50% of account value penalty) x (years of non-compliance)
H1B visa holders, dual citizens, ex-pats in dire need of utilizing the Offshore Voluntary Disclosure Initiative.
Based on our experience, these new IRS FBAR form rules have had a disproportionate of impact on foreign-born nationals, H1B and other visa holders who send or earn money overseas. This 50% FBAR penalty threat is incredibly draconian police power, especially on many people who never had an intent to evade taxes. However, there is substantial likelihood that those how made an honest mistake can seek a one-time FBAR penalty reduction using the Offshore Voluntary Disclosure Program. And for smaller account holders the penalty is a one-time 12.5% regardless of circumstances.
Request our free IRS FBAR form disclosure guide
Because the rules can’t be explained in the blog post, we created a special guide to help you decide if the OVDI initiative would help someone you know with this tax situation. Just sign up below. We don’t need your real name, just some place to send the information.