What are the penalties for not filing an FBAR? The ultimate (likely) consequences.
Let’s just this out of the way — we aren’t going to be talking about jail. The reason is that for most FBAR non-filers, going to jail for failing to file an FBAR is about as likely as dying in a plane crash.* The point of this article to to discuss the likely consequences for not filing an FBAR – the FBAR penalty.
How 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:[nbox type=”info”]
Unfiled FBARs for 2008-2011
Average Account Balance: $350,000
- FBAR penalty if non-willful: $40,000 (4 violations @ $10,000 per year)
- FBAR penalty if willful: $700,000 (4 violations @ $175,000 per year)
FBAR penalty collection is unlike IRS debt collection.
Once assessed, none of the typical collection or appeals processes are followed. The Treasury Department actually has to sue you in order to collect on the FBAR debt. In once 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, a program that isn’t exactly fair, but at least creates a known outcome that can be planned around.[nbox type=”simple”]*This is likely an exaggeration. The risk of dying in a plane crash are less than going to prison for an FBAR violation. This is our reasoning: there are, in our estimation, 1.5 million taxpayers (most of those expats) who somehow failed to file an FBAR. The vast majority are not using the OVDP/OVDI. Yet we would be surprised to see more than 300 taxpayers to go to jail over the next 10 years for FBAR violations. This is just our opinion and definitely not anything you can rely upon as a defense. The point is, there is no way the IRS can put anything but the smallest fraction of FBAR violators behind bars. The IRS usually just wants the money. [/nbox]