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IRS FBAR Form: What Is It and Why so Dangerous?

by: Anthony Parent   2012-07-24

The IRS FBAR form is a required informational return for any US taxpayer who owns or controls foreign financial accounts totaling $10,000 or more. FBARs must be filed with the IRS when your tax return is due. If you do not file on time, you will be granted one automatic 6 month extension. It must be filed online, there is no longer a paper FBAR that is mailed in. Read our step by step filing instructions here.

 

The complicated and strange rules of the IRS FBAR form are best explained by explaining the evolution of the form and the laws 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 they might be able to hinder criminals from using bank accounts to further their objectives, passed the Bank Secrecy Act of 1970. Part of the act was a new requirement that required taxpayers to report their foreign accounts directly by use of Form 4683 instead of reporting those accounts to the IRS. This first 'FBAR' was filed with a taxpayer's return. And -- despite the 40+ year time-window -- the reporting threshold remains at $10,000 today.

 

Unfortunately, because of the Watergate scandals and attempted misuse of the IRS, tensions were high. There were worries that unauthorized political opponents could access the first FBAR in 1976, and the law was changed to rename the FBAR as the Treasury Form Report of Foreign Bank and Financial Accounts (TD F 90-22.1).

 

The Financial Crimes Enforcement Network (FinCEN), created by Congress to address international crimes, became responsible for collecting and administering the FBAR. FinCEN -- with a really over-the-top approach -- 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 cases of tax evasion, but rather international crimes like money laundering and drug trafficking that only incidentally involved tax evasion (i.e. Al Capone). The idea was to use tax evasion as a tool or reason to uncover much more substantial crimes.

 

For years, there was a requirement that taxpayers file an FBAR. However, this mandate was often overlooked, mainly because it was not a huge concern for the agency responsible for collecting it. Up to this point, it's not too difficult to understand the reasoning and execution of the FBAR. Well, things are about to get a bit more complicated.

 

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 crippling act of terrorism. At this point, multiple things started happening at the same time. 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. After all, why would a criminal willingly submit their financial information? It stands to reason that the people submitting their information were the ones who had nothing to hide.

 

With the increased workload, there was simply no way that FinCEN could keep up. 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.

 

As is the case with all things the IRS touches, things were about to get a lot messier and infinitely more complicated.

 

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 failed to file. The IRS did not need to prove a state of mind any longer. Instead, it became the burden of the taxpayer to prove they had reasonable cause. So, with the standard six-year look-back period, the IRS could assess a penalty equal to 300% of a taxpayer's entire net worth unless the taxpayer can prove they were unaware of the need to file or that they had reasonable cause to not file.

 

Let's look at that again, this time as an equation:

(FBAR Filing requirement + No FBAR filed) = (50% of account value penalty) x (years of non-compliance)

 

Not only does this make for a staggering amount owed, but the number arrived at holds little base in reality. Believing that anyone could possibly pay the penalty is a wild display of delusion.

 

H1B visa holders, dual citizens, and ex-pats

Based on our experience, these new IRS FBAR rules have had a disproportionate impact on foreign-born nationals, H1B and other visa holders who send or earn money overseas. This 50% FBAR penalty threat is absurdly over-the-top, especially for many taxpayers who never had any intention of evading taxes. However, there is substantial likelihood that those who 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.

 

Conclusion

Wherever you are in the process -- realizing you need to file all the way up to missing years of filed forms -- take a deep breath. We often have people call us, and the stress and fear they are feeling is almost debilitating. There is hope; contact us and we can help get you on the right track for your situation. Call us at 888-727-8796 or email info@irsmedic.com.

 


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