The FBAR: Who Should File? Do you have income overseas you forgot to report? Did Grandpa leave you his foreign bank account when he passed away? If you have foreign bank accounts holding more than $10,000 in the aggregate anytime during the year, you are required to file an FBAR (Report of Foreign Bank Accounts) by June 30th of the following year. It doesn’t matter whether the foreign accounts generate income or not; just owning them, or having signature authority, requires you to file.
What’s the Big Deal? Failure to file can result in serious consequences. The sanctions for not completing the FBAR include numerous severe civil penalties and potential prosecution followed by a term in federal prison.
New in 2011: Form 8938 Beginning in 2011, the IRS has added Form 8938 to the individual 1040 tax return, further tightening the noose on taxpayers failing to report ownership of overseas accounts. If you fail to file Form 8938 or fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for your income tax return (Form 1040) until three years after the date you file a complete and accurate Form 8938.
What Can I do Now? In order to encourage taxpayers to correct previously filed returns that were false, or to remedy past failures-to-file tax returns, the IRS created in the early 1950s the “Voluntary Disclosure Policy” – a policy under which no criminal prosecution will be initiated if the taxpayer comes forward before the IRS is onto him. In 2009, as the IRS became aware of increased offshore tax abuse, it initiated the formal Voluntary Disclosure Program for offshore accounts. While making a voluntary disclosure doesn’t guarantee immunity from prosecution, taxpayers making truly valid disclosures are rarely, if ever, prosecuted.
Ready….Set….File! It’s important to realize that the Voluntary Disclosure Program essentially sets up a race between you and the IRS. In order to avoid criminal prosecution you must come forth before the IRS comes knocking. A growing number of foreign banks are sharing American accountholder information with the IRS, so time is of the essence.
Better Safe than Sorry While the current voluntary disclosure program is currently running indefinitely, the rules can change at any time. The FBAR penalty has been raised in 2012 to 27.5% of the largest balance during the period covered by the voluntary disclosure. Sounds like a steep price to pay? The penalties are far greater if you don’t “get with the program” and then get caught. In addition, disclosing now allows you to transfer the money to your American accounts as well as to implement gifting and other estate planning strategies. Finally, for a “Get Out of Jail Free Card” it’s a pretty good deal. Now you will be able to sleep at night!