Correcting Common FBAR Errors

Currently, the US government has 5 solutions to correct FBAR errors.

Participation in the two formal disclosure programs is permitted only if the funds held in the foreign financial account(s) are from a legal source (and not the proceeds of an illegal activity) and if the IRS is not already in a position to know of the person’s noncompliance.

1. File an Amended FBAR

According to the FBAR instructions, a person who previously filed an FBAR but mistakenly provided incomplete or inaccurate information on the form can file an amended FBAR. FinCEN Form 114 includes a box for providing a brief explanation of the error. Because of the 6 year statute of limitations, a filer need not correct an error on an FBAR filed more than 6 years ago.

Filing an amended or delinquent FBAR outside one of the IRS’s penalty relief programs provides NO penalty protection and therefore requires very careful consideration. The IRS may impose penalties if it later determines that the FBAR error was willful or due to negligence. On the other hand, no penalties may be imposed under the law if the error was due to reasonable cause (i.e., an innocent mistake). Even if the error was not due to reasonable cause, under the IRS’s penalty mitigation guidelines, the IRS has discretion to determine that a penalty would be inappropriate and may instead issue an FBAR warning letter. This approach is not recommended due to the lack of penalty protection.

2. File Pursuant to the IRS’s Delinquent FBAR Submission Procedures

A person who has not previously filed an FBAR, but who has properly filed federal income tax returns that fully reported the income from any foreign account(s), may be eligible for the IRS’s Delinquent FBAR Submission Procedures. Under the Delinquent FBAR Submission Procedures, “[t]he IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.” Therefore, there can be NO unreported income.

The U.S. person must e-file the delinquent FBAR and include a statement that persuasively explains why the FBAR is being filed late. Although not required by the procedures, the explanation should also reference that the FBAR is being filed pursuant to the “IRS’s Delinquent FBAR Submission Procedures.”

3. File Pursuant to the IRS’s Streamlined Filing Compliance Procedures: Streamlined Domestic Offshore Procedure (SDOP)

The IRS’s Streamlined Domestic Offshore Procedure (SDOP) is available for a resident U.S. person who non-willfully failed to file an FBAR and/or failed to report on a U.S. tax return income related to foreign financial account(s). Note that a taxpayer currently under examination is not eligible for the streamlined program.

In general, a taxpayer is eligible to participate in the streamlined program if his or her failure to file a U.S. tax return and/or FBAR was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) for 3 prior years and FBARs for 6 prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, FBAR and information return penalties, as well as criminal liability. The IRS carefully reviews and scrutinizes every certification.

The IRS will also impose a penalty equal to 5% of the maximum aggregate balance in the unreported foreign financial account(s) during the 6 year period.

4. File Pursuant to the IRS’s Streamlined Filing Compliance Procedures: Streamlined Foreign Offshore Procedure (SFOP)

The IRS’s Streamlined Foreign Offshore Procedure (SFOP) is available for a nonresident U.S. person who mistakenly failed to file an FBAR and/or failed to report on a U.S. tax return income related to foreign financial account(s). These procedures are also available for a nonresident U.S. taxpayer who failed to file a federal income tax return (i.e., Form 1040). Note that a taxpayer currently under examination is not eligible for the streamlined program.

In general, a taxpayer is eligible to participate in the streamlined program if his or her failure to file a U.S. tax return and/or FBAR was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) for 3 prior years and FBARs for 6 prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, FBAR and information return penalties, as well as criminal liability. The IRS carefully reviews and scrutinizes every certification.

In general, the IRS will not impose any penalties on a participating nonresident taxpayer.

5. Apply to Participate in the IRS’s Updated Voluntary Disclosure Program (VDP)

In general, the VDP requires a taxpayer to file 6 prior years’ tax returns and FBARs, provide detailed information regarding any unreported foreign financial account(s), and pay all taxes for the 6 year period.

In addition, the IRS imposes a civil fraud penalty equal to 75% of the highest one year’s tax due during the 6 year period. Taxpayers can request the imposition of 20% lower-accuracy-related penalties instead of civil fraud penalties, but must present compelling persuasive evidence to support their request. Also, the IRS imposes an FBAR willful penalty equal to 50% of the single maximum aggregate balance in the unreported foreign financial accounts during the 6 year period. Taxpayers may request the imposition of non-willful FBAR penalties instead of willful FBAR penalties based on a showing of appropriateness.

Nevertheless, this program remains a potentially attractive option for a U.S. person otherwise exposed to even greater civil penalties or possible criminal prosecution.

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