One of the most common FBAR problems arise from a failure to keep required records. The reporting requirements are not onerous, but taxpayers who are managing multiple accounts or making complicated business transactions can sometimes end up running afoul of the FBAR’s reporting requirements. Anyone who has a financial interest in a foreign bank account must keep records that contain information regarding the name under the account is maintained, the number that designates the account, the name and address of the foreign financial institution where the account is maintained, the type of account, and the value of the account. Federal law requires that these records be kept for five years from the June 30 due date for filing the FBAR for that calendar year and be kept available for inspection as provided by law.
Obviously, accidents can happen. Employees entrusted with filing the FBAR report may mishandle it, individuals with dozens of international bank accounts might lose track of their money, and life circumstances (health problems, relationship troubles, etc.) could make it difficult to manage a large and diffuse financial portfolio. The Internal Revenue Manual gives the example of a taxpayer who has failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts, but properly reported the income from each account and made no attempt to conceal the existence of the accounts. In this instance, the underlying facts and circumstances would determine whether the examiner imposes civil FBAR penalties or merely sends the FBAR warning letter (“Letter 3800, Warning Letter Respecting Foreign Bank and Financial Accounts Report Apparent Violations”).
In most of these situations, a non-willful penalty amount up to $10,000 is the likely remedy, with mitigation factors applied to the penalty, such as reasonable cause for the violation or proper reporting of the account balance. In more extreme cases, such as when a taxpayer goes out of his or her way to remain completely ignorant of the extent of his financial holdings or deliberately conceals them, the burden falls on the IRS to demonstrate willfulness of the violations, which could trigger a $100,000 penalty or 50% of the balance in the account at the time of the violation.
For a free phone consultation regarding the FBAR or other tax matters, please contact the Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.