Offshore account holders: Take note of recent FBAR changes

The IRS has recently made some changes that are relevant to U.S. taxpayers with foreign bank accounts and other international financial assets. These changes may benefit foreign account holders by making it easier to comply with their tax obligations and easing the penalties they could potentially face when a mistake, oversight or other circumstances result in a failure to properly disclose those accounts.

A new deadline for reporting foreign accounts

All U.S. taxpayers, including U.S. citizens living abroad, are required to make a disclosure to the IRS if they have foreign financial accounts with a total value of over $10,000 at any time during the year. Those assets must be reported separately from the individual’s income taxes on a form frequently referred to as an FBAR, which is more formally known as FinCEN Form 114 or Report of Foreign Bank and Financial Accounts.

Taxpayers with foreign accounts above the $10,000 threshold are required to file an FBAR even though, in most cases, they have already reported the income from the accounts on their individual income taxes. Complicating tax compliance matters further, the FBAR filing deadline was set at June 30 until recently, 90 days later than the filing deadline for income tax returns. To help streamline the reporting process and simplify compliance, the IRS recently announced that the FBAR deadline would be moved to April 15 to correspond with the regular income tax return deadline beginning in 2016.

Changes to FBAR penalty structure

Another recent change regarding FBAR policies at the IRS affects taxpayers who are out of compliance with their offshore account reporting obligations. In a memo issued internally earlier this year, the IRS established a new policy to guide revenue agents in assessing civil penalties against taxpayers with unreported accounts. Under the new structure, FBAR violations that are determined to be willful are generally capped at 50 percent of the highest value of the unreported accounts, while non-willful violations are penalized with a $10,000 fine per year to cover all unreported accounts.

However, the new guidance also gives agents broad discretion to depart from those guidelines on a case-by-case basis depending on the circumstances involved, such as the conduct of the account holder and the value of the unreported assets. Thus, in cases determined to be particularly egregious, the agent may recommend a harsher penalty of $10,000 per year per unreported account. Similarly, if an agent determines that a more lenient penalty is warranted, he or she may recommend a single $10,000 fine to cover all years and all accounts.

Even with these changes, however, it is important to keep in mind that failure to report foreign financial accounts can also lead to other serious penalties in addition to these described here, including possible prison time and criminal fines.

Get legal advice before taking action on unreported accounts

If you have questions or concerns about unreported foreign assets, it is important that you seek advice from a skilled tax lawyer before taking steps to resolve the situation on your own. An attorney with experience in this complex and high-stakes area of federal tax law can help you evaluate the options that are available to you and help you plan your next steps in a way that is designed to minimize your legal and financial risks. Contact the knowledgeable tax attorneys at Allen Barron to begin the process of addressing the situation and setting it right again.