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New guidance explains how certain taxpayers can file delinquent FBARs without penalty

IRS has provided procedures for filing a delinquent Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90.22.1), without penalty, by taxpayers that use neither the Offshore Voluntary Disclosure Program (OVDP) nor the Streamlined Filing Compliance Procedures.

Background. The Bank Secrecy Act (BSA) gave the Treasury Department authority to collect information from “U.S. persons” who have financial interests in or signature authority over certain financial accounts maintained with financial institutions located outside of the U.S. In general, an FBAR is required under the BSA if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. For this purpose, a U.S. person includes: a U.S. citizen or resident; an entity created or organized under U.S. laws such as a corporation, partnership, or limited liability company; and a trust or estate formed under U.S. laws. U.S. persons that are disregarded for tax purposes may be required to file an FBAR.

The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as U.S. financial institutions. The FBAR is also a tool used by the U.S. government to identify persons who may be using foreign financial accounts to circumvent U.S. law. Information contained in FBARs can be used to identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

Except in the case of willful failures, the amount of any civil penalty imposed for violating the requirement to file FBARs will not exceed $10,000. However, those who willfully fail to file their FBARs on a timely basis, i.e., on or before June 30 of the following year, can be assessed a penalty of up to the greater of $100,000 or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR. IRS has discretion as to the amount of the penalty, subject to these limits. (31 USC 5321(a)(5)(C))

RIA observation: IRS recently provided guidance on computation of the FBAR penalty and the maximum amount that would be imposed. See Weekly Alert ¶  28  06/16/2015 for more details.

Filing delinquent FBARs. According to the FBAR instructions, delinquent FBARs should be filed by U.S. persons who:

  • do not need to use either the OVDP or the Streamlined Filing Compliance procedures to file delinquent or amended returns to report and pay addition tax,
  • have not filed the required FBARs,
  • are not under a civil examination or a criminal investigation by the IRS, and
  • have not already been contacted by the IRS about the delinquent FBARs.

Steps to resolve delinquent FBARs. According to IRS, the following steps should be followed to resolve delinquent FBARs:

1. Review the instructions.
2. Include a statement explaining why the FBARs are being filed late.
3. File all FBARs electronically with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department.
4. Select a reason for filing late on the cover page of the electronic form.

To determine possible alternatives to electronic filing, the FinCEN’s Regulatory Help line at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the U.S.) may be contacted.

Penalty relief.IRS will not impose a penalty for the failure to file the delinquent FBARs, if the taxpayer: (i) properly reported on its U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and (ii) has 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.

References:For foreign financial accounts reporting requirements, see FTC 2d/FIN ¶  S-3650; United States Tax Reporter ¶  60,114.06; TaxDesk ¶  815,516; TG ¶  60611.

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