Correcting Common FBAR Errors

The IRS offers four options to fix FBAR mistakes. 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 is required to file an amended FBAR. FinCEN Form 114 includes a box for providing a brief explanation of the error. Because of the six-year statute of limitations, a filer need not correct an error on an FBAR filed more than six years ago.

Filing an amended or delinquent FBAR outside one of the IRS’s penalty relief programs does not afford any penalty protection and therefore requires 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.

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.”

The U.S. person should e-file the delinquent FBAR and include a statement that 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

The IRS’s Streamlined Filing Compliance Procedures (commonly referred to as the “Streamlined Offshore Program”) are available for a resident or 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).

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 three prior years and FBARs for six prior years, along with a 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.

In general, under the terms of the streamlined program, the IRS will not impose any penalties on a participating nonresident taxpayer. For a taxpayer resident in the U.S., the IRS will impose (1) accuracy penalties (20 percent) on the unreported tax, and (2) an FBAR-type penalty equal to 5 percent of the maximum aggregate balance in the unreported foreign financial account(s) during the six-year period. The streamlined procedures are fully described on the IRS’s website.

4. Apply to Participate in the IRS’s Offshore Voluntary Disclosure Program

The current iteration of the OVDP program is intended to help those taxpayers who knowingly violated the tax laws to come back into compliance and avoid criminal prosecution. In general, this program requires a taxpayer to file eight prior years’ tax returns and FBARs, provide detailed information regarding any unreported foreign financial account(s), and pay all taxes, accuracy penalties, delinquency penalties, and interest due for the eight-year period. In addition, the IRS imposes an FBAR-type civil penalty equal to 27.5 percent of the single maximum aggregate balance in the unreported foreign financial accounts during the eight-year period. The penalty is increased to 50 percent if the IRS or DOJ has initiated an investigation of the financial institution in which the accounts are held. Nevertheless, this program remains a potentially attractive option for a U.S. person otherwise exposed to even greater civil penalties or potential criminal prosecution.

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