Many Americans living abroad believe that they don’t need to worry about taxes because they don’t live in the United States. Unfortunately, this belief has gotten many citizens into trouble, including Boris Johnson, Prime Minister of the United Kingdom, who learned he owed the IRS a significant amount of money due to his citizenship, despite his living outside the U.S. since age five.
While most Americans living abroad won’t need to pay taxes, they must file. Besides a standard tax form, they must also include an FBAR. Failure to do so can result in enormous fines and other penalties. If you find yourself behind on your FBAR forms, you may want to contact an experienced tax lawyer to protect yourself from these penalties.
What is FBAR?
An FBAR, or Report of Foreign Bank and Financial Accounts, is an IRS form that helps the department track American’s foreign investments. Regardless of location, an American citizen, corporation, limited liability company, partnership, trust, and estate, or foreign citizens residing in the U.S. must file an FBAR if they exceed the stated limit.
As of 2021, the limit for the FBAR was $10,000. This means that if your name is on a foreign account that exceeded $10,000 at any point in the last year, you must file an FBAR. If you have more than one, you must include all the accounts, even if they are joint accounts.
According to the IRS, you don’t need to file an FBAR if your account is:
●A Nostro or Correspondent account
●Associated with a U.S. military bank
●Owned by an international financial institution
●In a trust, if an American in charge of the trust files an FBAR
●Part of your IRA (Individual Retirement Account)
●In a retirement plan
Additionally, you don’t need to file an FBAR if you already reported your accounts on a consolidated FBAR or if all the accounts are co-owned with your spouse, who has filed an FBAR.
The deadline for the FBAR is April 15, but everyone receives an automatic extension until October 15. You need to file an FBAR annually.
The IRS can target you for an FBAR audit, where they check your foreign accounts for sums above $10,000 and ask for your tax records, including proof that you filed FBARs. You must keep your FBARs for at least five years in case of an audit. If you failed to file an FBAR, whether willfully or unintentionally, you can receive hefty fines or suffer criminal penalties.
It is up to the IRS to determine whether you committed a negligent, non-willful, or willful violation.
If the IRS targets you with an audit and believes you should have known about the FBAR requirements, you must still pay a fine. However, it’s significantly lower than other types of violations. In 2021, the maximum fine is $1,118 per violation, with no criminal penalties. This violation cannot be applied to individuals and can be applied in tandem with a non-willful violation.
If your company demonstrates a pattern of negligent violations, you can receive a fine of up to $86,976 per violation.
Non-willful violations apply to both individuals and companies. If you didn’t know you had to file FBARs, the IRS could charge you with a non-willful violation. With a maximum fine of $12,921 per negligent violation, the penalties are steep. However, you may be able to reduce or eliminate the fine by proving reasonable circumstances. Working with an experienced tax lawyer can help you get out of this fine.
Like the negligent violations, this violation does not carry any criminal penalties.
Willful Failure to File
If, after their audit, the IRS believes you willfully failed to file your FBAR, despite knowing about the requirement, you could receive significant fines and jail time. The IRS can fine you either 50% of what’s in your account or up to $129,210, whichever number is larger. Additionally, criminal penalties can reach $250,000, five years in jail, or a combination.
Willful Failure to File While Committing Other Crimes
If you commit other crimes in addition to failing to file an FBAR, you receive even higher fines. The IRS can take up to 50% of the money in your account or up to $100,000, whichever is higher, and you can also receive a criminal penalty of $500,000, ten years in prison, or both.
If you willingly and knowingly file a false FBAR, the IRS can take up to $100,000 or 50% of your account, whichever is more. Additionally, you can receive a $10,000 fine, five years in prison, or both.
If you have not filed an FBAR, it’s significantly better to do so before the IRS contacts you for an audit. Often, you can file delinquent FBARs with an explanation for their delay. The IRS accepts answers like you didn’t know about the requirement until today, but it’s best to have an experienced accountant or tax lawyer fill out your form.
If the IRS contacts you for an audit, you should immediately contact a tax attorney who is knowledgeable about international reporting requirements. With such high fines and significant jail time possible, you want to ensure you have legal protection. An attorney knows the terminology to convince the IRS that you did not commit a willful violation.
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