You need to file a Report of Foreign Bank and Financial Accounts (FinCEN Firm 114) each year that you have offshore accounts with cumulative balances that cross the $10,000 threshold. If you are a U.S. person and fail to make the disclosure, the civil penalties are stiff.
For a non-willful failure to file a FBAR, the civil penalty is up to $10,000 and can be applied each year you miss the required disclosure. When willful, the penalties skyrocket and can reach 50 percent of the value of unreported accounts up to $100,000.
Getting back into compliance and the Bedrosian example
Earlier this year, the tax court ruled in favor of a taxpayer who failed to file FBARs for a number of years. The taxpayer had set up a UBS bank account in the 1970s to accommodate his international travel. In 2006, he mentioned to his accountant that he had never filed FBARs. His accountant told him he had been breaking the law and advised him not to start, because he “could not unbreak the law.”
In 2007, when his first accountant died and a second accountant took over, he disclosed one of his Swiss account. At that time, he had two accounts. The one disclosed had about $240,000. The one he failed to disclose had more than $2 million.
It was not long after that UBS notified him that he needed to transfer his accounts to another bank. What they failed to inform him was that his information has also been given to the IRS. The Service began auditing his returns in 2011.
Willfulness – whether he knowingly or recklessly violated a law – became the main point of contention. This question is highly fact specific and generally involves looking at the facts in other cases and weighing whether behavior was as bad.
The court in Bedrosian’s case found that he was not willful in his failure to report the larger account. Requesting not to get regular statements and meeting once a year with a banker did not rise to the same level as the facts in other FBAR willfulness cases.
The advice of the accountant in the example is incorrect today. There are ways to come back into compliance. The Offshore Voluntary Disclosure Program and Streamlined Filing Compliance Procedures provide options that were not available in the mid-2000s. Speak with a tax attorney, however, when deciding which strategy works best for your situation.