How to avoid a 6-figure tax penalty on foreign bank accounts
You may have heard of FBAR filing, but you don’t know what it is. FBAR stands for “Foreign Bank Account Report”, and refers to FinCen Form 114, Report of Foreign Bank and Financial Accounts. What does it entail? Well, whether you’re an ex-pat or U.S.-based, you may need to report your foreign accounts to the U.S. Department of the Treasury by April 15 — or face costly tax penalties. You need to disclose if combined balances exceed $10,000 at any point during the year, you have “financial interest” or “signature authority” over accounts – regardless of whether they produced income…
The maximum penalty for willful violations is $129,210 or 50% of the amount you failed to report.
The anti-money laundering Bank Secrecy Act of 1970 requires Americans with overseas assets to disclose holdings. While most Americans know to file taxes, the FBAR can be easy to overlook. One problem: You can’t file this using commercial tax software. Instead, account owners must file the FBAR digitally through the Financial Crimes Enforcement Network’s Report 114. One big difference between regular taxes and the FBAR is you report each account’s maximum balance during any point in the year instead of the year-end total.
For example, let’s say you had a foreign bank account with a $7,000 balance for most of the year. If the amount jumps to $100,000 for one day, you’ll report $100,000 on the FBAR. But you don’t pay taxes on that amount. Another point of confusion is which accounts to disclose on the FBAR, which may include bank accounts, brokerages, or even trusts. You may not realize you need to report accounts if you have “a financial interest” or “signature authority”. If you’re overseeing accounts for retired parents in Germany, for example, you may need to disclose those. The definitions are really broad as far as what must be reported.
50% of the amount you failed to disclose
If you don’t file the FBAR when required, penalties may depend on whether it’s seen as a “willful” or “non-willful” violation. While the maximum fee for a mistake is $12,921, a willful violation may incur a whopping $129,210 penalty or 50% of the amount you failed to disclose, whichever is greater. That means if you willfully didn’t report $1 million in a foreign account, you may have to pay a $500,000 fee.
It’s one of the biggest hammers in the code. The penalties aggressively and actively encourage compliance. And in extreme cases, there are criminal penalties that may include jail time. Ultimately, disclosure is your friend.