Failure to Disclose Foreign Bank and Financial Accounts

If you have foreign assets – and in particular, foreign financial accounts – then you may already be aware that you have to report the existence of these accounts to the federal government. Even if those accounts do not generate any taxable income, you are still required to file a Report of Foreign Bank and Financial Accounts (FBAR) if the value of those accounts exceeds $10,000. A failure to do so can lead to serious civil and even criminal penalties.

FBAR violations will – at a minimum – result in steep fines of up to $10,000 per incident. If the IRS believes that you purposefully violated these reporting and recordkeeping laws, then you may be required to pay hundreds of thousands of dollars in penalties and spend as many as 10 years in federal prison. If you have received notice of an FBAR violation, you should contact a Virginia IRS lawyer as soon as possible.

Poole, Brooke, Plumlee represent both individual and corporate taxpayers on a range of tax matters involving both the State of Virginia and the federal government. Our lawyers offer strategic tax advice that is aimed at minimizing your taxes AND your exposure to potential penalties. If you have concerns about a potential FBAR violation or simply want advice on how to properly report your foreign financial accounts, reach out today to schedule a consultation with a member of our legal team.

Am I Required to Disclose Foreign Assets?

The Internal Revenue Service (IRS) requires many taxpayers to report certain foreign financial accounts to the Treasury Department. This includes bank accounts, mutual funds, and brokerage accounts. These accounts must be reported by filing a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114. These reports must be filed by April 15 each year, or October 15 with an automatic extension.

These laws are intended to combat both money laundering and tax evasion. By requiring taxpayers to file these reports, the Treasury Department can better track alleged violations of these laws.

These financial accounts must be reported by a U.S. person (including citizens, residents, corporations, partnerships, limited liability companies, and trusts and estates) if the account in question meets certain criteria. Specifically, the taxpayer must have financial interest in or authority over a financial account located outside of the United States IF the aggregate value of the account(s) exceeded $10,000 over the calendar year. Even if the account does not generate taxable income, you must still file an FBAR if its value exceeds $10,000.

In addition to filing an FBAR through FinCEN’s BSA E-filing system, you must also keep records about the account. This includes the name on the account, the account number, the name and address of the foreign bank, the type of account, and the account’s maximum value during the year. Typically, you will have to keep these records for 5 years.

FBAR is not the only form that you may need to file if you hold foreign assets. You may also need to report these accounts on forms such as Schedule B of Form 1040 and Form 8938 under the Foreign Account Tax Compliance Act. Understanding what forms need to be filed and which accounts need to be reported can be confusing. It is little wonder, then, that some taxpayers find themselves in legal hot water with the IRS over a failure to report foreign bank and financial accounts.

What Are the Consequences If I Fail to Disclose Foreign Bank and Financial Accounts?

As discussed above, if you have an ownership interest in or signature authority over foreign financial accounts above a certain value, you are required to file an FBAR each year. You must also keep records of these foreign accounts.

If you fail to file an FBAR or otherwise violate recordkeeping obligations, then you may be subject to civil monetary penalties and/or criminal penalties. The amount of the penalty is based on the type of violation and whether it is considered willful, non-willful, or negligent. 

These penalties may be imposed for each year that the FBAR is not filed. For example, if you did not file an FBAR from 2015 to 2020, then the IRS would likely consider this to be 5 separate violations. As a result, even small penalties can result in hundreds of thousands of dollars worth of fines. 

The maximum civil penalty for a non-willful violation for failure to file a FBAR is $10,000. The United States Supreme Court recently ruled that this penalty should be assessed per report – not per account. This ruling came after the IRS imposed a $2.72 million fine on a taxpayer based on the number of accounts that he had failed to report (which totaled more than 50 accounts) over five years, resulting in 272 violations. The Supreme Court found that for non-willful violations, the penalty should be assessed for each FBAR that was not filed – not for each account.

Because the potential penalties for FBAR violations are so different based on whether it is considered willful or non-willful, it is vital to work with a Virginia tax lawyer with experience with these matters. 

How an Experienced Tax Attorney Can Help

If the IRS determines that you failed to file an FBAR or committed a related violation, then it will notify you of the alleged violation. It will first send IRS Letter 3709 before the penalty is assessed. After the FBAR penalty is imposed, it will send IRS Letter 3708.

IRS Letter 3709 is commonly referred to as a FBAR 30-day letter. This letter will explain why the IRS believes that you have committed an FBAR violation and the proposed penalty. You will then have 30 days to appeal this determination. IRS Letter 3708 is a demand for payment, which includes both the penalty and any other costs, such as interest and collection expenses.

If you get a FBAR 3709 or 3708 letter, you should immediately contact an experienced Virginia tax attorney to discuss your options. If you believe that the assessment is correct, you can agree to pay the fine and submit a full or partial payment to the IRS within 30 days. Alternatively, you can appeal the penalty.

To file an appeal, you can request a conference with the IRS Appeals Office in response to FBAR Letter 3709. If you have received FBAR Letter 3708, then you will either need to file an administrative appeal, or pay the penalty and then file a lawsuit against the IRS for a refund. If you fail to respond to either letter, then the penalties will be imposed – and you won’t have any way to contest the issue.

You must consult with a tax lawyer as soon as possible after receiving FBAR letter 3709. Your attorney can help you understand why the IRS has determined that you have committed a FBAR violation, and how to respond. In some situations, the best option might simply be to pay the fine to avoid further penalties. However, even if you agree that the violation was appropriate, you may still contest the penalty amount.

Even if you wait to talk to a lawyer until after you receive FBAR Letter 3708, you can still appeal the violation or otherwise seek to contest it. The key is to take action. While it may be tempting to stick your head in the proverbial sand, it won’t make the problem go away. A skilled tax lawyer can work with the IRS to convince them that the violations were not willful. They may be able to reduce or eliminate the penalties, depending on the situation.

Contact Poole, Brooke, Plumlee for Help with FBAR Matters

Failure to report foreign bank and financial accounts is a serious offense. You could be facing tens of thousands of dollars in penalties for these violations – or even a stint in federal prison. If you have received an IRS Letter 3708 or IRS Letter 3709, you should immediately call an IRS lawyer so that you can obtain the best possible outcome.

Based in Virginia Beach, the tax law attorneys of Poole, Brooke, Plumlee represent clients on federal and state tax matters throughout Virginia. We have decades of experience in the field of tax law, including issues related to foreign holdings. To learn more or to schedule a consultation with a seasoned Virginia tax law attorney, give us a call at 757-499-1841 or fill out our online contact form.