FBAR - what should a non-compliant American do?

This is a complicated and often challenging question!

Click here to find out what is an FBAR.

What is the 2017 filing deadline?

We regularly assist Americans residing in Montreal and across Canada and other countries deal with late FBAR filings, and their potentially expensive FBAR late-filing penalties.

Usually we start reviewing the details, such as:

  • Are they compliant with their Canadian income taxes.
  • Are the US 1040 personal income tax return filings up-to-date?
  • If the US tax returns were filed, were they deficient in some way? Problematic and often overlooked forms/issues can include form 3520, 3520a, 8891, 5471, sub-part “f” income, US Income Sourcing, etc.
  • What is the nature/location/magnitude of the accounts to be reported on the FBAR?
  • Has all income been reported completely/correctly on the Canadian tax returns?

FBAR - Streamlined Program

The IRS “Streamlined Program” commenced in September 2012.

This program is designed to facilitate the process for non-compliant individuals who are considered to be "low-risk" to bring their US tax filings up-to-date and potentially avoiding late filing penalties.

This program requires filing 6 years of FBAR’s and 3 years of tax returns, and can resolve the FBAR issue at the same time as the unfiled US tax returns.

However the “Streamlined Program”:
  • Does not deal with the scenario where the tax returns (1040's) were filed and the FBAR's were not filed;
  • Does not offer the structural protections that exist for filers using other options such as the Voluntary Disclosure Program (OVDI), and;
  • Many individuals do not qualify for the “Streamlined Program” because they do not meet the criteria for "low risk". For instance, if their US tax returns reflect taxes payable of greater than $1,500/year, the submission is not considered "low risk".

Clearly most Americans who are not compliant with their FBAR filings are concerned with the penalties that can be levied on late FBAR's. While the Streamlined Program does not provide any guarantees, it can be an attractive option for those who's US tax returns meet the IRS criteria of "low risk".

FBAR - Voluntary Disclosure

A voluntary disclosure is one method of rectifying defficient tax filings.
Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process.

Note FAQ 17 of the OVDI web page states:

“The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters. Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process."

However many US and Canadian tax attorneys still recommend using the OVDI program because this FAQ appears to be IRS "policy" only, and is not actual law.

The OVDI is an option which should be considered, but keep in mind that the voluntary disclosure process can be expensive and arduous. Our experience is that the IRS OVDI program is backlogged with files, and processing a file can take several years.

FBAR - Quiet Disclosure

Another option is the "Quiet Disclosure", which consists of quietly mailing in late filings with no special program or cover information.

Quiet Disclosures were often succesful in the past based on the experience that the IRS processed these tax filings and penalties were rare.

We do not recommend this option because the IRS has been alerted to this issue, and we have been informed that their ability to identify late-filings has increased, and they are intending to assess been late-filing penalties.

FBAR - Noisy Disclosure

Some practitioners are still advocating the “Noisy Disclosure” approach, which involves bringing taxpayers through the normal filing process, but with a carefully worded legal letter and personal contact with the IRS.

The “Noisy Disclosure” option has not been endorsed by the IRS, and therefore there is little comfort that it avoids late filing penalties.

FBAR - New Filing Procedures

Effective July 1, 2013, FBARs must be filed electronically using the E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This mandatory electronic filing requirement applies to all FBARs, and to amendments of previously filed FBARs, that are submitted by individuals or by entities on or after the effective date.

FBAR - Final Comment

American residents in Canada and elsewhere are becoming increasingly aware of FBAR filing issues.

Great care should be taken when filing late FBAR's because the penalties can be onerous. Note that in exteme cases individuals can be subject to criminal prosecution with jail sentences as well as high financial penalties.

Violation Civil Penalties Criminal Penalties Comments
Negligent Violation Up to $500 N/A 31 U.S.C.
§ 5321(a)(6)(A)
31 C.F.R. 103.57(h)
Non-Willful Violation Up to $10,000 for each negligent violation N/A 31 U.S.C. § 5321(a)(5)(B)
Pattern of Negligent Activity In addition to penalty under § 5321(a)(6)(A)
with respect to any such violation, not more than $50,000
N/A 31 U.S.C. 5321(a)(6)(B)
Willful - Failure to File FBAR or retain records of account Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $250,000 or 5 years or both 31 U.S.C. § 5321(a)(5)(C)
31 U.S.C. § 5322(a)
and 31 C.F.R. § 103.59(b) for criminal.
The penalty applies to all U.S. persons.
Willful - Failure to File FBAR or retain records of account while violating certain other laws Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $500,000 or 10 years or both 31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal
The penalty applies to all U.S. persons.
Knowingly and Willfully Filing False FBAR Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. $10,000 or 5 years or both 18 U.S.C. § 1001,
31 C.F.R. § 103.59(d) for criminal. The penalty applies to all U.S. persons.
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d).

If you would like to discuss FBAR's, contact Jonathan Levy (Montreal, Quebec, Canada) from our US Tax Group.

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