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Foreign Account Reporting-FBARs:  Report them!

Aug 15, 2014

If you fail to file a required Foreign Bank Account Report (FBAR), that failure can result in penalties so steep that they would mean the loss of most of the investment in question. But many who should have filed FBARs in the past have been reticent to start filing because that might alert IRS to the prior failures, leading to a ugly things. But now there is good news for many delinquent FBAR filers. IRS has recently clarified its rules, and indicated that there will be no penalty assessed if the following conditions have been met:

1.     Income tax has been duly paid on any earnings of the foreign account.
2.     There is no IRS audit already underway for the pertinent year.
3.     No demand has been sent by IRS that the delinquent FBARs be filed.

The statute of limitations on FBAR penalties is six years, and the statute for income tax assessment is three years, so this means there are two three-year periods to be concerned about, the most recent three-year period, and the three-year period before that.

First, the most recent three years: If you didn’t report all of your foreign income during the past three years, then you should start by amending your income tax returns for those years to correct that omission and pay the tax on the additional income. Then you will need to file the related FBARs. (I am writing in July 2014, so this would presumably mean tax years 2011 to 2013.) 

For the earlier three-year period (presumably 2008 to 2010), you would merely file the FBARs but not amended income tax returns. This is because of the fact that no additional income tax can be assessed for those years – they are beyond the three-year income tax statute. 

Under this plan, no penalties will apply to any of the FBARs for the past six years since your income tax is (or will soon be) paid, and because the FBAR filing will have been initiated by you. BUT if you wait for IRS to demand your FBARs, penalties could be very heavy indeed.

If you are a delinquent FBAR filer, contact us for help in understanding what years should be filed. Also, you can read more on the subject at: http://www.forbes.com/sites/stephendunn/2014/07/20/all-you-need-to-do-is-file-your-delinquent-fbars/

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