Glasgow Girl

The following only applies to anyone with unreported foreign accounts and unreported foreign income. If all foreign income has been declared to the IRS and the appropriate tax paid then it is a simple and penalty free process to backfill the required forms. Simply file FBARS for the delinquent years up to a maximum of the prior 6 years, and amend up to the 3 prior year tax returns to include Form 8938 if the thresholds are met. It is very important to do this because of the penalties for not doing so, see below. The opportunities and penalties to correct any deficiency change without notice, so this should be done immediately a deficiency is recognized.

Be aware that the reasonable cause defense is very hard to prove and if it fails the IRS has everything they need to audit, investigate and prosecute which they will. Switching to the streamlined process is then no longer an option and presents very serious consequences, financially and criminally.

The reasonable cause defense is meant for those that were physically or mentally incapacitated and could not file, or those where a licensed professional advised (in writing) that the foreign accounts did not need to be reported, and the burden is on the individual to prove that the advisor was informed of the accounts regardless of whether or not the advisor inquired about foreign accounts. A very tough bar to meet.

The streamlined process is targeted at those unaware they needed to file, or for whatever reason thought they did not need to, basically anyone whose defense is ignorance of the requirement, “I did not know about it……”, or misinterpretation of the requirement, “I did not think it applied because…..”, and is what they call non willful non compliance. It provides an opportunity to come into compliance for a 5% penalty of the highest aggregate balance of all foreign accounts during the delinquent period. Contrast that to the alternative if now under audit or investigation. If they determine the non compliance was non willful under those circumstances the penalty is now up to $10,000 applied to every individual account for every year not reported on an FBAR when required. That can add up in a hurry, not reporting just 2 accounts over a 3 year period could result in a $60,000 fine. If they determine it was a willful non compliance then the fines are now up to 50% of the highest aggregate account balance, for every year of non compliance, if non compliant for just 2 years that can add up to 100% of your highest aggregate account balance and if for more than 2 years will wipe out all savings and then some. In both cases unpaid tax must be paid and additional penalties will apply on that unpaid tax. Either way the 5% penalty for the streamlined procedure does not seem so bad after all.

There is another method that people have used in the past, but I won’t provide any information because it is now expressly prohibited by the IRS on their web pages. Some people using this method are incurring a very nasty surprise just before the statute of limitations runs out up to 6 years later.

If anyone has unreported foreign accounts and unreported foreign income, they should consult a professional advisor asap. It is a very serious situation.