Offshore accounts get a bad rep. The truth, however, is that many people choose to bank with foreign entities in order to take advantage of legal protections, potentially lower tax rates and most importantly an increased sense of privacy. Storing your money in an offshore account is not only more common than you’d think, it’s also perfectly legal —as long as you don’t purposefully and willfully skip filing an FBAR with the IRS. If you do, there will be consequences
FBAR stands for Report of Foreign Banks and Financial Accounts. In some cases, you may hear it referred to as FinCEN Form 114. Regardless of its title, American citizens must file an FBAR disclosure with their yearly taxes in order to satisfy the IRS requirements found in the Bank Secrecy Act (BSA) passed in 1970. The goal of the BSA is to reduce —and eliminate— instances of tax evasion and other fraudulent behavior. Failure to file an FBAR serves as a red flag for the IRS as it points to a potentially fraudulent situation in progress.
Extenuating circumstances versus willful neglect
What separates compliance from criminality? A thin line, as it turns out. Any American citizen, regardless of whether they live in the United States or abroad as an expatriate, must file an FBAR form if they have offshore assets. The only extenuating circumstance is when the total funds in those accounts are less than $10,000. Anything else constitutes a failure of compliance, compete with consequences, especially if the neglect is discovered to be willful.
What happens if you fail to file an FBAR?
With an offshore account, there is an increased presumption of privacy. However, in the name of fraud reduction, the BSA implemented a number of measures meant to add transparency to all foreign investments. As a result, failure to disclose offshore holdings of $10,000 or more carries serious consequences. Those consequences include:
- A mix of both criminal and civil penalties
- A financial penalty totaling $100,000 or 50% of the account value, whichever is greater
- The repayment of all delinquent back taxes
- A possibility of up to 5 years jail time
Determining civil and criminal penalties is a matter of determining whether failure to file the form was the result of recklessness and willful choice. If the party in question fails to file the FBAR on a yearly basis, a qualified tax lawyer will need to step in to remedy the situation before significant penalties are levied against you.