Understanding FBAR and Penalties
Each year, U.S. individuals who hold foreign financial accounts are required to file a Report of Foreign Bank and Financial Accounts (FBAR). A failure to file when required to do so can lead to serious penalties, including fines and potential criminal charges.
FBAR penalties are among the most serious of all consequences imposed by the IRS. If you have a financial interest in a foreign financial account, it is vital that you comply with recordkeeping and reporting requirements. Otherwise, you may receive FBAR letters 3708 and 3709, which are how the IRS informs taxpayers that they are subject to FBAR penalties. Luckily, most of these reports are “informational” assuming you do not have income from those countries.
If you receive FBAR letter 3708 or FBAR letter 3709, the window of opportunity to handle the situation is rapidly closing. It is important to contact a tax attorney as soon as possible so that you can get the matter under control.
What Are FBAR Penalties?
A United States person (which includes citizens, residents, corporations, partnerships, LLCs, trusts, and estates) must file an FBAR if they have:
A financial interest in or signature or other authority over at least one financial account located outside the United States if
the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
In other words, if you have one or more accounts (or signature authority for an account) at a financial institution located outside of the U.S., and the value of those accounts is more than $10,000, you must file an FBAR. This must be done through the IRS’s BSA E- filing system. In addition, anyone who is required to file an FBAR must keep records for each foreign account.
If you fail to file an FBAR or violate these recordkeeping obligations, then you may be subject to civil monetary penalties or criminal penalties or both. The amount of the penalty is based on the type of violation and whether it was willful, non-willful, or negligent.
These penalties can be imposed for each year that the FBAR is not filed. In this way, even relatively small penalties can add up to hundreds of thousands of dollars in fines.
Criminal penalties are only imposed in situations where a person acted willfully, as follows:
Willful failure to file or retain records: up to $250,000 in fines and/or 5 years in prison; and
Willful failure to file or retain records while violating certain other laws: up to $500,000 in fines and/or 10 years in prison.
Criminal penalties are reserved for, understandably, criminal acts such as willfully avoiding reporting or committing tax fraud. Even if you file on time, you may also be charged with a crime if you willfully and knowingly file a false FBAR. For example, if you filed your FBAR, but omitted one or more foreign accounts from the report, then you could face both civil penalties as well as criminal prosecution.
Importantly, crimes related to FBAR are felonies, meaning there may be other consequences, such as the loss of voting rights, professional licenses, the right to have a gun, and difficulty finding employment or housing. For individuals who are not citizens, a felony conviction may also mean deportation.
Because there is a huge difference in FBAR penalties for willful versus non-willful violations, it is critical to work with an international tax lawyer who can convince the IRS that any violation that may have occurred was not willful. Generally, the IRS will categorize a violation as “non-willful” if they believe that you didn’t know about the requirement. However, if the IRS believes that you should have known about it or that you purposefully failed to learn about it, then you will likely face a more serious penalty.
A willful violation may be imposed if the IRS determines that you intentionally and voluntarily failed to file an FBAR or to keep records in accordance with the law. This usually happens when the IRS believes that you knew that you were required to file an FBAR, but chose to ignore it.
How Will the IRS Contact Me about a Potential FBAR Penalty?
If the IRS determines that you failed to file an FBAR when you were required to do so, or that you committed another violation relating to an FBAR, then it will send two letters. First, IRS Letter 3709 is sent before the penalty is assessed. Second, IRS Letter 3708 is sent to taxpayers after an FBAR penalty has been imposed.
Letter 3709 is also referred to as an FBAR 30-Day Letter. It explains why the IRS believes that FBAR penalties should be imposed in your situation, as well as information on the penalty amount. You then have 30 days to appeal this determination.
Letter 3708 is a demand for payment of the penalty that has already been imposed, along with information about other costs that may be imposed for failure to pay, including interests, penalties, and collection expenses. If you receive an FBAR 3708 letter, you should have already gotten an FBAR 3709 letter.
Getting either an FBAR 3708 or 3709 letter is an incredibly serious matter. If you fail to take action, you could face substantial monetary penalties or even incarceration in federal prison.
How Should I Respond to an FBAR 3708 or 3709 Letter?
If you have received IRS Letter 3708 or 3709, there are two potential ways to respond. It is not a signed, sealed, and delivered that you will face all of the fines, penalties, and interest listed in the letter. However, if you don’t take action, then the potential for having the full extent of the penalties imposed increases.
There are two basic options for responding to either letter. First, if you agree with the IRS’s assessment of the fine and penalty, you can reply as such to the IRS. You need to submit this response and either a full or partial payment to the IRS within 30 days. Depending on penalties, you may be able to negotiate an installment agreement for the payments.
Second, you can appeal the penalty. This can be done by requesting a conference with the IRS Appeals Office in response to FBAR letter 3709. Alternatively, in response to FBAR letter 3708, you can file an administrative appeal or pay the penalty and then sue the IRS for a refund. Importantly, you can only request an administrative appeal in response to letter 3708 if you did not already do so, or if new situations have arisen since you filed an administrative appeal.
For both letters, time is of the essence. If you fail to respond, then the penalties will be imposed. That is why it is important to consult with a Tax Lawyer as soon as possible after receiving notice that you may be subject to FBAR penalties.