Delinquent FBAR: How to Resolve Unfiled Foreign Bank Account Reports (FBAR)
There are three different ways to take care of delinquent FBAR forms, and the right option depends on your situation.
- File FBAR as usual and note why you're filing late.
- Use the IRS's streamlined procedures to file delinquent FBAR.
- File the FBAR through the IRS Criminal Investigation Voluntary Disclosure Practice.
To minimize penalties and other repercussions as much as possible, you need to choose the optimal option. Keep reading to determine which delinquent FBAR filing strategy is right for your situation.
FBAR Delinquent Submission Procedures
If you simply overlooked your FBAR reporting requirement but filed your tax returns correctly, you can just file FBAR online. When filing, note the reason why you didn't file on time. If you cannot file online, contact the Financial Crimes Enforcement Network at 1-800-949-2732 or 1-703-905-3975.
As long as you reported any income from these foreign accounts correctly on your income tax return, that's all you need to do. There aren't any penalties for taxpayers who qualify to submit their delinquent FBAR in this manner.
You can only use this option if you're proactive about taking care of your delinquent FBAR. If the IRS has already contacted you about the unfiled FBAR, you cannot catch up using this option. You cannot use this option if you're currently under criminal or civil investigation from the IRS, even if the investigation isn't focused on your foreign accounts.
FBAR Late Filing Explanation
If you're filing delinquent FBAR reports using BSA online, you need to explain why you're filing late. On the first page of the FBAR, you should see a drop-down box with a list of the most common reasons for late filing. You can choose from one of the following:
- Forgot to file FBAR.
- Didn't know that you had to file FBAR.
- Didn't realize your foreign account balances were over the reporting threshold.
- Didn't know that your account was considered a foreign account.
- Didn't have your account statement in time to file on time.
- Lost your account statement and just got the replacement.
- Missing account information.
- Couldn't get your spouse's signature on time.
- Unable to file the FBAR online when it was due.
If you don't see your reason for filing a late FBAR on the list, choose option "Z: other" and then write in your FBAR late filing explanation. You only have 750 characters, so be precise. 750 characters is only about 135 words.
You should also choose "other" if you file late because an earlier FinCEN filing waiver applied to you. In this case, just note the waiver by number in the text box.
FBAR Late Filing Reasonable Cause
The IRS does not audit every late FBAR submission, but if the IRS audits your FBAR and doesn't agree with your reason for filing late, the agency may require you to use a different submission process. Or the IRS may assess penalties on your account.
So, what are the reasonable causes for filing an FBAR late? They include situations where you didn't know you needed to file, weren't aware that your account was classified as a foreign account, or didn't have the right details from your foreign bank.
Some of these reasons are becoming less believable over time. For instance, when people paper filed or used early versions of tax prep software, they could easily file their tax returns without being aware of the FBAR requirement. Now, most tax prep software asks if you have assets in foreign bank accounts. This type of technology obliterates lack of knowledge as a reasonable cause for not filing.
Streamlined Delinquent FBAR Reporting
The IRS's streamlined FBAR filing process is for people who overlooked their FBAR requirement and missed another filing obligation. For instance, if you didn't file your income tax return or failed to report income from your foreign accounts, you may qualify to use this program.
If you live in the United States, you should use the Streamlined Domestic Offshore Procedures (SDOP). Use the Streamlined Foreign Offshore Procedures (SFOP) if you live in another country. Here's an overview of the steps.
How to File FBAR Under the Streamlined Procedures
The exact process can vary based on your situation. But typically, you need to work through these steps.
1. File or amend your returns.
Typically, you need to file or amend the last three years of tax returns — depending on your situation, and you may need to amend returns that go further back. For instance, if you were compliant the last three years but forgot about FBAR four, five, and six years ago, you may need to amend your annual tax returns from those years.
2. Add additional forms related to foreign income.
You may need to file some of the following forms when amending your tax returns. The forms you need to file vary based on the type of foreign accounts and income you have.
- Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts)
- Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner)
- Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations)
- Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business )
- Form 8938 (Statement of Specified Foreign Financial Assets)
- Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation)
- Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund )
3. Note that you're using the streamlined procedures.
When you send in your amended returns, write "Streamlined Domestic Offshore" or "Streamlined Foreign Offshore" on the top of your amended returns. Writing this ensures they get processed correctly.
4. Pay any tax owed.
Your new tax returns will lead to a higher tax liability. This is due to the unreported foreign income. You may also face failure-to-file penalties related to the unreported income. You must pay the delinquent tax liability to participate in the streamlined program.
5. File your delinquent FBAR returns.
You also need to file the last six years of FBAR returns using FinCEN Form 114 (Report of Foreign Bank and Financial Accounts). You must file this form online on the BSA -Efiling System.
Normally, you only have to file Form 114 if the aggregate balance on your foreign accounts exceeds $10,000 during the tax year. However, if you're using the streamlined process, you need to file all six years regardless of the balances in your account for each year.
6. Fill Out Form 114a If Needed
If someone else (including your spouse) is filing the FBAR on your behalf, you need to fill out Form 114a (Record of Authorization to Electronically File FBARs ).
7. File Form 14654 or 14653
Finally, you tie everything together with Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures) or Form 14653 (Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures). You can download these forms from the IRS's website.
Penalties When You Use the Streamlined Procedures
Taxpayers who use the FBAR streamlined procedures must pay a penalty of 5% of the value of their unreported accounts. Some accounts, such as certain Canadian retirement accounts, may be exempt from this fee.
To ensure you calculate the correct fee and amend your tax returns correctly, you may want to get help from a tax professional.
IRS Criminal Investigation Voluntary Disclosure Practice
If you willfully failed to file an FBAR, you may need to use the IRS Criminal Investigation Voluntary Disclosure Practice. This program allows people who have committed tax-related crimes to come forward voluntarily. Using this program doesn't eliminate your criminal exposure, but the IRS looks more favorably on taxpayers who came forward on their own when reviewing cases.
To apply for this program, submit Form 14457 (Voluntary Disclosure Practice Preclearance Request and Application). Once the IRS gives you preclearance confirmation, fill out Part II of the form within 45 days. If you're approved to participate, the IRS Criminal Investigation will send you a Preliminary Acceptance Letter.
The IRS will assign an examiner to your case, and you will work directly with them to resolve the issue. You may want to hire a tax lawyer to help with this process.
What to Do After You File Delinquent FBAR
After you file the delinquent FBAR, keep a copy of your paperwork for your records. If you file online, you may not even get a response. The IRS treats these returns the same as any other returns it gets.
When you use the streamlined procedures, you generally will not get a response letting you know that the case has been closed, but you should receive a processing notice for the amended return that you filed. The Voluntary Disclosure Practice includes a lot of back and forth with the IRS, and you will know when your case is resolved.
Get Help With Delinquent FBAR
You don't have to navigate this process on your own. There are tax attorneys and other tax professionals with lots of experience with delinquent FBAR reports. With TaxCure, you can search for a pro based in your area — contact a tax pro for help today.