The Report of Foreign Bank and Financial Accounts, Treasury Form TD F 90-22.1, or FBAR, has emerged from the dusty stacks of federal form oblivion onto the front page. If you have foreign bank accounts holding more than $10,000 in the aggregate any time during the tax year, you can face big penalties or even jail.
If you haven’t disclosed your foreign account on your tax return and haven’t previously filed FBARs, should you? If you are in the process of coming clean with your foreign accounts under the OVDI, the answer appears to be yes. Even if you’ve only done a pre-clearance, you should still file your FBAR.
But what if you won’t make a voluntary disclosure under the OVDI? First, examine your assumptions. It may be shortsighted not to join the OVDI.
Second, consider the alternatives and your facts. Starting to file FBARs now can appear to be a “quiet disclosure” something the IRS discourages. Here are some variables:
Did You Report All Income?
If you reported all income from your foreign account(s) and paid additional taxes (for example, because of foreign tax credits), filing an FBAR is less risky. In fact, the 2011 FAQs explicitly state that such filers are not required to enter the OVDI. In that case your tax returns might not have to be amended.
Arguably your sole failure was to file FBARs, so starting to file now makes sense. The IRS could assess penalties for past failure to file FBARs, but you could explain and dispute the penalties. Alternatively, you could explain with your first FBAR that you previously were not aware of filing requirements.
Did You Check the Foreign Account Box?
Another variable is whether you previously disclosed the existence of your foreign account(s) on your tax return, even though you didn’t file FBARs. If you appropriately included foreign income on the income tax return, you shouldn’t need to file amended tax returns.
It’s less clear what to do if you checked the “no” box on Schedule B to your tax return saying you don’t have any foreign accounts, or if you didn’t check either box. That makes your returns inaccurate and gives you more exposure. Most advisers would say that if you still wouldn’t owe more U.S. tax, you should file the current year FBAR.
If you didn’t disclose the account on your tax returns and owe tax from the past, you face a tough choice. Staying hidden forever seems unlikely and is highly risky. But if you file your first FBAR and the IRS asks for past FBARs and asks questions about your past returns, you cannot lie. The choices are tough enough that you should get advice from an experienced tax lawyer.
JDKatz, P.C. is a full-service law firm focused on tax law and estate planning. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys.