FBAR Penalties – Failure to file FinCEN form 114 (the FBAR)
Failure to file FinCEN form 114 (the FBAR) can be far more severe if the failure to file is found to be willful. A finding of a willful failure to file carries a penalty of up to the greater of $100,000 or 50% of the account balance. This penalty is in addition to the tax, interest, and an accuracy penalty of between 20% and 40%. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. The IRS has the burden of proof, but in a FBAR case, the only thing the prosecution must show is that the person knew they had obligation to report.[1] If there is a finding of willfulness, there is a strong potential criminal prosecution of the case. If the failure to file is found to be non-willful, the penalty is potentially $10,000. Prison time is still possible for the non-willful taxpayer, but unlikely.
Criminal Penalties other than FBAR Penalties
The Internal Revenue Service has an arsenal of potential criminal charges:
- Failure to file an income tax return – IRC § 7203 – not filing a required return in a timely manner. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000.
- Filing a false return – IRC § 7206(1) – filing a return containing false information. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000.
- Tax evasion – IRC §7201 – willfully attempting in any manner to evade paying tax. A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000.
- Tax perjury – IRC §7206(1) – willfully signing false returns under penalty of perjury. A person convicted of perjury is subject to a prison term of up to five years and a fine of up to $250,000.
- Tax obstruction – IRC §7212(a) – corruptly impairing the lawful function of the IRS. A person convicted of obstruction of justice is subject to a prison term of up to and not more than 10 years or a fine of up to $250,000.
- Conspiracy – 18 U.S.C. §371 – conspiring to commit one of the above crimes or impairing the IRS from enforcement. A person convicted of conspiracy to commit one of the above offenses or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
- Willfully failing to file an FBAR – 31 U.S.C. § 5322 – Knowing of the obligation to file the FBAR and not doing so. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
- Willfully filing a false FBAR – 31 U.S.C. § 5322 – Filing a FBAR with inaccurate information. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
FBAR Penalties- Statute of Limitations
A “statute of limitations” is a law which defines the time within which a legal action may be brought against a person or entity for an act or omission. Once that period of time has run out it is said that the statute of limitations has “tolled” which means you are exempt from having a legal action, civil or criminal filed against you. With regard to tax matters, the statute of limitations is the time period that the government can come back against you criminally or civilly regarding issues concerning your tax returns. For example, if you fail to file your 1040 or 1040A, neither the three-year statute of limitations on assessment of tax and penalties, nor the 10-year statute of limitations on collection of such assessments, starts to run until you file your tax returns.
With respect to FBAR penalties, if you fail to file Form 8938 or fail to report a specified foreign financial asset that you are required to report, the statute of limitations for the tax year may remain open for all or a part of your income tax return until 3 years after the date on which you actually file Form 8938.[2] In other words, if you never file the delinquent return, the statute of limitations never starts to run. This period can be extended if you do not include in your gross income an amount relating to one or more specified foreign financial assets. If the amount you omit is more than $5,000, any tax you owe for the tax year can be assessed at any time within 6 years after you filed your return.
If a completed form 3520 is not filed by the due date, including extensions, the time for assessment of any tax imposed with respect to any event or period to which the information required to be reported in Parts I through III of such Form 3520 relates, will not expire before the third anniversary of the date on which the required information is reported.[3] So, again if you never file the delinquent return the statute of limitations does not start to run.
Have more questions regarding FBAR penalties? Please call our office today.
[1] Internal Revenue Manual – IRM§ 4.26.16.4.5.3.5
[2] Internal Revenue Service Instructions for Form 8938. https://www.irs.gov/pub/irs-pdf/i8938.pdf
[3] Internal Revenue Service Instructions for From 3520. https://search.irs.gov/search?q=3520&output=xml_no_dtd&proxystylesheet=irs_portals_frontend&client=irs_portals_frontend&oe=UTF-8&ie=UTF-8&num=10&ud=1&exclude_apps=1&site=default_collection&numgm=5&requiredfields=-archive%3A1