Top Five Reasons You Should Start Reporting Your Foreign Bank Accounts

Written by Gregory A. Fallon on Tuesday, 14 July 2015.

US citizens who have neglected to report foreign accounts they own or have signing authority over may be facing stiff penalties.  Many of my clients want to comply with this policy but have concerns about prior years they failed to report.  Should you file late FBARs or just start reporting them going forward? If they file a current year FBAR, will the IRS flag them for audits in prior years?  One thing I tell them for certain is that continuing to not report their foreign accounts is a bad idea.  The end game for not reporting your foreign accounts is costly and stressful. Here are the top five reasons you should start reporting you foreign bank accounts.

The IRS will find out

Recent legislation called FACTA may be the strongest weapon the IRS has been armed with in years. This law allows the IRS to enforce a debilitating withholding tax on foreign banks that do not report their US depositors. The results speak for themselves.  Even the strict bank secrecy laws in Switzerland are proving to be no match for FACTA.  Almost all the major overseas banks are reporting their US depositors to the IRS.  Even though the IRS receives information on millions of foreign accounts owned by US citizens, thanks to current technology, they can easily check this information against their databases.  Even if the IRS runs into technical complications processing this information, they will inevitably work them out and become more efficient as time goes on.

The fines are ridiculous and easy to enforce

Would you believe receiving a tax bill for $100,000 because you forgot to report a foreign account with a balance of $75,000?  The current penalty for not reporting a foreign banks account is $100,000 or 50% (whichever is greater) of the account’s value.  There are mitigating procedures for non-willful failures by account holders with balances under certain thresholds, but these procedures are at the mercy of the IRS.  What makes these fines so powerful is their simplicity.  There is no arguing over taxable income or where the money came from.  If you don’t report it, then you are subject to the fine (regardless if you inherited the money from your old Aunt Edna).  All the IRS needs to prove is that you did not report it.

Being compliant is easy and free

Every year US citizens with foreign bank accounts that exceeded $10,000 they need to report them by June 30th.  This reporting form is known as a FBAR.  The FBAR is a simple form that needs to be e-filed on the Financial Crimes and Enforcement Network website. There is no tax due, and for the most part, all you need to submit is your personal information as well as your foreign banking information such as average balance, account number, bank names, and bank addresses.  Also, many tax software providers are now offering FBAR solutions. Reporting your foreign accounts with FBAR should be a straightforward process that will only take about 10 minutes per foreign account.  There have been complaints about technical problems with the reporting website, but these issues should be remedied in the near future.

Waiting to get compliant will only grow in cost

Waiting until the IRS sends a letter will end up costing you more time and money. Once the IRS assesses the penalties, you can expect a long and costly battle if you choose to fight them.  In most cases the taxpayer will need to hire a professional to represent him or her and file delinquent FBARs plus amend prior year tax returns if needed. 

Special voluntary procedures will most likely go away
 
Currently, the IRS has established programs to help willing individuals get compliant. The two most common are known as the Offshore Voluntary Disclosure Program (OVDP) and the Streamlined Domestic/Expat Offshore Procedures. These two procedures can help individuals who wish to come forward avoid penalties.  Deciding which procedure is best for you depends on a number of factors and should be discussed with a tax professional.   The most common option for taxpayers with foreign accounts that have small to medium balances is the Streamlined Offshore Procedure.  Prior to July 1st, 2014, the streamlined filing compliance procedures were only available to nonresident U.S. taxpayers who owed less than $1,500 in taxes for each of the three covered years. Also, the IRS flagged the amended returns submitted through the program as high risk and usually subject to examination.  However, now the IRS has opened up the Streamlined Offshore Procedure to all US taxpayers, eliminated the $1,500 limit, and will no longer flag amended returns submitted through the procedure as high risk. This Streamlined Offshore Procedure is a great option for US taxpayers who have neglected to file their FBARs and wish to become compliant.
 
If you are a US taxpayer who has neglected to report your foreign bank accounts, now is the time to talk about your options with a tax professional. We have advised or represented many clients in connection with the Streamlined Offshore Program or the Offshore Voluntary Disclosure Program if you are interested in a free consultation, please contact us.

About the Author

Gregory A. Fallon

Gregory A. Fallon

Gregory Fallon is an Enrolled Agent (EA) and as such is admitted by the Treasury Department to practice (represent clients) before the IRS. Gregory has a Master's of Science in Taxation (MST) from Golden Gate University and a B.S. in Business Administration from Northeastern University in Boston, MA.  Gregory is also a Certified Public Accountant (CPA) in Massachusetts and a member of the AICPA.

Gregory began his career in public accounting as an auditor and tax analyst for a regional CPA firm in Boston, MA. In early 2006 he moved to Santa Monica, CA to pursue an opportunity with a national defense contractor.Gregory's knowledge of various federal and state tax laws  has allowed him to create and implement  customized tax strategies for clients.  Currently, Gregory focuses on international tax planning and preparation for individuals and small to mid size firms.