Under the Bank Secrecy Act, U.S. residents – or a person in and doing business within the United States – must file a report with the U.S. Treasury if they have a financial account in a foreign county with an aggregate value exceeding $10,000 at any time during a calendar year. Willfully failing to file an FBAR report can be punished under both civil and criminal law.
Filing an FBAR is a two-part reporting process. Form 1040, Schedule B, Part III, instructs a taxpayer to indicate an interest in a financial account in a foreign country by checking “Yes” or “No” in the appropriate box.
Form 1040 then refers the taxpayer to Form 114, the FBAR, which states that it should be used to report a financial interest in – or authority over – bank accounts, securities accounts, or other financial accounts in a foreign country. The deadline for filing a FBAR for each calendar year is on or before June 30 of the following year.
On March 26, 2009, IRS Commissioner Doug Shulman announced what was, in effect, a settlement offer, called OVDI, for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer had to pay back taxes and interest for six years and pay either an accuracy or delinquency penalty on all six years as well.
The taxpayer also paid a penalty of 20% of the highest asset value of an account anytime in the past six years. However, those that came forward would not face criminal prosecution. This offer was only open until October 31, 2009.
On February 11, 2011, the Commissioner announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers were to required to file or amend their individual tax returns, file all FBAR reports and pay delinquent taxes, penalties and interest by September 9, 2011.
The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per year. In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts avoided criminal prosecution for their unpaid taxes and were subject to significantly reduced penalties.