FBAR is an acronym standing for Report of Foreign Bank and Financial Reports. This report is due annually June 30th on all Taxpayers with offshore assets; it is a Report that Taxpayers must file in addition to disclosure on schedule B of their 1040s. There are extremely harsh penalties of up to 50 per cent of the aggregate balances in the accounts for failure to file…the penalties can be stacked for each year the Taxpayer fails to file timely FBAR Reports, so the penalties can exceed the aggregate balances in the foreign accounts.
The eighth amendment of the US Constitution prohibits excessive fines//such penalties may be in violation of the Constitution. On June 18, 2014, the Government came out with several changes to the Offshore Voluntary Disclosure Program; the most important change was the ”Streamlined Domestic Offshore Procedures (SDOP).
If a Taxpayer can certify that their conduct was non-willful, he or she would be entitled to a one-time penalty of five per cent of the highest value of foreign financial assets over a six-year period. Non-willful is defined as due to negligence, inadvertence or mistake or conduct that is a result of a good faith misunderstanding of the requirements of the law.
The five per cent penalty is a huge saving over the potential 50 per cent penalty! There has never been a better time for a Taxpayer to come forward; how long the window on this five per cent penalty will stay open is uncertain.
Taxpayers under the SDOP amend three years returns versus eight under the Offshore Voluntary Disclosure Program (OVDP), the other alternative to coming forward voluntarily. FBARS also only need to be filed for six years under SDOP versus eight years under OVDP.
If a Taxpayer does not enter into either the SDOP or OVDP and they get caught, they will be subject to the 50 per cent FBAR penalty for each open year that a FBAR was not filed. SDOP and OVDP are the carrot for coming forward. Feeling lucky and think you won’t get caught? In the next blog post…Welcome to the FATCA World…we will tell you about the stick.