Worst case scenario — you can be subject to significant penalties and even criminal charges for forgetting to file FBAR. But in many cases, you can file your late FBAR forms and get back into compliance without a lot of issues. The situation depends on why you forgot to file FBAR and whether or not you missed other tax reporting obligations.
Here's a look at what to expect if you forgot to file FBAR.
How Does the IRS Know That You Forgot to File FBAR?
In the past, FBAR compliance was extremely low. Only about 20% or fewer of the people who were supposed to file FBAR were doing so. Many of these people were never caught, and because of that, the IRS labeled not filing an FBAR as one of its dirty dozen tax scams.
The government passed The Foreign Account Tax Compliance Act (FACTA) to increase compliance with foreign bank account reporting requirements. FACTA requires all foreign banks with U.S. persons as clients to report those accounts to the IRS. Once your bank sends a report to the IRS, the agency will know that you didn't file your FBAR.
In some cases, the IRS also finds people with unfiled FBAR due to foreign income they have reported on their tax returns. Or, the agency may unearth overlooked FBAR forms when auditing a taxpayer.
How the IRS Contacts People About Unfiled FBAR
Once the IRS realizes that you have forgotten to file your FBAR, the agency will send you Letter 4265 (FBAR Appointment Letter). Then, the IRS will request information about your foreign accounts and have you schedule a time to talk with an examiner on the phone.
A lot hinges on your meeting with the examiner. During this conversation, you get to explain why you forgot to file the FBAR.
What to Expect After Your FBAR Examination
If the examiner thinks you have reasonable cause for not filing, they may just let you take care of the delinquent FBARs without assessing a penalty. In that case, the IRS will send you Letter 3800 (Warning for Report of Foreign Bank and Financial Accounts (FBAR) Apparent Violations).
You will only get this letter if the IRS is not assessing any FBAR penalties against you. In some cases, you may incur penalties for some years but not for others.
If the examiner decides to assess non-willful penalties on your account, the IRS may send you Letter 3708 (Notice and Demand for Payment of FBAR Penalty). You may also receive Notice 1330 (Information on Making FBAR Penalty Payment by Check). Note that the IRS sends several different letters and notices. These may not be the exact letters that you receive.
As of 2022, the maximum penalty for non-willful violation is $14,489. This amount is indexed to inflation and increases every year, but remember, this is the maximum amount. The examiner can assess lower penalties at their discretion.
Willful penalties are a maximum of $144,886or 50% of the balances in your foreign accounts. If the examiner decides to assess willful penalties, the FBAR Counsel will review your case. You have the right to appeal, but you should brace yourself for a battle. Cases involving willful FBAR penalties often go through several appeals in the court system.
What Should You Do If You Forgot to File FBAR & are Past Due?
The best thing to do if you forgot to file FBAR is to take care of the issue before the IRS contacts you. Once the IRS contacts you, your options become more limited. You also increase your risk of facing penalties.
The exact steps you should take vary. If you forgot to file FBAR based on your situation, here is what you should do.
You're Less Than Six Months Past Due on FBAR
The FBAR is due April 15th, the same day as your federal income tax return. But the IRS gives taxpayers an automatic six-month extension for the FBAR. If you forgot to file the FBAR for last year, there might still be time to file without being late.
You Forgot to File FBAR Due to a Natural Disaster
You may also have extra time if you've been affected by a natural disaster. The Financial Crimes Enforcement Network (FinCen) posts information about FBAR deadline extensions due to natural disasters on its website.
You Filed Your Taxes Correctly But Forgot FBAR
The FBAR requirement is just a reporting requirement. When you file an FBAR, you just note the value of your foreign bank accounts. You don't share any information about earnings on these accounts.
If your foreign bank accounts earned any income such as interest income, you should have reported that on your income tax return. If you correctly reported everything on your income tax return and simply forgot about your FBAR, you can usually take care of the issue by filing the FBAR online.
Simply file the FBAR online as usual, but note the reason that you're filing late. This is the easiest way to take care of an overlooked FBAR requirement.
You cannot use this option if the IRS contacted you about the missing FBAR or if you're under criminal investigation. Generally, if you qualify to take this route, the government will not assess penalties.
You Also Forgot to Report Income From Your Foreign Bank Accounts
If you forgot to file the FBAR and also forgot to report income from your foreign accounts on your tax return, you might be able to take care of the FBAR through the streamlined filing option.
The IRS refers to these programs as Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.
To use the streamlined program, you must meet the following requirements:
- You have a Social Security Number or a Tax Identification Number.
- Your failure to file the FBAR was not willful. It may have been due to negligence, a mistake, or any good faith misunderstanding of the rules.
- You are not under an IRS civil examination. Even if the IRS is investigating you for an unrelated issue to foreign accounts, you cannot use the streamlined program.
- You are not under criminal investigation from the IRS.
The rules for both streamlined options are about the same. You need to amend the last three years of tax returns to report income from your foreign accounts, and you also need to pay any additional tax due. Then, you need to file the FBAR for each of the years in question.
The only difference is that people living in the United States should file Form 14654 (Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures). People who live abroad should file Form 14653 (Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures).
These forms certify that you've completed the streamlined delinquent FBAR process steps and that your failure to file on time was not willful. You can find them on the forms and publications page of the IRS's website.
You Willfully Forgot to File the FBAR
Typically, if someone acts willfully, they didn't forget to file their FBAR. They deliberately (willfully) choose to ignore the reporting requirement. However, willful doesn't just apply to people who purposefully and knowingly ignored the reporting requirement.
Willfulness can also include cases where you purposefully avoided learning about a tax requirement. This is called willful blindness. Reckless behavior can also be considered willfulness. For instance, if you sign your return and answer the question on Schedule B about the foreign bank account reporting requirement but still don't file an FBAR, you may have acted recklessly.
Suppose you believe you committed a crime or have criminal exposure due to willful failure to file the FBAR. In that case, you may need to file your FBAR through the IRS Criminal Investigation Voluntary Disclosure Practice.
Because the penalties can be severe in these situations, you should work with a tax professional. They can advise you on the best way to get back into compliance.
This program does not necessarily prevent you from facing criminal prosecution. But when you make a voluntary disclosure, the IRS is often less likely to recommend criminal charges.
Get Help If You Forgot to File FBAR
If you're less than six months late or meet the criteria to file delinquent FBAR without penalties, just file online. You can handle the FBAR independently or contact a tax pro if desired.
If you believe that you need to use the streamlined procedures or are worried about criminal charges, you can also take care of the process on your own. But to be on the safe side, you should work with a tax professional.
They can help you meet all of the requirements and choose the best option for your situation. To learn more, contact a local tax professional today. Using TaxCure, you can search for a CPA, enrolled agent, or tax lawyer experienced with FBAR and based in your area.
Post reviewed by Sean O'Connora tax attorney from Connecticut and Edward Parsons a CPA based in Florida.
