On June 24, 2009 the I.R.S. published an update to its frequently asked questions (FAQs) regarding the filing of FBARs (Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts) and other cross-border tax forms under the offshore account and entity voluntary disclosure program announced on March 23, 2009.
There are now 51 FAQs.
FAQ # 46 asks:
A taxpayer moved to the U.S. in 2007 and is now a permanent resident of the U.S. The taxpayer had a requirement to file an FBAR for one year but failed to do so. Is the taxpayer subject to a penalty equal to 20 percent of the account?
The answer to this FAQ is quite interesting ---
First, the taxpayer should confirm that the taxpayer had an FBAR filing requirement. Assuming that the taxpayer was required to report the interest earned on the account during the year the taxpayer was in the U.S. and failed to do so, the taxpayer is subject to a penalty based on the high account balance during the year. The penalty may be limited to five percent if the taxpayer did not avoid U.S. tax with respect to the deposits and if the account was passively held during the year the taxpayer was in the U.S. If there was no unreported taxable income related to the unreported foreign accounts that would have been reported on the FBAR, the taxpayer will not be subject to the 20 percent offshore penalty. In that case, the taxpayer should file delinquent FBARs attaching a statement explaining why the FBAR was not timely filed. For more information, see FAQ 9.
As mentioned in FAQ #50,
Taxpayers and practitioners trying to decide whether to simply file an amended return . . . or to make a formal voluntary disclosure . . . should consider the nature of the error they are trying to correct.
As mentioned in FAQ #15, the civil penalty for non-willfully failing to file the FBAR cannot exceed $10,000. If the failure to file is non-willful and the bank account balance is greater than $50,000, the voluntary disclosure program would not seem to make sense. Further, the I.R.S. has been lenient in assessing the $10,000 penalty for non-willful failures, especially under circumstances such as those described in FAQ #46. If the taxpayer described in FAQ #46 did not willfully fail to file the FBAR, the taxpayer should consider whether filing the FBAR as part of the voluntary disclosure program is the best course of action.
Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.