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Foreign account reporting, pt 2: FBAR penalties and 'willfulness'

For taxpayers without foreign bank accounts, filing season comes only once a year, in April. But if you have reporting obligations for a non-U.S. account, there is a second filing deadline that comes at the end of June. The applicable form for this second filing is now called FinCEN 114, though it is still widely known as the FBAR.

If you have foreign assets, you have to check "yes" in the appropriate box on your regular tax filing. You may also have to file Form 8938, the Statement of Specified Foreign Financial Assets, even if the value of the assets is not high enough to trigger an FBAR filing obligation. We explained this in more detail in our February 19 post.

In the first part of this post, we discussed who must file an FBAR. In this part of the post, we will address the issue of FBAR penalties.

The consequences for failing to file a required FBAR can be very serious. They include not only civil penalties, but also the possibility of criminal prosecution.

The risk of facing such penalties is one reason why so many taxpayers with previously undisclosed foreign accounts have participated in the IRS's Offshore Voluntary Disclosure Program (OVDP) and other programs offering limited amnesty.

This is very complicated area of the law to get a handle on. For example, the IRS technically refers to penalties imposed on participants in the OVDP and certain other programs as "miscellaneous penalties," not FBAR penalties. To be confident in responding to your specific situation, it is important to get counsel from a knowledgeable tax attorney.

For purposes of this post, however, it is fair to say that a key factor in determining the penalty amount is whether or not the failure to disclose the account was willful in nature. If the IRS considers the FBAR violation to be willful, the penalties become much more significant. We will explore the question of "willfulness" further in an upcoming post.

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