Friday, September 16, 2011

Non-willful FBAR violations: don’t worry about it

I recently talked to an American who was living and Spain and freaking out about the fact that he had never filed an FBAR form (any US person is required to file it every year if you have more than $10,000 in total financial assets outside the US).

If you read the law, you could think that you are in deep shit… up to $10,000 fines per account per year, even if you never knew you needed to file. In order to take advantage of the overly honest, the IRS launched a “voluntary disclosure” program, which lets you come clean, pay your fine, and promise not do it again.

Should you join the voluntary disclosure program? Personally, I’d avoid it. Firstly, if it was unintentional, the FBAR penalties cannot be collected via the IRS (from Jack Townsends blog):

I also think there is an important distinction to be made between proving that a taxpayer willfully failed to report income and that a taxpayer willfully failed to file an FBAR. The FBAR was a form few practitioners heard of pre-UBS. To prove a taxpayer’s knowledge of the FBAR and his obligation to file the form will not be an easy task for the government as few accountants told their clients of their FBAR obligation. Additionally, the FBAR is a penalty that arises out of Title 31 of the United States Code and not Title 26 (Internal Revenue Code). As a Title 31 penalty, the IRS can assess the penalty but it cannot collect it under the Internal Revenue Code with lies and levies and other IRS collection tools. Instead, the IRS is treated just like any other creditor. To collect the FBAR penalty, the IRS must make a referral to DOJ’s Tax Division, which then must seek a judgment in US district court against the taxpayer. Once in court, the taxpayer may assert a lack of willfulness as a defense and have his day in court.

So basically, if you are living in Spain, the IRS is severely restricted in what it can do to go after you, especially if you have no assets in the US. Since this is not a “tax”, the US cannot ask the Spanish government to collect this tax on the basis of the US/Spain tax treaty. (but do remember that if you are an American living overseas, the Washington DC District Court has jurisdiction over you)

This is one of the reasons that the IRS is moving away from FBAR towards the “Son of FBAR”, which is part of your tax return, and thus any fines and penalties are much more difficult to avoid.

Of course, now that you know about FBAR, you have to start filing your statements. Sorry about that.


Anonymous said...

Thanks for this. What about a non US citizen with 401K funds in the US from old employment there? Is this subject to the FBAR rules also?

santcugat said...

FBAR is only for US persons (people now living in the US, or anyone with a greencards or citizens).

If you are a non-US citizen living here, you may be able to withdraw the money tax free by using the US/Spain tax treaty. If you get a good tax advisor, you may even be able to avoid the 10% early withdrawal penalty.