Do You Qualify for Delinquent FBAR Submission Procedures?

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Delinquent FBAR Submission Procedures Explained (Examples)

Delinquent FBAR Submission Procedures Explained (Examples)

Delinquent FBAR Submission Procedures Explained (Examples)

In any year in which a U.S. person for tax purposes has an ownership interest in, or signature authority over foreign accounts where the combined value of the accounts exceeds $10,000 on any day of the year, they may be required to file the annual FBAR. The FBAR refers to foreign bank and financial account reporting (FinCEN Form 114). The FBAR is not an IRS form but rather a FinCEN Form — although the IRS is tasked with enforcement to ensure taxpayers comply with the annual filing requirements.  When taxpayers fail to file the FBAR, they may become subject to fines and penalties. In recent years, the IRS has taken an aggressive position in penalizing taxpayers who fail to file the form or file the form late. However, the IRS has also initiated various FBAR offshore disclosure programs to assist taxpayers with safely getting compliant for failing to file the FBAR in prior years. One program that some taxpayers may qualify for is the Delinquent FBAR Submission Procedures. Let’s review the basics of the Delinquent FBAR Submission Procedures, along with some common delinquent FBAR filing examples. *For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

How to Qualify for the Delinquent FBAR Submission Procedures

The first thing to remember is that not all taxpayers with unreported foreign accounts will qualify for the delinquent FBAR submission procedures. There are certain requirements taxpayers must meet to become eligible for this program.   As provided by the IRS: “Taxpayers who do not need to use either the IRS Criminal Investigation Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
      • have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),
      • are not under a civil examination or a criminal investigation by the IRS, and
      • have not already been contacted by the IRS about the delinquent FBARs should file the delinquent FBARs according to the FBAR instructions.”

Important Tip: Not Required to File Amended Returns

The most important aspect of qualifying for the delinquency procedures — aside from being non-willful — is that the taxpayer is not required to file delinquent or amended tax returns and pay additional tax.  
      • “Taxpayers who do not need to use either the IRS Criminal Investigation Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax…
In other words, if taxpayers are required to amend their tax return because they also have unreported income to report, then they generally will not qualify for the delinquency procedures and instead would submit to the Streamlined Procedures or make a Reasonable Cause submission — unless they are willful in which they would submit to the IRS Voluntary Disclosure Program instead of these non-willful programs.

Delinquent FBAR Penalty Waiver

The idea behind the Delinquent FBAR Submission Procedures is that if a taxpayer failed to file the FBAR but was otherwise tax compliant for the remainder of their tax return filings, they should not be penalized for their non-compliance. As further provided by the IRS:
      • “The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.”
Thus, to qualify for a penalty waiver, the taxpayer files delinquent FBARs under the presumption that their previously filed tax returns included all their income from all sources — including the accounts being reported on the delinquent FBARs. Stated another way, if, in addition to filing delinquent FBARs the taxpayer also has to amend their tax return to include unreported income, they may not qualify for the delinquent FBAR submission procedures. *Non-willful taxpayers who do not qualify for the Delinquent FBAR Submission Procedures may still qualify for alternative IRS programs such as the Streamlined Procedures or Reasonable Cause

Examples of Delinquent FBAR Submission Procedures

Let’s take a look at some common examples of Delinquent FBAR Submission Procedure filings:
      • Example: Frank is a U.S. person who previously lived overseas and has two bank accounts with a combined value of $45,000. There is no unreported income from these accounts and Frank properly reported all of his income with originally filed tax returns. If Frank’s failure to report these accounts on the FBAR was non-willful, Frank may qualify for the Delinquent FBAR Submission Procedures.
      • Example: Fran is a U.S. person who previously lived overseas and has four bank accounts with a combined value of $95,000. She files her U.S. tax returns timely and has no unreported income but failed to report the FBAR. Since Fran files her tax returns jointly, she falls below the Form 8938 FATCA reporting requirement.  Fran’s failure to report these accounts on the FBAR was non-willful and therefore Frank may qualify for the Delinquent FBAR Submission Procedures.
      • Example: Felicia is a U.S. person who has three bank accounts overseas with a combined value of $650,000. She has no unreported income, but due to the value of the accounts she failed to file both the FBAR and the Form 8938. Since she is required to file Form 8938 as well as the FBAR, she would not qualify for the Delinquent FBAR Submission Procedures but instead may qualify for the Delinquent International Information Return Submission Procedures (DIIRSP). The DIIRSP procedures are like the Delinquent FBAR Submission Procedures, but the program was modified in November 2020 and since then, the IRS has become less inclined to issue an automatic penalty waiver.
      • Example: Fred is a U.S. person who has unreported accounts worth $35,000, but he also has unreported income from these accounts of $3,000 for the year. Since Fred did not include the interest income from his accounts on his tax return, he is required to amend his tax returns as well as file delinquent FBAR and therefore Fred may not qualify for the Delinquent FBAR Submission Procedures.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them. *Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.