The Internal Revenue Service presently offers five options for correcting common FBAR errors. These are:
- File an Amended FBAR
- IRS’ Delinquent FBAR Submission Procedure
- IRS’ Streamlined Domestic Offshore Procedure (SDOP)
- IRS’ Streamlined Filing Compliance Procedures (SFOP)
- IRS’ Voluntary Disclosure Program (VDP)
Moreover, participation in the disclosure programs is only allowed if the assets in the account(s) came from a legal source (not illicit operations), and the IRS is not currently aware of the violation.
File an Amended FBAR
A person who previously filed an FBAR but accidentally gave incomplete or inaccurate information can file an amended FBAR, according to the FBAR rules. A box on FinCEN Form 114 allows you to give a brief explanation of the inaccuracy. Don’t forget that crypto might need to be reported on an FBAR.
A filer is not required to correct an inaccuracy on an FBAR filed more than 6 years ago due to the 6-year statute of limitations. However, filing for an amended FBAR outside the IRS’s penalty relief programs gives no penalty protection. Thus, correcting FBAR errors through this approach needs careful consideration. Also, some foreign assets might need to be reported on an FBAR and a Form 8938.
IRS’s Delinquent FBAR Submission Procedures
The IRS’s Delinquent FBAR Submission Procedures may be applicable to a person who has not previously filed an FBAR but has correctly filed federal income tax returns that fully show the revenue from any of his or her overseas account(s).
This procedure has quoted, “[t]he 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.”
The overdue FBAR must be e-filed, together with a statement that persuasively explains why the FBAR is being filed late. The explanation should additionally mention that the FBAR is being filed under the “IRS’s Delinquent FBAR Submission Procedure,” even though it isn’t required.
IRS’s Streamlined Domestic Offshore Procedure (SDOP)
A resident U.S. citizen who non-willfully failed to file an FBAR and/or hasn’t properly reported income related to foreign financial accounts on a U.S. tax return income may be eligible for the IRS’s Streamlined Domestic Offshore Procedure (SDOP).
However, the taxpayers who are currently under examination are not qualified for this streamlined program to correct their FBAR mistakes. Generally, taxpayers can only participate in SDOP if his or her failure to file an FBAR and/or U.S tax return was not willful.
As such, if you are a participant in this streamlined program, you must file federal income tax returns (or amended returns) for the previous three years and FBARs for the previous six years, along with a compelling declaration (signed under penalty of perjury) attesting that your failure to file was not willful.
A false certification could expose a disclosing individual that could result in civil fraud, FBAR and information return fines, and even criminal consequences. Thus, every certification is thoroughly examined and scrutinized by the IRS. On top of that, during the six-year period, the Internal Revenue Service will also apply a penalty equivalent to 5% of the maximum aggregate balance in every unreported foreign account.
IRS’s Streamlined Filing Compliance Procedures (SFOP)
The Streamlined Filing Compliance Procedure is another streamlined offshore program that is available for a nonresident U.S. citizen who non-willfully failed to file an FBAR and/or failed to report income related to foreign financial accounts on a U.S. tax return. We actually have a full guide to IRS streamlined foreign offshore procedures. Moreover, SFOP can also be applied by the non-resident U.S. taxpayers who failed to file a federal income tax return. However, the taxpayers who are currently under examination are not qualified for this streamlined program.
Generally, just like Streamlined Domestic Offshore Procedures, participants in SFOP must file federal income tax returns (or amended returns) for the previous three years and FBARs for the previous six years along with a compelling declaration (signed under penalty of perjury) attesting that their failure to file was not willful.
A false certification could expose a disclosing individual that could result in civil fraud, FBAR and information return fines, and even criminal consequences. Thus, every certification is thoroughly examined and scrutinized by the Internal Revenue Service. But, the IRS won’t charge any penalties on a participating non-resident U.S. taxpayers.
IRS’s Voluntary Disclosure Program (VDP)
The Voluntary Disclosure Program requires taxpayers to file amended tax returns for the previous six years, together with the applicable international reporting forms, such as Forms 8621, 5471, and 8938.
In general, taxpayers must submit tax returns and FBARs for the previous eight years, as well as detailed information about their unreported foreign accounts, pay accuracy penalties, pay any taxes due, pay delinquency penalties (up to 47.5 percent of taxes due), and pay interest on the delinquent taxes for the entire eight-year period when participating in this program.
There is also a civil penalty of 27.5 percent of the highest amount in foreign accounts over the 8-year period. If the DOJ or the IRS have opened an investigation into the institution where the accounts are held, the penalty increases to 50%. Nonetheless, for US citizens who would otherwise face significantly harsher civil fines, this program may be a viable choice.