Penalties for Not Filing Your FBAR? Willful vs. Non-Willful Violations

Money disappearing when you don't file FBAR

The Report of Foreign Bank and Financial Accounts (FBAR) is an annual report that U.S. citizens, residents, certain trusts, non-foreign estates, and domestic companies have to file every year if they have money in foreign bank accounts. Although this is not a tax document and doesn’t result in you owing a tax liability, there are still severe penalties associated with failing to file or filing late.

If you have ignored FBAR filing requirements or you just recently discovered you should have been filing every year, you have options. Learn more about FBAR penalties, the difference between willful and non-willful violations, and your options if you have missed your filing date.

What is FBAR?

The FBAR is a form required under the Bank Secrecy Act, legislation passed to prevent money laundering and fraud. Per the IRS, any U.S. person with an interest in or signature authority over one or more foreign accounts whose aggregate balance was more than $10,000 total at any point in the year must file an FBAR by April 15. However, there is an automatic extension until October 15 if you miss the April 15 deadline.

The term “U.S. person” includes citizens, residents, domestic corporations, certain trusts, and estates that are not foreign. The FBAR is essentially a list of your foreign accounts, including which financial institution they are at, the account number, other people listed on the account, and the maximum value during the year.

Requirements for Filing an FBAR

If the total value of the accounts equaled or exceeded $10,000 at any point during the previous calendar year, you must file an FBAR for that year. This includes accounts at foreign branches of American banks and accounts where you are not the only account holder. Even if you are not the account holder, you must still report the account if you are an authorized signatory on it.

Not all accounts must be reported on an FBAR. Excluded accounts include those that are owned by governmental entities, correspondent and Nostro accounts, accounts owned by international financial institutions, and accounts maintained on a U.S. military banking facility.

When you file, you must file electronically on the BSA E-Filing System. You cannot opt for paper filing without special permission from FinCEN.

Another important requirement relates to documentation and record keeping. Your FBAR records may be audited for six years from the date on which they were due. Keep records for your foreign accounts for at least six years so you are prepared in case of an audit.

Penalties for Not Filing an FBAR

The United States has agreements with international financial institutions that allow them access to their banking records. This means that they can track down people who should be filing an FBAR every year and who are not.

If you’ve realized that you should have been filing for years now but never have, you’re in good company—a surprising amount of people think they do not have to file, especially if they live out of the country. However, don’t let the common nature of this mistake lull you into a false sense of security. Failure to file penalties are intense, and it is always in your best interest to become compliant as soon as possible to avoid unnecessary penalties.

Penalties for Non-Willful Violations

The majority of violations are non-willful. This doesn’t just mean that they were unintentional; it means that the account holder didn’t know and reasonably could not have been expected to know that they needed to file each year. The penalty varies from year to year based on inflation and is based on a starting penalty of $10,000. For penalties assessed after January 2024, the maximum penalty is $16,117. This number adjusts annually.

Willful Violation Penalties

Willful violations occur when a U.S. person knew or could reasonably have been expected to know that they needed to file an FBAR every year. The penalties are much steeper for a willful violation. The maximum penalty is either $100,000 or half of the value of the non-disclosed accounts, whichever is greater. As of 2024, the penalty is $161,170 per report.

For example, if you failed to file an FBAR for two years in a row and the IRS determined that your failure was willful, you could face a penalty of $322,340. However, if 50% of your account balance is higher than this amount, you will incur that penalty.

What Makes a Violation Willful or Non-Willful?

When considering whether a failure to pay is willful or non-willful, the IRS has the freedom to consider the totality of the circumstances. This basically means that they look at all of the information they have and make a decision based on that, versus making a decision based on strict preset guidelines. They look at the individual’s knowledge of the reporting requirements or lack thereof.

They may also consider the individual’s financial knowledge and professional background when determining whether or not they should have known about the requirements. However, this is an entirely subjective decision, so it’s possible for two different IRS examiners to make completely different decisions regarding a filer’s willfulness or non-willfulness.

Criminal Penalties

In certain circumstances, failing to file an FBAR or filing late isn’t just a civil matter—it’s a criminal matter. For example, knowingly and willfully filing false FBARs can result in fines of $10,000, five years imprisonment, or both. Failure to file FBAR or failure to retain records may lead to fines as high as $250,000 and up to five years in prison.

It’s important to note that this is not common; most people only ever face civil penalties. Criminal charges are generally only pursued if an individual egregiously files false FBARs, knowingly and willfully fails to file over a period of years, or engages in crimes like money laundering.

Misconceptions About FBAR Penalties

There are several misconceptions that can muddy the waters when it comes to FBAR filing. Many people believe that they do not have to file an FBAR if they live abroad. However, U.S. citizens or residents living abroad must still file if they meet the reporting requirements. Another pervasive myth is that all foreign accounts must be reported, and this misconception can lead to people filing even when they do not need to.

If your accounts are among the several exceptions laid out by the IRS, they do not need to be included in your calculations. Many think that they don’t need to report accounts if they are not income-generating. Whether or not you earn interest or dividends from an account, it must be included on your FBAR if it is not on the list of exclusions.

Catching up on Delinquent Reports to Avoid FBAR Penalties

Of course, the most obvious way to avoid FBAR penalties is to file on time, every time. Assuming that this option is no longer available to you for some of your filing years, you may be able to avoid penalties by filing late and providing a reason for your delinquent filing. If you have not been contacted about your missing FBARs, this process is often enough to resolve your issue with minimal penalties. There are other ways you can resolve missing FBARs, such as Streamlined Filing Compliance.

When It’s Time to Talk to a Tax Professional

If you’ve recently learned about the FBAR requirements and realized that you should have been filing for several years, it’s normal to be concerned about what comes next. While you may simply be able to file your delinquent FBARs and move on, it’s wise to talk to a tax professional about your obligations, potential penalties, and next steps.

Even if you’ve known about the FBAR for years and simply have not filed, it’s never too late to start complying and avoid extra penalties. Are you panicking about potential FBAR penalties after finding out you should have filed? Then, it’s time to talk to the team at Wiggam Law. Schedule your consultation online or call us at (404) 233-9800 to get started.