Many people have financial accounts in foreign countries, but very few of them report it. To resolve this problem, Congress passed legislation a few decades ago requiring certain U.S. taxpayers to report their foreign accounts by filing form FinCen 114 (Report of Foreign Bank and Financial Accounts). In the tax world, this form is commonly known as FBAR (Foreign Bank Account Report). Failure to comply with the reporting requirements could lead to civil and criminal penalties. Despite these potential sanctions, FBAR compliance has remained relatively low for years. However, things are changing now.
In late 2004, Congress amended the law and introduced new penalties for both non-willful and willful violations. To implement this law, the U.S. Treasury Department delegated full investigatory and enforcement authority to the IRS. And since crackdown began by IRS in 2009, more than 55,800 people have paid more than $9.9 billion to come clean on such accounts. At a conference in late May, an IRS official said the agency has acted on 100 potential criminal cases and another 14,000 potential civil cases.
The U.S. Department of Justice is also looking through data from the “Panama Papers” (an unprecedented leak of 11.5 million files from the database of world’s fourth largest offshore firm, Mossack Fonseca). This will further result in finding more information about people with undisclosed offshore accounts.
Many are unaware that U.S. taxes its tax residents on worldwide income unlike most other nations. Also, U.S. citizens and green card holders living abroad are taxed on worldwide income.
The good news is that most of these cases are fixable without penalties. For example, the IRS’s “Streamlined Filing Compliance” program allows many Americans living abroad to escape penalties for past noncompliance and U.S. residents who qualify for the program can pay penalty of 5% on highest account balance in last 6 years to comply with all the past years of non-filing.