Americans living in Brazil should know about this recent tax case. On May 28, 2014, a federal court jury in Florida decided that it was appropriate for the IRS to assess a penalty of $2,241,809 for the willful failure to report a financial interest in a foreign bank account with a high balance of $1,691,054.
Failing to report his foreign assets for several years, Carl Zwerner must now pay an FBAR penalty that is equivalent to 150% of the highest balance in his account. Although many of the facts in the case seem to justify lenience, the judgment sends a clear message that the U.S. is serious about identifying and collecting taxes on foreign assets.
What is an FBAR?
FBAR refers to the Report of Foreign Bank and Financial Accounts that is required by the Bank Secrecy Act. Under this law, “U.S. persons” must file an FBAR if they have a financial interest in, or signatory authority over, a financial account located outside of the United States, and the aggregate value of all financial accounts exceeds $10,000 at any point during the calendar year. The definition of foreign financial accounts includes bank accounts, brokerage accounts, mutual funds, and trusts.
Although the FBAR is not a part of the IRS code, the report must be filed yearly with the IRS by June 30th. The request and granting of an extension to file an IRS tax return does not give an extension to file the FBAR. Even though the FBAR is the common description of the report, the official form is FinCEN Form 114.
Persons required to file an FBAR but who fail to file the report may be subject to a civil penalty of $10,000 per nonwillful violation without reasonable cause. If the violations are deemed willful, as in the case of Mr. Zwerner, the penalty for each violation may be the greater of $100,000 or 50% of the balance in the account at the time of the violation.
Consider Voluntary Disclosure
As of January 9, 2012, the IRS reopened its Offshore Voluntary Disclosure Program. Under the program, those with unreported taxable income from foreign accounts have the opportunity to resolve their filing and reporting obligations.
One option that may be attractive to Americans living in Brazil is the streamlined compliance procedure for non-resident U.S. citizens who have not filed U.S. income tax returns or FBARs. Upon filing delinquent tax returns for the past three years and delinquent FBARs for the past six years, the IRS will expedite processing and not assert penalties or pursue follow-up actions.
Does the FBAR Apply to You?
Because of the severity of nondisclosure of foreign financial accounts, it is important that Americans living in Brazil determine if they must file an FBAR. There are subtle complexities and exceptions involved, so be sure to check with your tax adviser to understand your reporting requirements.
