Discover more from American Expat Lessons Learned
Not filing an FBAR might cost you more than not filing a 1040
Filing an FBAR seems unimportant. It’s not. It’s cheap financial disaster insurance.
If you’re an American expat you should know that Uncle Sam has an annoying form for you to manage. It’s called the Foreign Bank Account Report, affectionately known by no one as the FBAR.
If you’re an American expat unfamiliar with FBARs, prepare yourself and read on.
The FBAR is often assumed to be part of the 1040 tax return. It is not, but the two are related. They're more cousins than siblings. The 1040 is about income from anywhere. The FBAR is about where you keep money outside the USA.
Despite the boring name, the FBAR demands sensitive information, the amount of money in your accounts and exactly where those accounts are. It was created about 15 years ago to make it easier for the US Treasury to find money hidden by Americans outside the US.
FBAR filing is required of all American citizens, but US residents rarely have or need foreign accounts. It’s a different story for Americans who reside abroad. We need local financial accounts to lead a modern life.
Only a fraction of American expats file FBARs, so many either don’t know they have to file or choose not to. I get it. The FBAR seems like a needless bureaucratic task. No money is owed upon filing, and nothing happens afterwards.
It’s tempting to conclude that Uncle Sam doesn’t know or care about your accounts. He probably knows about them. Even so, he’ll fine you if you don’t tell him about them.
When FBARs were started, Uncle Sam pressured foreign financial institutions to share information about accounts held by Americans. Canadian banks resisted but were threatened with additional taxes on funds invested in the US if they didn’t cooperate. As a result, major Canadian banks now ask about US citizenship status on account forms.
If your non-US bank knows of your American citizenship, it’s likely that your account information is being shared with Uncle Sam. Although some countries may not participate (North Korea?), you should probably assume that your foreign bank is not an FBAR-free walled garden.
The FBAR involves an online form. If you only have one or two accounts, it’s simple to complete, and no money is owed. That said, there’s a hidden price, the cost of your time. If you have many accounts, the FBAR can be quite time consuming.
FBARs are based on the calendar year and are due when US taxes are due. For now, Americans who live abroad are given a 6-month extension to the traditional April 15 deadline.
Haven’t done your 2022 FBAR yet? It’s not too late. October 17th is the expat deadline, and you don’t need to formally request that extension.
Why file an FBAR?
There’s one reason: failing to file exposes you to large penalties. FBAR penalties aren’t like those for income tax underpayments or late filing. They’re worse. And potentially stunningly large.
FBAR non-compliance penalties fall into two buckets, criminal and civil. Criminal penalties are most serious and are related activities like money laundering and tax evasion. If you’re a launderer or evader, get a criminal lawyer.
A lawyer may not be necessary for civil penalties. There’s an important distinction between the two subcategories of civil FBAR penalties, willful and non-willful.
You don’t want to be in the willful subcategory. Uncle Sam doesn’t have to demonstrate that you intended not to file, only that you showed displayed reckless disregard or willful blindness in your FBAR dealings. The possible penalty for willful non-compliance? $100k!
Much lower FBAR penalties are levied for non-willful non-compliance, and they vary greatly in severity. The low end is a warning letter in your file (whew!). The high end is a penalty of 50% of the value of all your accounts (gasp!).
The bottom line is that FBAR non-compliance can lead to an admonishment or a crippling penalty. With that as context, filing an annual FBAR is unquestionably a cheap form of disaster insurance.
OMG! What if I haven’t filed?
Many expats have never heard of the FBAR. What is the chance that their noncompliance will be noted? I have no idea. Moreover, I’ve been unable to find any stats on the probability of a penalty. All I can offer is some circumstantial information.
When I was hired by a Canadian university decades ago, I was one of many expat hires. In the intervening years I’ve not heard of any expat being penalized for 1040 or FBAR filing noncompliance. Of course, a penalty isn’t something one would want to publicize. That said, my experience suggests minimal FBAR enforcement.
Recent evidence, however, suggests that enforcement actions are increasing. A US law firm specializing in expat matters is convinced that FBAR penalties are on the rise for various converging reasons, both legal and administrative.
Another hint of increased FBAR scrutiny by the IRS is a new feature of the online FBAR form. That form previously had a single text box where you could explain why you’re filing late. In the most recent version of the form, there’s a new 9-option dropdown list of possible reasons.
Screenshot from 2022 FBAR form
The above reasons do not imply reckless disregard or willful blindness towards FBAR filing. Rather, they appear to be a framework for categorizing non-willful reasons. What action will result from any reason selected is unknown.
In any case there’s no question that the IRS is paying new attention to the reasons for late filing.
Are you FBAR delinquent?
Determine if you owe Uncle Sam one or more FBARs, but consider the following points first:
Are you unknown to Uncle Sam and thinking of bringing your possible American citizenship to the attention of the US government? Such a step has significant, potentially negative, long-term consequences. Consult a lawyer with American citizenship expertise before filing anything.
If Uncle Sam is already acquainted with you, next consider the 6 most recent years for which FBARs could be delinquent (2016-2021). Have you failed to file in any of those years? Note that the deadline for the 2022 FBAR is October 17, 2023.
For a specific year, you didn’t need to file if the sum of money in your accounts was less than $10K (calculation of that sum is tricky; see my next newsletter for more details).
Your options if you’re delinquent
What should you do if you are delinquent for one or more years? I see three general paths.
Keep quiet and hope that the IRS doesn’t notice your past delinquencies. Choose this path and you’ll need to decide what to do about the 2022 and future FBARs. Filing henceforth would insure you against future penalties but also might draw attention to past delinquencies. I honestly don’t know.
Quietly disclose by completing and filing delinquent FBARs. The online form accommodates filing for past years by allowing you to specify the year being reported. Quiet disclosure is the IRS’ recommendation. Here’s what they say: Filing an FBAR late or not at all is a violation and may subject you to penalties. If the IRS hasn’t contacted you about a late FBAR and you’re not under civil or criminal investigation by the IRS, you should file late FBARs as soon as possible to keep potential penalties to a minimum.
A better option? Quiet disclosure is not the best option, according to Sean Golding, whose legal firm specializes in expat issues. Consult his short YouTube video. As you’ll see he’s not specific about what to do instead of quietly disclosing. I believe his firm would recommend using the Streamlined Filing Compliance Procedures, but that’s just my guess.
In sum, there seem to be no clearly good options for a delinquent FBAR filing. However, one needs to weigh them against the possibility of penalties.
FBARs are unfamiliar to many, maybe most, American expats.
Many don’t file, perhaps because they don’t exceed the $10K threshold. Most delinquencies, I think, are the result of ignorance about FBARs.
To make matters worse, Uncle Sam seems uninterested in educating expats. I’ve never seen an ad or public service announcement directed at expats about the FBAR and its importance.
As we’ve seen, the risk of being caught for non-filing may be very small. However, the possible consequences of being caught for delinquent or late filing are awful.
The whole FBAR system is outrageous, and I don’t endorse its ends or means. Nevertheless, I file my annual FBAR because failure to do so would expose me and my family to devastating penalties.
I’d be grateful to learn of your FBAR experiences. Here are some questions for you to consider:
Do you know of expats who’ve never filed?
Do you know of non-filers who’ve been penalized?
Have you heard of someone receiving a warning letter instead of a penalty?
Have you ever seen a US government notice about the importance of FBAR filing?
My FBAR analysis may be wildly off base, so I look forward to feedback. Just share you experience in a comment.