The American expat crime of FBAR ignorance

Breathtaking reporting penalties for middle-class Americans living abroad

Image by storyset on Freepik

A modest middle-class expat life

A hypothetical American expat, Pat, lives abroad and has worked as a preschool teacher for 10 years for an annual salary of €31K.  Pat is married to an engineer, not an expat, who has an annual salary of €70K.  

They deposit their monthly salaries, totaling about $9K, to a joint checking account.  They also have a joint savings account with an ongoing balance of about $3K.

An accidental discovery

During a chance conversation with another expat, Pat learns about the requirement for an expat American to file a Foreign Bank Account Report, or FBAR.  

The FBAR is an online accounting to the US Treasury Department about balances in one’s non-US financial accounts during a calendar year.

Filing an FBAR for a given year is required if the maximum balance in all of one’s accounts exceeds $10,000 at any time during that year.  

Pat thought this would be no problem because their share of the amounts in the joint accounts was always about a third.

The joint account surprise

Alas, FBAR calculation rules for the maximum balance in a joint account is not Pat’s proportional share, but the total account balance.  

Taken together the average $9K monthly balance in checking, coupled with the average $3K balance in savings leads to a typical $12K balance.  

Because the sum of the maximum balances in all of Pat’s accounts exceeds the $10K filing threshold, Pat needs to file an annual FBAR.  

Violations and penalties

Pat’s failure to have filed an FBAR because of ignorance would be a non-willful violation in the eyes of the IRS.  

That’s good because willful violations, more intentional, reckless, or criminal violations, earn much worse penalties than non-willful violations. 

To what kind of penalty would Pat’s first-time innocent non-willful penalty lead?  

In past years the IRS had a mitigation policy towards penalizing non-willful violations that often reduced the severity of penalties.

Unfortunately for Pat, the IRS just released revised policies in a July 2023 memo that eliminate most penalty reductions for non-willful penalties.  

Their new policy states, “In most cases of non-willful violations, examiners will recommend one $10,000 penalty” per violation (year)!

To make matters even worse, Uncle Sam adjusts FBAR penalties for inflation.  Under the policy Pat’s failure to file an FBAR would lead to an actual $15,000 penalty!

There’s more

The IRS window for FBAR compliance is 6 years.  Pat would find themselves FBAR noncompliant for six years, not one.  Pat’s unintentional ignorance of FBARs could lead to a $90K fine (6 x $15K)!  

A fine of 3x one’s income for an unwitting recordkeeping oversight.  Where no crime has been committed.  Where no money has been hidden to avoid taxation.  Unbelievable.

IRS second thoughts

Apparently someone in the IRS thought that such a devastating penalty for a non-willful misstep might be a bit extreme.

Later in the recent IRS memo the following sentence is found:  “In no event will the total amount of the penalties for non-willful violations (among all open years) exceed 50 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate for the years under examination.”

If 6 years of delinquent FBARs are involved, the largest aggregate balance over the 6 years would be identified and halved to determine a penalty.  

If Pat’s highest yearly aggregate account balance was $14K, Pat would owe $7K for the “crime” of not knowing about FBARs.  

$7K is way better than $90K, but it’s still terrible – it would be about a quarter of Pat’s annual income. Moreover, the fine is incurred only because of someone else’s contribution to a shared account!

Incidentally, the minimum fine for a non-willful penalty (before inflation adjustment) now appears to be $5000.  That’s because the filing threshold of $10K would be the smallest possible maximum balance that could be halved for a reduced fine.

Know someone in Pat’s situation?

They’re in luck if their only crime is failing to file the 2022 FBAR.  It’s not delinquent until October 17, 2023, so they should file their 2022 FBAR soon.  On the other hand the 2017-2021 years are in play. 

If your friend missed FBAR filings for any or all of those years, they should not immediately file a late FBAR and hope. Such “quiet disclosures” have some surprising consequences that make one’s situation worse.  

Moreover, there are better options that I’ll review in my next newsletter.  Some lead to FBAR compliance without penalty. Unfortunately, these alternatives, like the FBAR, are not widely publicized or known. 

Encourage your expat acquaintances to sign up for my free newsletter so they won't miss my next report.  It could actually save them $1,000’s.