To gather information for law enforcement, particularly drugs and organized crime, Congress has long required U.S. persons owing or having signatory authority over foreign financial accounts to file a report with the Department of the Treasury disclosing information about the accounts.

The Report of Foreign Bank and Financial Account (TD F90-22.1), commonly referred to as the FBAR, is informational only, and has no direct tax consequence or cost.  However, since U.S. persons are required to report and pay income, and estate and gift tax on worldwide income and assets, the IRS has a keen interest in the information reported on FBARs.  The IRS also encourages taxpayers to file FBARs, particularly when the accounts are in tax haven jurisdictions where the IRS’s ability to gather information is limited.  Other state and federal agencies also have an interest, but it is the IRS’s activity that has recently captured our attention.

The FBAR is not a tax return.  Instead, it is a Treasury information form that is filed with the Treasury by mail or by hand-carrying it to any local IRS office to forward to the Treasury office in Detroit.

Taxpayers must file the FBAR if they have a financial interest or signatory authority over financial accounts in foreign countries with an aggregate value exceeding $10,000 at any time during the tax year.  The financial accounts covered by the form include cash accounts, CDs, securities and other financial interests.  “Signatory authority” is broadly interpreted to include anyone having power to directly use, or direct the use of, the funds in the account.  The FBAR is due June 30 for the preceding year with no extensions allowed.

FBAR information is input into the Banking Secrecy Act financial database that is jointly administered by the Detroit Computing Center and Financial Crimes Enforcement Network (FinCEN).  Once FBARs are posted to the Currency and Banking Retrieval System database, the information is available to FinCEN analysts, law enforcement and appropriate regulatory authorities to track the flow of money.

Because the FBAR is not controlled by IRS privacy requirements, it may be freely shared with law enforcement agencies, although the IRS has principal responsibility to enforce the FBAR requirements.  The IRS may refer violations to the Department of Justice with recommendations of criminal prosecution and/or to assert civil penalties.

Coordination between the FBAR filing requirements and income tax reporting is achieved through the following question of Form 1040, Schedule B: “At any time during 2009, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?  See instruction on back for exceptions and filing requirements for Form TD F90-22.1.”

“yes” answer requires the name of each foreign country – and triggers FBAR filing.  A false “no” answer on Form 1040 raises a tax perjury or evasion charge.  Failure to file the FBAR is an independent action subject to potentially harsh penalties and potential felony criminal charges.

Civil penalties for failure to file are 1) if non-wilful, up to $10,000 per incident, but with a reasonable cause exception, and 2) if wilful, up to the greater of $100,000 or 50 percent of the balance in the account(s).  “Wilful,” for purposes of the increased penalty, is the intentional violation of the known legal duty, i.e., intentional failure to file the FBAR or intentional filing of a false FBAR.  These penalties can apply to each failure to file, so, for example, the wilful penalty could theoretically assess a 50 percent per year (subject to constitutional excessive penalties limitations).

In either case, the IRS may assert some lesser amount depending on mitigating factors, such as no prior history of FBAR violations, taxpayer cooperation and IRS failure to assert a penalty as to any income tax underreported related to the account.  The Treasury has up to six years to assess the civil penalty, plus, after assessment, two years to sue for recovery.

In addition, there can be civil and criminal penalties for income or estate and gift tax noncompliance.  The taxpayer can be criminally prosecuted and subject to the accuracy-related penalty (20 percent) or even the fraud penalty (75 percent).  The penalties could accumulate if there were foreign structures involved that have separate filing requirements, such as Forms 3520 for trusts and 5471s for certain foreign corporations.

U.S. persons having offshore accounts used to avoid U.S. tax obligations have historically been able to take advantage of the IRS’s voluntary disclosure program to come clean and avoid criminal prosecution for either tax misconduct or failure to file FBARs.

This is the case under the IRS general voluntary disclosure program described in the IRS’s Internal Revenue Manual.  From March 23 through Oct. 15, 2009, the IRS provided a special voluntary disclosure program for foreign financial accounts.  The taxpayer could come clean with assurance of no criminal prosecution and only a 20 percent income tax penalty for years starting in 2003, plus a single “in lieu of” FBAR penalty of 20 percent of the highest amount in the foreign account(s) for the highest year.  Under this special initiative, the IRS would forego all other applicable penalties, such as for failure to file 5471s and 3520s.

Taxpayers failing to disclose their activities within this special program ending Oct. 15 can still qualify under the voluntary disclosure program to avoid criminal prosecution, but the amount of the civil penalties, as of this writing, has not yet been determined.  It will certainly exceed the civil penalties available under the special 2009 program.  Possible criminal prosecution and even higher penalties are in store for those who do not voluntarily disclose their activities.

Taxpayers who failed to join the special 2009 voluntary disclosure initiative will need advice.  The easy answer is to issue a voluntary disclosure, but there are different types of voluntary disclosures.  The type that works best for a particular taxpayer depends on the circumstances and, in some respects, the taxpayer’s tolerance for risk.

The two types of voluntary disclosure under the IRS historical practice are 1) a voluntary disclosure with the taxpayer’s counsel negotiating directly with the IRS Criminal Investigation division, or 2) simply filing amended or original delinquent returns for up to six years for income tax returns, and up to five years of amended or delinquent original FBARs.

Choosing between these alternatives is not for the novice or the faint of heart, it really should be done with the close involvement of an experienced attorney.  Yet, when done correctly, taxpayers can be reasonably assured they will not be criminally prosecuted and that the maximum potential civil penalties will not apply.

Non-lawyer practitioners who receive information indicating their clients have foreign financial accounts that were not previously reported correctly for income tax or FBAR purposes should recommend that the client seek an attorney.

Supporting Information

Supporting information on the specific rules and regulations regarding the TD F 90-22.1 Form can be accessed by reviewing this information on the Internal Revenue Agency’s website.  Some additional information pertaining to the above is:


If you have any questions regarding the completion of the Foreign Bank and Financial Accounts Form please do not hesitate in contacting Joe Truscott at 905 528-0234 or by e-mail at [email protected].