IRS jurisdictions of monitoring and ensuring tax compliance among US taxpayers extend not only to accounts on US territory, but also to financial accounts held abroad.
To ensure that these requirements are met, the government requires FBAR submissions from all qualified taxpayers with foreign accounts to comply with the country’s tax laws.
Continue reading to learn more about unreported foreign accounts, FBAR filing, and the consequences for violating the law.
What Is FBAR Filing and Who Needs to File?
FBAR Basics (Report of Foreign Bank and Financial Accounts)
The Foreign Bank Account Report (FBAR), also known as FinCEN Form 114, is an annual report required to be filed by U.S. taxpayers with a foreign financial account.
The FBAR is mandated by the Bank Secrecy Act (BSA) to monitor overseas account transactions held by US citizens. The FBAR is designed to prevent financial crimes, such as money laundering, tax evasion, and other financial offenses.
Who Must File an FBAR
Those who must file FBAR include those who meet the following criteria:
- Citizens, alien residents, or U.S. entities such as corporations, partnerships, trusts, or limited liability companies.
- Have a financial stake in, or signature authority over, one or more overseas financial accounts. These accounts may include bank accounts, securities, mutual funds, cash-value insurance policies, and accounts held in foreign branches of U.S. banks or U.S. branches of foreign banks.
- With a threshold exceeding $10,000 at any time during the calendar year.
Reporting Foreign Income: IRS Filing Obligations Beyond FBAR
IRS Form 8938 (FATCA Reporting)
FATCA, commonly known as IRS Form 8938 or Statement of Specified Foreign Financial Assets, is another tax form that U.S. taxpayers must file along with their annual income tax return (Form 1040). FATCA complements the FBAR by requiring the reporting of any foreign assets and accounts owned.
Similar to the FBAR, U.S. citizens who own financial accounts in foreign financial institutions and other foreign financial assets and interests (such as stocks, securities, partnerships, corporations, and mutual funds) are required to file FATCA.
Taxpayers who have a total value of foreign financial assets exceeding the following amounts are bound to FATCA regulations:
- $50,000 on the last day of the tax year or $75,000 at any time during the year (for unmarried individuals living in the United States)
- $100,000 on the last day of the tax year or $150,000 at any time (for married filing jointly residing in the United States)
- $200,000 on the last day of the tax year or $300,000 at any time (for unmarried individuals living outside the United States)
- $400,000 on the last day of the tax year or $600,000 at any time (for married individuals residing outside the country)
Other Common Forms
In addition to the FBAR and FATCA, US taxpayers with foreign income or assets may be required to file additional IRS forms (3520, 5471, 8621) to record specific foreign financial activities or interests.
Form 3520 is used to report transactions involving foreign trusts (such as distributions and donations) and substantial gifts from overseas corporations or persons.
Form 5471 reports ownership or control of certain foreign firms to guarantee income and transaction transparency, especially for Controlled Foreign Corporations (CFCs).
Form 8621 reports direct or indirect distributions and gains from a Passive Foreign Investment Company (PFIC) or Qualified Electing Fund (QEF).
Consequences of Unreported Foreign Accounts and Income
Unreported overseas accounts and income can result in significant issues, including penalties and even imprisonment. Non-willful violations, which include failing to report a financial account due to negligence, misunderstanding, or other reasons without intent to evade taxes, can result in penalties of up to $10,000 per violation.
Wilful violation, which occurs when a taxpayer knowingly or recklessly fails to report foreign accounts or income—indicating intent to evade taxes—is punishable by the greater of $100,000 (adjusted for inflation, approximately $160,944 for 2025) or 50% of the account balance at the time of the violation per violation.
Criminal FBAR applies when non-compliance results from intentional tax evasion, fraud, or other illegal activities. The penalties can include fines of up to $250,000 and/or imprisonment for up to 5 years.
If taxpayers are part of a conspiracy or a pattern of illegal activity (e.g., money laundering or hiding income), penalties can increase by $500,000 or more, and imprisonment can be up to 7 years.
Additional IRS Penalties
Other penalties that may be imposed for failing to comply with IRS foreign reporting requirements include accuracy-related penalties of up to 20% of the underpayment and 40% of the underpaid tax for underpayments related to undisclosed foreign financial assets.
Failure to file a tax return that includes foreign income or Form 8938 may result in both the failure-to-file penalty and the form-specific penalty.
Late tax returns are subject to a monthly penalty of 5% of the unpaid tax, up to a maximum of 25% of the total tax amount. Similarly, undeclared foreign income that results in underpaid taxes can lead to a failure-to-pay penalty of 0.5% per month of the unpaid tax, up to a maximum of 25%.
Furthermore, failure to meet your tax requirements, including the disclosure of foreign accounts, may result in an audit and potentially lead to long-term tax consequences.
What Triggers IRS Scrutiny?
Non-compliance or inconsistencies in these filings are the main trigger for an IRS audit or scrutiny.
The IRS cross-references data, for instance, FATCA disclosure, with U.S. taxpayers’ filings (e.g., FBAR, Form 8938, or Form 1040) and checks for accuracy. Large international or frequent transfers, or those with suspicious patterns, are more likely to get more scrutiny from the authorities.
Minimize scrutiny by taking the necessary steps, such as filing on time and accurately, disclosing all accounts and assets, and paying taxes in a timely manner.
How to Correct Unreported Foreign Accounts or Income
Just like with filing taxes or paying taxes late, taxpayers are given opportunities to fix unreported foreign accounts or income. This is possible through:
IRS Voluntary Disclosure Programs (VDP): Allows taxpayers who willfully failed to report foreign accounts or income to disclose their non-compliance proactively, potentially avoiding criminal prosecution while resolving tax and penalty obligations.
To qualify, one must be a U.S. taxpayer with unreported foreign accounts or income and have a valid Taxpayer Identification Number (TIN). Moreover, it is essential to apply for VDP promptly, before the IRS initiates an audit or investigation.
Streamlined Filing Compliance Procedures: The Streamlined Filing Compliance Procedures allow non-willful taxpayers to correct unreported foreign accounts or income with reduced or no penalties.
U.S. taxpayers must certify non-willful conduct with a signed statement under penalty of perjury, be free of IRS audits or criminal investigations, and have a valid TIN.
Delinquent FBAR or Informational Return Submissions: This option allows for filing delinquent forms accompanied by a reasonable cause statement to avoid penalties, for individuals with no unreported income (no tax liability) who failed to file their FBAR.
Eligibility includes no underreported income or unpaid taxes, being neither under IRS audit nor investigation, and not having committed a non-willful failure to file (e.g., due to ignorance or oversight).
Why You Need To Hire an Expert Tax Attorney for FBAR Issues
Unreported foreign accounts and income are a severe tax issue that should not be overlooked.
Therefore, if you wish to take any action, such as filing an FBAR, resolving a problem, or communicating with the IRS, we strongly advise you to seek expert assistance. A tax attorney has familiarity with all aspects of the tax system, including determining the best answer for your unique case.
Contact Greenberg Law today and let us help you avoid tax difficulties!
