Filing tax returns when working in the United States is complicated enough, but what if you were living abroad? Or working with clients abroad? Or expanding your business to another country? This is where FBAR penalties come in. There are many scenarios which require a Report of Foreign Bank and Financial Accounts, commonly called an FBAR. Many taxpayers required to file an FBAR don’t even know they have to. In this case, ignorance of the law does not protect against it. You are still required to file an FBAR for any foreign income, including interest, dividends, and earned income, among others, even if it was already taxed in another country. If you have interests in foreign accounts which total more than $10,000 at any time, additional documentation is required.
FBAR Penalties on Foreign Income
Whether from a business, consultation, sale, working for a foreign company, foreign investments, or something else, you are required to document the income you earned. If you were living and working abroad and your income was already taxed by the country you were living in, you may be exempt from domestic taxes, but you are still required to file. Failing to report on the income that you earned in another country can result in FBAR penalties. These include serious fines, even if you were not aware of the problem.
Non-Willful Failure to File
Non-willful failure to file an FBAR means you didn’t file, but you didn’t know you were required to. Unfortunately, this still results in FBAR penalties. If you had significant financial interest or were earning money in another country, you must file FBAR and additional documents properly. If you do not, each non-willful FBAR penalty can amount to $10,000. Each year the FBAR is not filed results in additional FBAR penalties.
Willful Failure to File
A willful failure to file means you knew you were supposed to file an FBAR, but didn’t. If you had reasonable resources available to learn about FBAR penalties and filing but didn’t, this may be considered “willful blindness,” and will also put you in the willful failure to file category. Deliberately not filing FBAR documents can result in fines of $100,000 or more.
A failure to file FBAR penalties does not mean immediate and unforgiving tax debt. The best way to resolve FBAR penalties on foreign income, bank accounts or other interests is to file as soon as you can. While this may incur penalties and fines, the IRS gives a better negotiating position to taxpayers who attempt to be compliant. This also means you can negotiate your FBAR penalties and your overall tax debt, and start fresh faster.
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