In recent years, the IRS has stepped up the steps necessary to identify and crack down on undeclared foreign bank accounts. To increase tax revenue, the IRS is targeting and examining the tax returns of more and more wealthy taxpayers, hoping to find people who do not comply. Now is the time to “clear” the FBAR if you have funds hidden in foreign bank accounts and want to sleep peacefully at night; otherwise, prepare to be attacked by huge FBAR penalties.

FBAR penalties can be too harsh

FBAR penalties are calculated on the value of one’s account, not on the taxpayer’s income. In addition, each year is treated separately. This could make the FBAR penalties severe beyond your wildest imagination. Consider, for example, that you have $ 1,000,000 in your offshore account. For one year, the FBAR fines will be $ 500,000. For two years, you may end up paying your entire account balance for your willful violation. Tax years stay open for six years, and if the IRS decides to calculate the FBAR penalties for the entire period, you will be forced into a negative equity position.

People have bank accounts abroad for a number of legitimate reasons, including retirement accounts for those who come from a foreign country, accounts that are inherited, and accounts for people who might one day return to their home country. These people are generally dual citizens and expats who add great value to the economic stability of the country. But the United States is the only country that has the legal power to tax people on their income earned anywhere in the universe.

So how can you avoid them?

The following are some of the voluntary disclosure programs available to individuals who are not under audit or criminal investigation:

Optimized Domestic OVDP: Non-volunteer taxpayers living in the US can take advantage of the procedure simply by paying a penalty abroad equal to 5% on the maximum aggregate balance of one year.

OVDP Optimized Offshore: This is for taxpayers who reside outside of the United States and qualify for a 0% penalty, eliminating the need to opt out of OVDP.

Standard 27.5% Offshore Penalty: The standard penalty (also known as “in lieu of the FBAR penalty”) equals 27.5% of the highest account balance during the voluntary disclosure period. This one-time penalty applies to most OVDP cases.

Standard 50% Offshore Penalty: This 50% FBAR penalty applies to all taxpayers with foreign accounts at financial institutions that are publicly named or identified as under investigation by the IRS.

Opt out of OVDP: This is for taxpayers who feel that the 27.5% penalty or the rigid structure of the 50% penalty is not appropriate for their circumstances and would like to be evaluated under normal FBAR guidelines. For unintentional violators, opting out of the program can be a tricky route to reducing penalties.

FBAR only: If there is no unreported income on your foreign accounts, you may not be subject to any penalties while filing delinquent FBARs.

If you are subjected to a criminal investigation for undeclared offshore assets

If the IRS has recommended criminal prosecution for your case, you should get immediate legal help to protect yourself from huge criminal penalties ($ 500,000 in fines) and jail time. In the wake of HSBC, UBS, and other escalating criminal investigations, the IRS has begun criminally charging taxpayers, including individuals, corporations, partnerships, and trusts, for undeclared offshore accounts. In addition to this, the IRS can assess FBAR civil penalties separately, but to collect them, the IRS must participate in FBAR litigation in federal court.