Missed FBARs With No Unreported Income: Your Options for Filing Late

There is a large group of people with FBAR problems who never hid a dime. They reported their foreign interest and dividends on their U.S. returns. Their foreign salary was on the return. They just never filed FinCEN Form 114, because nobody told them it existed.

For those people, the full streamlined procedure is often more than they need. The question is how to file the missing FBARs in a way that puts them in the strongest position.

First, where things stand with the IRS programs

For years the IRS published a separate page for Delinquent FBAR Submission Procedures. As of this writing, the IRS page listing options for taxpayers with undisclosed foreign financial assets lists three options: the IRS Criminal Investigation Voluntary Disclosure Practice, the Streamlined Filing Compliance Procedures, and the Delinquent International Information Return Submission Procedures. It does not list a separate delinquent FBAR procedure.

That does not leave you without a path. It means the path runs through the FBAR rules themselves and the IRS's internal guidance for examiners, which I will walk through.

How to file a late FBAR

Late FBARs are filed the same way as timely ones, electronically through FinCEN's BSA E-Filing System. FinCEN's instructions say that if the report is filed after October 15 of the year following the reporting year, you select a reason from a drop-down list, and if none applies you select "other" and provide a written explanation.

The IRS's own manual, at IRM 4.26.16.3.11, adds detail. Delinquent FBARs should be filed on the current electronic report, using the instructions for the year being reported to decide whether a requirement existed. The first page should state the reason the FBAR was late. The "Other" choice opens a text box of up to 750 characters.

File each missing year as its own report. Use the valuation rules for each year, including the Treasury exchange rate for the last day of each year.

What the IRS manual says about penalties for late FBARs

This is the sentence that matters most. IRM 4.26.16.3.11 states that a penalty will not be asserted for an account if it is determined that the failure to report the account on a timely FBAR was not willful, was due to reasonable cause, and the account was properly reported on the delinquent FBAR.

The statute points the same way. Under 31 U.S.C. 5321(a)(5)(B)(ii), no non-willful penalty is imposed if the violation was due to reasonable cause and the balance in the account was properly reported.

And if the IRS does examine, the IRM gives examiners discretion to issue a warning letter, Letter 3800, and secure the delinquent FBARs instead of asserting a penalty. Factors include whether a warning letter would achieve compliance, the nature of the violation and amounts involved, the person's conduct, cooperation, account balances, and the total of all penalties. See the Bittner guide for how non-willful penalties are computed when they are asserted.

Reasonable cause is about facts, not feelings

The IRM's non-willful penalty section notes that some courts have used the tax law's reasonable cause principles for FBAR cases, under which reasonable cause exists when a person exercised ordinary business care and prudence and still failed to comply.

What does that look like in a late FBAR explanation? Concrete facts: you lived abroad and the accounts were ordinary local accounts; the income was reported on your U.S. returns; your preparer never asked; you filed as soon as you learned. Seven hundred fifty characters will not hold a novel, so choose the facts that matter.

Who this path usually fits

The expat whose returns were complete. A U.S. citizen in Canada filed U.S. returns every year, reported her Canadian bank interest, and claimed foreign tax credits. She never heard of the FBAR. The income side is clean. The missing FBARs are the whole problem.

The child of immigrants. A U.S. resident was added to a parent's account in another country decades ago. He never deposited or withdrew a cent, and the account produced little income that was reported by his parent. He has signature authority or a joint interest and never knew it mattered.

The returning American. Someone who moved back to the United States and left a small account open abroad to pay a few bills, with the interest reported on the return.

Each of these people should still confirm the income side and the other information returns before deciding. But their stories are the kind the late-filing rules were built for.

Keep proof of everything

When you file through BSA E-Filing, you receive a BSA Identifier for each report. Keep the confirmation for every year. The IRS manual notes that FBAR filing can be verified through the FinCEN Query System, but your own records are your first line of proof. Under the regulations, keep the account records for five years from each FBAR's due date. If you ever need to amend, you will need that identifier.

Keep a copy of every explanation you typed into the late-filing box, too. If the IRS ever asks about those years, you will want to know exactly what you said, word for word, and you will want your later statements to match it.

When late FBARs alone are not enough

Filing the FBARs by themselves is a reasonable path only when the rest of your compliance is clean. Check these before you choose it:

• Was all the income actually reported? If interest, dividends, gains or pension distributions from foreign accounts were left off your returns, you have an income problem too. The streamlined procedures, foreign or domestic, exist for that.
• Are other information returns missing? A missing Form 8938, 3520, 5471 or 8621 keeps your tax year open under 26 U.S.C. 6501(c)(8) and carries its own penalties. See delinquent international information returns.
• Did you file U.S. returns at all? If you are an American abroad who never filed, late FBARs alone do not fix the problem.
• Is there an open examination? If the IRS has already contacted you about the FBARs or opened an examination, the analysis changes, and you should not file anything without advice.

What not to put in the explanation

• Speculation. Do not guess about what you might have known. State what you knew and when.
• Blame without facts. "My accountant should have told me" helps only if the accountant knew about the accounts. Say what the accountant knew.
• Statements that conflict with your returns. If your Schedule B answered the foreign account question "no," do not write that you were never asked about foreign accounts without explaining that answer.
• Promises. The explanation is a record of the past, not a pledge. Keep it factual.

A sensible order of operations

If the list of accounts is long, or some statements are missing, do not let that stop you. FinCEN's instructions allow reasonable approximations of the maximum value based on periodic statements, and an amount unknown box exists for filers with fewer than 25 accounts who truly cannot determine a value. Reasonable, documented estimates filed now are better than perfect numbers filed never. Note in your own records how each estimate was made, so you can explain it later.

• Build the account list for six years: every account, maximum value each year, and the exchange rate used.
• Confirm, return by return, that the income from those accounts was reported.
• Check for other missing international forms.
• Choose the path: late FBARs with explanations, delinquent information return procedures, or streamlined.
• Write the explanations with care, then file.
• Calendar every future FBAR before October 15.

Do not let anyone tell you that you must spend a fortune to fix missed FBARs when all your income was reported. Do not let anyone tell you to file them blind, either. If you want a second set of eyes on your plan, let's talk.