As we have already explained, many tax evaders attempt to use foreign accounts and entities to conceal income and assets from the IRS. In addition to aggressively prosecuting these tax evaders, the IRS has also attempted to enact reporting requirements that make it more difficult for tax evaders to conceal off shore holdings as well as provide an additional prosecution tool. The most significant one is the requirement that holders of foreign accounts must file Report of Foreign Bank and Financial Accounts (FBAR). Any financial interest or signature authority in a foreign account (bank, brokerage, mutual fund, etc.) must be reported yearly to the Internal Revenue Service by filing an FBAR.
The federal government created this requirement because foreign countries do not have the same reporting requirements as the United States. It also provides an important tool in identifying anyone who may be using a foreign account to evade income taxes. However, merely holding a foreign account is not a crime, especially if the FBAR is timely filed. But taxpayers who hold foreign accounts and willfully fail to file a FBAR face civil and criminal penalties.
While even a negligent failure to file a FBAR may be sufficient to expose a taxpayer to substantial civil penalties, criminal penalties are required for those who willfully fail to file a FBAR. If the IRS cannot prove that the failure to file a FBAR was intentional, criminal penalties will not be assessed. Nevertheless, the civil fines can still be substantial even for a negligent failure. The 4th Circuit has recently ruled that merely knowing that the FBAR requirement exists is enough to find a willful violation.
While other tax evasion crimes requires the IRS to prove that the taxpayer concealed income and assets in order to evade taxes, no such evidence is required to prosecute a willful failure to file a FBAR. The crime is simply failing to report a foreign account, regardless of whether or not taxes are avoided. This provides the IRS with an important tool in prosecuting tax evaders taking advantage of foreign accounts. Even if they cannot prove that taxes were avoided, the IRS can still impose criminal penalties for failing to file an FBAR.
Nevertheless, the IRS estimates that less than 20 percent of individuals who are required to file an FBAR actually do so. This leaves a substantial number of people potentially vulnerable to both civil and criminal actions by the IRS. And given the amount of money this could net the agency, they are unlikely to ignore those who fail to file for very long.