Oversight of seemingly insignificant, immaterial assets such as bank balances could cost you big money in penalties.
The IRS has disclosure reporting requirements for ownership or control over foreign assets. The disclosures relate to control over a foreign business entity or trust, receipt of gifts or inheritances from foreign sources, and ownership in (or signing authority for) a foreign bank or investment account. The penalties for not filing the disclosure forms on time, or incomplete filings, include both civil and criminal penalties, with civil penalties starting start at a minimum of $10,000 per person, per year, per failure to file.
The IRS recently announced a reduction in the Foreign Bank Account Reporting (FBAR) penalties and disclosure penalties for those with an interest in foreign entities (foreign companies, foreign trusts, etc.) if they voluntarily disclose previously unreported information prior to September 23, 2009. This sounds great, but penalties are still being assessed at 20% of the maximum value in the bank account at any point during the last 6 years (or 20% of the maximum value of the assets held by a business), which may be substantial. In certain circumstances the penalty may be reduced to 5%, but these cases are very limited. Even worse, an IRS memorandum directs examiners that “no reasonable cause exception may apply” – so there is no getting out of these penalties because of an innocent mistake. This can be unfair, as many of those failing to file these forms don’t know that the requirement exists. The commissioner also threatened in a statement that “the situation will only become more dire” for those who do not self-correct, directing examiners to pursue both civil and criminal penalties that are available for non-compliance. The good news is that if you self-correct in time, a “get out of jail free card” is still available.