FBAR and FATCA are two important abbreviations for those who have overseas financial interests.  Failure to file the FBAR report, in view of the IRS’s continuing application of FATCA, can get you into what old military veterans used to call FUBAR.

Let’s back up a bit and go over those abbreviations:

FBAR is a Foreign Bank and Financial Accounts report. It’s a report form required by the Bank Secrecy Act. Here’s how the IRS describes it:

“If you have a financial interest in or signature authority over a foreign financial account, … exceeding certain thresholds … you [are required to] report the account yearly to the Internal Revenue Service…”

To summarize, if you are what the IRS calls a “United States person,” you must file an FBAR when:

• you have a financial interest in at least one account located outside the country; and
• the total value of all your overseas accounts exceeds $10,000 at any time during the year.

FATCA stands for Foreign Account Tax Compliance Act. Time has run out for high-income earners and U.S. corporations who, in the past, have been successful in concealing foreign holdings with the passive assistance of the host foreign governments. FATCA is the mechanism that will report and subject that income to taxation.

FUBAR is an old military slang term that means Fouled Up Beyond all Recognition/Repair/Reason. (The word fouled for the purpose of this piece is the G-rated F-bomb substitute.) FUBAR is what can happen if the IRS criminal investigators decide to turn the screws on someone who:

• has unreported foreign income, interest, dividends;
• fails to disclose capital gains related to investments in a foreign account;
• hides earnings in a foreign business or foreign rental property;
• conceals unreported taxable foreign income of any kind;
• fails to report the existence of offshore accounts under Schedule B on a personal tax return.

The bad news is that the IRS has an almost 80 percent conviction rate when it pursues FBAR violations. Compared to other tax evasion penalties, you could describe these as harsh and draconian. The bleeding begins at $10,000 per year for mere negligence to up to 50 percent of the unreported balance for every year the account was open.

If the IRS can prove actual tax fraud by pinning a “badge of fraud” on the accused, then there is a felony conviction with three years in prison and a fine of $250,000. A conviction of tax evasion ups the sentence to five years in federal prison.

By the way, applying a “badge of fraud” is how the IRS proves, by circumstances and inferences, that the taxpayer’s actions were willful, rather than just negligent.

Finally, no discussion of FBAR and FATCA would be complete without a quick reference to OVDP. Long explanation short, OVDP stands for Offshore Voluntary Disclosure Program. It’s somewhat of an amnesty program that anyone who had enjoyed years of overseas tax avoidance really needs to look into.

To learn all about FBAR go to the IRS web page. Also, see my previous blog discussing the general provisions of FATCA.