FBAR penalties in 2025: Everything you need to know

Having foreign bank accounts comes with specific reporting obligations for US taxpayers. Understanding FBAR penalties is paramount, as failure to do so could lead to a penalty for not declaring a foreign bank account.

Whether you're an expat managing overseas assets or a US resident with foreign investments, knowing your obligations and the penalties for not filing and non-compliance is essential for maintaining financial compliance.

The IRS is seriously focussing on combating tax evasion in 2024, making it more crucial than ever to understand and meet these requirements. With penalties ranging from modest fines for accidental oversights to substantial financial penalties and potential criminal charges for willful violations, the stakes are particularly high.

Even if you're just beginning to navigate the complexities of international banking, staying informed about FBAR requirements and potential non-filing penalties is your first line of defense against costly mistakes.

What is FBAR?

The Foreign Bank and Financial Accounts Report (FBAR) is a crucial reporting requirement designed to prevent tax evasion through undisclosed foreign accounts. 

If you're a US citizen, resident, or entity with foreign financial accounts totaling more than $10,000 at any point during the calendar year, you must file an FBAR. This FBAR limit applies to the combined value of all foreign accounts, not just individual ones.

The requirement encompasses various types of foreign financial accounts, including traditional bank accounts, securities accounts, mutual funds, and even certain insurance policies with cash value. For instance, if you have three foreign accounts with $4,000 each, you would need to file an FBAR since their combined value exceeds the threshold.

Understanding the FBAR limit and what constitutes a foreign financial account is crucial, as overlooking certain accounts could unintentionally lead to non-compliance.

✔️Pro tip: Be aware that even if your account balance drops below $10,000 at some point during the year, this does NOT make you exempt.

You still need to file if it exceeds this threshold at any point.

Penalties for failure to file an FBAR

The consequences of not filing an FBAR can be severe, ranging from monetary penalties for non-filing to potential criminal charges in extreme cases. This includes a potential penalty for late filing of FBAR. The IRS takes these violations seriously, and FBAR compliance is a key focus of their enforcement efforts.

In recent years, the IRS has significantly increased its resources dedicated to identifying unreported foreign accounts, leveraging international banking agreements and sophisticated data analysis tools.

This heightened scrutiny means that the chances of detecting unreported accounts are higher than ever before. The penalties for not filing or for late filing of FBAR are designed not only to punish non-compliance but also to encourage voluntary disclosure and maintain the integrity of the US tax system.

Willful failure to file FBAR penalties

When the IRS determines that someone knowingly failed to file an FBAR, the penalties can be substantial. The IRS considers several factors when determining willfulness, including patterns of non-reporting, attempts to conceal accounts, and the taxpayer's background and sophistication in financial matters.
The penalties for willful violations include:

• maximum penalty of $100,000 or 50% of the account balance at the time of the violation, whichever is greater
• potential criminal penalties, including:

- up to $250,000 in FBAR fines
- up to 5 years imprisonment
- both monetary penalties and imprisonment in severe cases

NOTE! These penalties can be assessed for each year of non-compliance, meaning multiple years of willful non-filing could result in penalties exceeding the actual account balances. The IRS may also pursue criminal charges if they find evidence of deliberate concealment or other fraudulent behavior.

A real example of how FBAR penalties are assessed

In a notable 2023 case, a California businessman faced severe penalties for willfully failing to report multiple Swiss bank accounts. After finding clear evidence that the taxpayer deliberately concealed these accounts from the IRS, the court imposed a penalty of $14.9 million, representing 50% of the aggregate account balances. You should always practice proper tax planning, as failure to do so could have devastating consequences.

The businessman had maintained these accounts for over a decade, using complex corporate structures and nominee entities to hide their existence – all the tricks in the book. The IRS investigation revealed that he had actively worked with foreign bankers to ensure the accounts remained undetected, including using coded communications and avoiding direct transfers to US accounts.

Despite his claims of ignorance about FBAR requirements, evidence showed he had received multiple warnings from financial advisors about his reporting obligations. The court noted that his sophisticated business background and deliberate actions to conceal the accounts clearly demonstrated willful non-compliance.

FBAR penalties for non-willful failure to file

While everyone makes mistakes, the IRS takes a strict approach even to unintentional oversights. Non-willful violations – resulting from negligence, inadvertence, or mistake – still carry significant penalties, though less severe than their willful counterparts. The IRS evaluates these cases based on what a reasonable person should have known or done under similar circumstances.

Be aware the FBAR penalties for not filing can be up to $10,000 per violation, and each unreported account each year counts as a separate violation. However, penalties may be waived if there's reasonable cause.

✔️Pro tip: Even simple oversights can multiply quickly when multiple accounts and years are involved, making professional guidance valuable for mitigation strategies.

Example of non-willful non-compliance

A US teacher working abroad maintained several small accounts in their host country, collectively exceeding $10,000. Unaware of FBAR requirements, they failed to report these accounts for three years. The IRS assessed a $20,000 penalty ($10,000 for two years) but waived the third year's penalty after the teacher demonstrated reasonable cause through professional tax assistance.

In reviewing the case, the IRS considered several mitigating factors: the teacher had consistently reported all foreign income on their US tax returns, maintained detailed records of their accounts, and took immediate corrective action upon learning of the FBAR requirement.

Similarly, in another case, a retired couple who had inherited a foreign account were able to demonstrate reasonable cause by showing they had relied on incorrect advice from their previous tax preparer. In this case, they avoided a larger penalty for not declaring foreign bank account.

These cases illustrate how the IRS may show leniency when taxpayers can prove their non-compliance was truly non-willful and take prompt corrective action.

FBAR penalty mitigation and relief options

Finding yourself on the wrong side of FBAR regulations can be stressful, but don't panic. There are several pathways to get back into compliance while potentially reducing or eliminating FBAR penalties:

1. Reasonable cause exception. The IRS understands that honest mistakes happen. You might qualify for this if you can:
   - demonstrate a good-faith effort to comply with the regulations
   - provide clear documentation supporting why you missed the filing
   - show you have no history of FBAR violations
   - prove you took prompt action once you discovered the requirement
   
   ✔️Pro tip: Keep detailed records of any circumstances that prevented timely filing, such as serious illness or reliance on professional advice that turned out to be incorrect.
2. Streamlined filing compliance procedures. This program is designed for taxpayers who can honestly say their failure to file was not intentional. It offers:
   - a simpler path to compliance for non-willful violations
   - significantly reduced penalties
   - potential penalty waiver in some cases
   - a fresh start with your tax obligations
3. Voluntary Disclosure Programs (VDPs). If your situation is more complex or involves deliberate non-compliance, this program might be your best option since it:
   - provides protection from criminal prosecution
   - offers offshore voluntary disclosure options for foreign accounts
   - allows you to proactively address compliance issues
   - typically results in lower penalties than if the IRS discovers the accounts first

NOTE! The key is acting quickly once you realize there's an issue. The IRS tends to be more lenient with taxpayers who come forward voluntarily rather than waiting to be discovered.

Penalties for late filing of FBAR

So you missed the FBAR filing deadline – now what? While an FBAR late filing penalty is generally less severe than FBAR non-filing penalties, they can still impact your wallet. Let's break down what you need to know about late filing penalties:

How the IRS Evaluates Late Filings The IRS looks at several key factors when deciding whether (and how much) to penalize late filers:

• Length of delay
  A few days late? Less severe.
  Several years late? Expect closer scrutiny.
  Prompt action once you realize the oversight can work in your favor.
• Your filing history
  Clean record? You're more likely to receive leniency.
  Previous late filings? The IRS may be less understanding.
  Consistent tax compliance in other areas helps your case.
• Your reason for filing late
  Natural disaster or serious illness? The IRS may be sympathetic.
  Reliance on incorrect professional advice? Document everything.
  Simply forgot to file FBAR? Be honest, but prepare for less flexibility.

✔️Pro tip: If your foreign accounts were properly reported on your tax returns, this shows transparency and can help demonstrate that you weren't trying to hide anything.

Good news for first-time late filers – the IRS often shows leniency if you:

• take immediate action once you discover the requirement
• can demonstrate reasonable cause for the delay
• have properly reported all foreign income on your tax returns
• haven't received any prior FBAR warnings
   

NOTE! This "first-time forgiveness" is typically a one-time opportunity, so make sure to stay on top of future filing deadlines.

Delinquent FBAR submission procedures

If you’ve discovered you've missed filing FBARs, don't worry – taking action now is much better than waiting for the IRS to find out. You can find more by reading the IRS section on the delinquent FBAR procedures, but to make things easier, here's a simple, sharp, step-by-step guide to getting back on track:

1. Gather required documentation
   Collect all foreign account statements.
   Document maximum balances for each account.
   List all account holders and signatories.
   Save relevant account correspondence.
   
   ✔️Pro tip: Use a spreadsheet to track yearly maximum balances – this simplifies the filing process.
2. Assess your filing status
   Current year late filing: Requires immediate attention
   Multiple years missing: Needs comprehensive resolution
   Incorrect previous filings: May require amendments
3. Select the appropriate compliance program
   Basic oversight: Use delinquent FBAR procedures
   Multiple missing years: Consider streamlined filing
   Complex situations: Look into voluntary disclosure
4. Complete submission process
   Submit through FinCEN's BSA E-Filing System
   Provide a clear explanation for late filing
   Include supporting documentation

NOTE! When in doubt, consider working with an experienced tax professional who can guide you through this process and help avoid costly mistakes.

Conclusion

Understanding and complying with FBAR requirements is crucial for US taxpayers with foreign accounts. While FBAR penalties can be severe, various relief options exist for those who take proactive steps toward compliance. Working with professionals in tax requirements can help you navigate these complex requirements and minimize potential penalties.

Remember, the IRS is more interested in bringing taxpayers into compliance than simply collecting penalties. By staying informed about your obligations and taking prompt action when you discover any oversights, you can often avoid the most severe consequences.

Whether you're an expat managing multiple foreign accounts or someone who recently inherited an overseas asset, understanding these requirements is your first line of defense against costly penalties.

The key is to stay proactive: maintain good records, mark your calendar for annual filing deadlines, and don't hesitate to seek professional guidance when needed. Your financial peace of mind is worth the effort of staying compliant.