Offshore Bank Accounts and FBAR Penalties –

Offshore Bank Accounts and FBAR Penalties – What You Need to Know Before It’s Too Late

Here’s something that surprises most people with foreign bank accounts: the IRS probably already knows you have them. The era of the “secret” Swiss bank account ended years ago. Foreign banks in 113 countries are now legally required to report American account holders directly to the IRS. If you thought your offshore account was invisible, you were wrong.

The question isn’t whether the IRS will find out about your foreign accounts. The question is whether you reported them properly. If you didn’t, you’re facing some of the most severe penalties in the entire tax code – penalties that can exceed the value of the account itself.

Welcome to Spodek Law Group. Our goal is to explain exactly what FBAR obligations are, what happens when you don’t meet them, and what options you have to fix the situation. Todd Spodek has helped clients navigate offshore disclosure situations ranging from honest mistakes to willful violations. The difference between those two categories is enormous – potentially the difference between a manageable penalty and losing everything.

If you have unreported foreign bank accounts, call us at 212-300-5196 immediately. Every day you wait makes the situation worse.

The $10,000 Number Everyone Gets Wrong

The FBAR – Report of Foreign Bank and Financial Accounts – is required if your foreign financial accounts exceed $10,000 in aggregate value at ANY TIME during the calendar year. Most people misunderstand what that means.

It dosent mean you have $10,000 sitting in a foreign account. It means the combined balance of all your foreign accounts exceeded $10,000 for even one moment during the year.

Heres how this catches people. Suppose you have $5,000 in a foreign savings account. Your grandmother wires you $6,000 as a gift. For one day, your balance was $11,000. You spent the money within a week. At year end, your balance is back to $5,000. You think you dont have to report because you “only have $5,000.”

Youre wrong. You hit the $10,000 threshold. You were required to file an FBAR. And if you didnt file, your now facing penalties that could be $16,536 or more – for an account you barely used.

The IRS looks at the HIGHEST balance during the year. It dosent matter if that balance lasted for one day. It dosent matter if you no longer have the money. If the threshold was crossed, the filing requirement triggered. Miss it, and the penalties begin.

This catches people who receive large transfers, inheritance distributions, or business payments that temporarily inflate their balances. They never thought of themselves as having “offshore accounts.” They just had a foreign bank account they rarely used. But temporarily crossing the threshold changes everything.

What Counts as a “Foreign Financial Account”

The definition is broader then most people expect. Foreign financial accounts include:

• Bank accounts (checking, savings)
• Securities accounts (brokerage accounts)
• Mutual funds
• Insurance policies with cash value
• Annuities with cash value
• Accounts held with a financial agent
• Foreign pension accounts (often overlooked)

If your parent added you as a signatory on there foreign account, you have FBAR obligations. If you have signature authority over a business account in another country, you have FBAR obligations. If your employer has a foreign pension plan, you may have FBAR obligations.

People who immigrated to the US often maintain accounts in there home countries. People with family abroad sometimes inherit accounts. Business owners with international operations often have corporate accounts overseas. All of these create FBAR exposure.

Why Your “Secret” Foreign Account Isn’t Secret

If you have money in a foreign bank, that bank is almost certainly reporting your information to the IRS. Heres how it works.

In 2010, Congress passed the Foreign Account Tax Compliance Act – FATCA. FATCA requires foreign financial institutions to search their records for customers with any connection to the United States. Birth in the US. Residency history. US address. US phone number. Any indicator of US person status triggers reporting obligations.

Once a foreign bank identifies you as a US person, they must report your account information to the IRS – or face severe withholding penalties. Banks that dont comply lose access to US financial markets. Almost no major bank is willing to accept that consequence.

The result? 113 countries now have intergovernmental agreements with the United States to share financial data. Swiss banks that once prided themselves on secrecy now file reports with the IRS. Caribbean jurisdictions that marketed themselves as tax havens now hand over account information automatically.

The IRS receives automatic data from foreign financial institutions about American account holders. Your bank is telling on you even if you never told the IRS anything.

This creates a dangerous situation for people who havent been filing FBARs. The IRS has your account information from the foreign bank. They can compare it against what youve reported. When those dont match – and they probably wont match if you havent been filing – you have a problem.

The IRS has raised over $10 billion from offshore voluntary disclosure programs. Thats $10 billion from people who thought their accounts were secret. They werent.

The Schedule B Trap

Every year when you file your tax return, theres a question that can destroy you if you answer it wrong. Its on Schedule B, Part III.

The question asks wheather you have a financial interest in or signature authority over a financial account in a foreign country. You must check either “Yes” or “No.”

Heres the trap. When you sign your tax return, you certify under penalty of perjury that everything on it is true and accurate. That includes your answer to the Schedule B question.

If you check “No” when the correct answer is “Yes,” youve made a false statement on a federal return. This is a separate crime – 26 USC § 7206 – punishable by up to three years in prison. You havent just failed to file an FBAR. Youve committed tax fraud.

But it gets worse. The Schedule B question explicitly references the FBAR filing requirement. It tells you that if you have foreign accounts, you may need to file FinCEN 114. When you sign your return, your certifying that you read this. Courts have held that signing a return with Schedule B creates presumed knowledge of the FBAR requirement.

In other words: you cant claim you didnt know about FBARs if youve been signing tax returns for years. The Schedule B question proves you were told. Your signature proves you saw it. Claiming ignorance becomes almost impossible.

This is why FBAR cases often involve willfulness findings even without direct evidence. The IRS doesnt need to prove you knew the law. They just need to show you signed returns that told you about the law. Your own signature becomes evidence against you.

Todd Spodek has seen this trap catch intelligent, sophisticated people who genuinely didnt pay attention to Schedule B. They glanced past the question, checked “No” reflexively, and created years of false statement exposure. By the time they realized the problem, every past return had become a potential criminal charge.

Non-Willful vs Willful – Why It Matters

The FBAR penalty structure has two tracks: non-willful and willful. The difference between them is enormous.

Non-Willful Penalties

If the IRS determines your failure to file was not willful – meaning you made an honest mistake, didnt understand the requirement, or had reasonable cause for not filing – the maximum penalty is $16,536 per report (as of 2025).

After the Supreme Courts Bittner decision, non-willful penalties are calculated per FBAR report, not per account. If you missed one year, you face one penalty – regardless of how many accounts you had. Miss five years, you face five penalties. But someone with ten accounts missing one year faces the same penalty as someone with one account.

This sounds manageable. But the IRS no longer routinely mitigates non-willful penalties. Before November 2020, they often reduced or waived penalties for first-time filers with reasonable cause. Not anymore. Now you face the full statutory penalty even for inadvertent mistakes. Five years of non-willful violations can easily exceed $80,000.

Willful Penalties

If the IRS determines your failure was willful – meaning you knew about the requirement or deliberately avoided learning about it – the penalty structure changes dramatically.

Willful penalties are the GREATER of $165,353 or 50% of the highest balance in the unreported account. Per year.

Have $1 million in an unreported offshore account? The willful penalty is $500,000. Per year. Miss five years of filing? Thats $2.5 million in potential penalties – more than twice what you actually have in the account.

And heres what “willful” actually means. It dosent require proof that you knew the specific FBAR law. It includes “willful blindness” – deliberately not learning about your obligations. It includes “reckless disregard” – ignoring obvious signs that you might have obligations. Courts have found willfulness based on the Schedule B question alone.

In 2024, Richard Rund was hit with a $2.9 million penalty for failing to report accounts in Hong Kong and Switzerland. The court found his conduct willful. The amounts involved can be staggering.

The Eighth Amendment Defense – A Glimmer of Hope

Theres one recent legal development that offers some protection. In the Schwarzbaum case, the Eleventh Circuit held that FBAR penalties are punitive in nature – meaning they can violate the Eighth Amendments prohibition on excessive fines.

This matters because FBAR penalties can easily exceed the value of the underlying account. When a $500,000 account generates $2 million in penalties over several years, the punishment may be constitutionally excessive. Courts are now required to evaluate wheather the penalty is grossly disproportionate to the offense.

This dosent mean you can avoid penalties entirely. But it provides a potential defense when the numbers become truly absurd. An experienced attorney can evaluate wheather an Eighth Amendment challenge makes sense for your situation.

The Numbers That Should Terrify You

Let me give you the penalty structure that applies to FBAR violations:

Civil Penalties:

• Non-willful: Up to $16,536 per report
• Willful: Greater of $165,353 OR 50% of account balance, per violation

Criminal Penalties:

• Up to $250,000 in fines
• Up to 5 years in federal prison
• Per violation

These penalties are cumulative. The civil penalties dont protect you from criminal prosecution. You can pay millions in penalties AND go to prison. They’re not alternatives – they’re additions.

And theres a second reporting requirement most people dont know about. If your foreign financial assets exceed $50,000 (for US residents), you must also file Form 8938 under FATCA. Failing to file 8938 triggers a separate $10,000 penalty, increasing to $50,000 if you continue failing after IRS notice. Plus a 40% penalty on any underpaid taxes related to unreported foreign assets.

The double reporting requirement – FBAR to FinCEN, Form 8938 to the IRS – means you can face penalties from both systems simultaneously. Missing one but filing the other dosent protect you. They’re separate obligations with separate penalties.

Heres a realistic scenario. Someone has $500,000 in an unreported Swiss account. They didnt file FBARs for six years. The IRS determines the conduct was willful (Schedule B signed every year).

Penalty calculation: 50% of $500,000 = $250,000. Per year. Six years = $1.5 million in potential FBAR penalties. Plus underpaid taxes on the income. Plus Form 8938 penalties. Plus interest. The total exposure can easily exceed the account value.

Your Options for Coming Into Compliance

If you have unreported foreign accounts, you have several paths to compliance. Which one is right depends on your specific situation.

Delinquent FBAR Submission Procedures

If you missed FBARs but properly reported all income from the accounts on your tax returns, you may qualify for delinquent FBAR submission procedures. You file the late FBARs, include a statement explaining why they’re late, and the IRS may waive penalties. This only works if your income was properly reported – its not a fix for unreported income.

Streamlined Filing Compliance Procedures

If you have unreported income from foreign accounts AND your conduct was non-willful, you may qualify for the Streamlined procedures. You file three years of amended tax returns, six years of FBARs, and pay a miscellaneous offshore penalty of 5% (or 0% if you live abroad). This is much better then facing full FBAR penalties.

The catch: you must certify under penalty of perjury that your conduct was non-willful. If it was actually willful and you claim otherwise, youve committed perjury. The IRS can revoke your streamlined status and pursue full penalties.

IRS Voluntary Disclosure Program

If your conduct was willful – or if your worried it might look willful – the only safe option is the Voluntary Disclosure Program. You come forward before the IRS contacts you, disclose everything, and pay a penalty structure that typically involves 75% civil fraud penalty plus 50% FBAR penalty.

This sounds harsh, but it provides protection from criminal prosecution. For willful violators, avoiding prison is worth the financial pain.

Which Path Is Right for You?

At Spodek Law Group, we evaluate each clients situation individually. The key questions are:

• Was your conduct willful or non-willful?
• Did you properly report income from the accounts?
• Has the IRS already contacted you?
• What does the Schedule B history look like?

The wrong choice can make everything worse. Filing through Streamlined when you were actually willful creates perjury exposure. Waiting too long closes voluntary disclosure options. Filing FBARs without professional guidance can trigger audits without the protections that come with formal disclosure programs.

Common Mistakes People Make

We see the same mistakes repeatedly:

Filing quietly and hoping no one notices. People file late FBARs without explanation, thinking theyll slip under the radar. Instead, the filings trigger examination. Without the protections of a formal disclosure program, they face full penalties with no negotiating leverage.

Assuming old accounts dont count. An account you opened 20 years ago and forgot about still creates annual FBAR obligations. The IRS has FATCA data going back years. Old accounts are still your responsibility.

Thinking small balances dont matter. A $15,000 account might seem minor, but failing to report it creates $16,536 annual penalties for non-willful violations – more then the account contains. Small accounts create big problems.

Relying on “I didnt know.” After signing Schedule B for years, ignorance is almost impossible to claim. The tax return itself proves you were informed.

What To Do Now

If you have unreported foreign bank accounts, the worst thing you can do is nothing. The IRS already has your data from FATCA. Every day you wait is another day for them to build a case.

The cascade from unreported accounts to prison works like this:

1. You dont file FBAR
2. IRS receives FATCA data from your foreign bank
3. IRS matches against your filed returns
4. Discrepancy identified
5. Civil audit begins
6. Pattern of non-filing over multiple years suggests willfulness
7. 50% penalty per year assessed
8. Total penalties exceed account value
9. Case referred to Criminal Investigation
10. Prison PLUS penalties PLUS taxes owed

Spodek Law Group is located in the Woolworth Building at 233 Broadway in Manhattan. We handle offshore disclosure cases nationwide. If you have foreign accounts that havent been properly reported – wheather its a single account you forgot about or a complex international structure – we can help you understand your options.

Call us at 212-300-5196. Todd Spodek has guided clients through every type of offshore disclosure situation. Some qualified for streamlined procedures with minimal penalties. Some needed voluntary disclosure to avoid criminal prosecution. Some discovered they actually had reasonable cause defenses we could pursue. The first step is always understanding where you stand.

The era of secret offshore accounts is over. The IRS knows about your foreign money. The only question is how you address it – on your terms, through a disclosure program, or on their terms, through enforcement. One of those options is much better then the other.

Dont let fear paralyze you. Dont let embarrassment keep you from acting. Dont assume that because the account is small or old or inherited, it dosent matter. Every unreported foreign account creates exposure. Every year that passes adds another potential penalty. Every Schedule B you sign with a false answer adds another potential charge.

The time to address this is now. The IRS enforcement apparatus is already in motion. FATCA data flows continuously. Your foreign bank has already reported you. The only variable you control is how you respond.

Call us today. The consultation is free. The cost of waiting could be everything you have.