Why FBAR Matters
Hypothetical: Saqib is a physician in the United States. At age 50, he decides to move back home to his native Pakistan, where he maintains financial accounts of $2,000,000.
At 61, Saqib decides to move back to the United States.
Because Saqib did not report his overseas bank accounts, the government can fine him for half of his money in Pakistan.
It’s common for Muslim families in the United States to have ties overseas and move back and forth. Many also maintain bank accounts overseas to collect rents or profits from business or real estate holdings, slowly disburse charity or zakat once in a while, or just as a place to hold inheritance or gifts.
FBAR Penalties can be steep
If you have financial interests overseas, you need to know about FBAR, or “foreign bank account reporting.” Under US Law (the Bank Secrecy Act), Americans must report their foreign bank accounts. The IRS gets to enforce this with an unforgiving penalty regime. There are two penalties, “willful” and “non-willful.” For non-willful, there is a maximum fine of $10,000. For “willful,” it’s a maximum fine of either $100,000 or half of all the money, whatever is more.
It does not matter if Saqib brought the money to Pakistan with him from the United States, that he inherited it from Pakistan, or if it’s not even his money, only his signing authority. It also does not matter that the account was in an account that earned no interest or income. Not reporting can cause some severe problems.
What “Willful” Means
In law, words often don’t mean what your common sense tells you. If Saqib did not know about the existence of FBAR (because he is an ordinary person), the government might consider his reporting “willful.” The definition of “willful” is evolving and can include people who have no idea they need to report such things. Saqib can be “reckless” about how he conducted his affairs.
Late Reporting
If Saqib has failed to report his bank account for ten years, should he be quiet about it? Should he fess up to the government and plead for mercy? Someone like Saqib should get some professional help. According to the IRS website, they won’t impose a penalty if Saqib is current on his taxes, and the IRS did not previously contact him about his non-compliance.
After Death Reporting
If Saqib dies, he may leave his heirs with a mess and increased exposure to penalties. I have previously written about international assets and how they are often inherently problematic. American heirs of foreign property are often victims of inheritance theft. Extreme FBAR penalty liability only adds to this. For Saqib’s beneficiaries, the penalty can be as much as 35% of the inheritance in some cases.
Affairs in Order
Making sure you have your affairs in order includes Islamic Estate Planning, but you should also consider organizing your finances so that surprises like hefty avoidable fines don’t happen. To discuss planning with Islamic Estate Planning Attorney Ahmed Shaikh, you should schedule a 15-minute mini-consultation over zoom.