San Diego International Tax Attorney — FBAR, FATCA & Foreign Account Defense

Written by Sam Brotman, J.D., LL.M. (Taxation), MBA — Managing Attorney, Brotman Law  ·  Updated May 2026

What International Tax Defense Covers

International tax problems generally fall into two categories: people who did not know they had a reporting obligation, and people who knew but did not file.

The first group — people who inherited a foreign account, moved to the U.S. and kept a home-country bank account, or received a foreign inheritance — typically has a non-willfulness argument and a path to compliance through the Streamlined Filing Compliance Procedures. The second group has more exposure and typically needs to use the IRS Voluntary Disclosure Program or work through a carefully structured approach with counsel.

Either way, the worst outcome is doing nothing. The IRS receives data from foreign financial institutions under FATCA, it receives information from treaty partners, and it receives tips. If the IRS discovers an unreported foreign account before you come forward, the penalties are substantially higher and the risk of criminal prosecution is real.

The right path forward requires an honest assessment of what you filed, what you should have filed, and what the IRS likely already knows.

Foreign Account and Asset Reporting Obligations

The U.S. reporting regime for foreign accounts and assets involves multiple overlapping forms, each with its own threshold, its own deadline, and its own penalty structure.

FBAR — FinCEN Form 114

The FBAR (Foreign Bank Account Report) is filed with FinCEN — not the IRS — and is due April 15, with an automatic extension to October 15.

A U.S. person must file FinCEN Form 114 if they have a financial interest in, or signature authority over, one or more foreign financial accounts with an aggregate value exceeding $10,000 at any point during the calendar year. The statutory authority is 31 U.S.C. § 5314, with implementing regulations at 31 CFR § 1010.350.

The penalty structure matters:

• Non-willful violation: up to $10,000 per year (31 U.S.C. § 5321(a)(5)(B))
• Willful violation: the greater of $100,000 or 50% of the highest account balance per year (31 U.S.C. § 5321(a)(5)(C))

After United States v. Bittner, 598 U.S. 85 (2023), the Supreme Court held that non-willful FBAR penalties are assessed per form — per year of violation — not per account. That was a significant taxpayer victory for people with multiple foreign accounts, since the IRS had previously been arguing for per-account penalties that could reach catastrophic levels for someone with, say, fifteen foreign accounts over ten years.

Willful penalties remain per-account. Whether a failure to file was willful or non-willful is a factual and legal question that I analyze carefully before recommending any path to compliance.

FATCA — Form 8938

Form 8938 (Statement of Specified Foreign Financial Assets) is filed with your tax return and covers a broader range of foreign financial assets than the FBAR.

Reporting is required under IRC § 6038D. The thresholds vary by filing status and where you live:

• Single filer living in the U.S.: $50,000 at year-end or $75,000 at any point during the year
• Married filing jointly, living in the U.S.: $100,000 at year-end or $150,000 at any point
• Single filer living abroad: $200,000 at year-end or $300,000 at any point
• Married filing jointly, living abroad: $400,000 at year-end or $600,000 at any point

Form 8938 covers foreign bank accounts, foreign securities accounts, foreign partnerships, foreign trusts, and other foreign financial instruments. There is overlap with the FBAR — you may be required to file both — but the FBAR and Form 8938 are filed with different agencies and cover somewhat different asset categories.

Foreign Trust and Gift Reporting — Forms 3520 and 3520-A

Form 3520 is required when a U.S. person receives a gift or bequest from a foreign person above certain thresholds, or is a grantor or beneficiary of a foreign trust.

The reporting threshold for gifts from non-resident aliens and foreign estates is $100,000 in aggregate during the year. For gifts from foreign corporations or foreign partnerships, the threshold is $17,939 in 2024 (adjusted annually for inflation).

Form 3520-A is an annual information return filed by the foreign trust itself — but if the trust does not file, the U.S. beneficiary may be required to file a substitute Form 3520-A. The penalties for failure to file are substantial: 35% of the gross value of any property transferred to or distributed from the trust, with a minimum penalty of $10,000.

Foreign Corporation Reporting — Form 5471

Form 5471 is an information return for U.S. shareholders who own 10% or more of a foreign corporation.

The filing obligation under IRC § 6038 applies to U.S. persons who are officers, directors, or shareholders of certain foreign corporations, including controlled foreign corporations (CFCs). The penalty for failure to file is $10,000 per year, per form — and that penalty can be assessed for each year the form was missing.

For business owners who set up foreign subsidiaries — sometimes on advice that did not include a discussion of U.S. reporting obligations — Form 5471 is one of the most common compliance gaps we see.

Foreign Partnership Reporting — Form 8865

Form 8865 applies to U.S. persons with interests in foreign partnerships. Like Form 5471, the failure-to-file penalty is $10,000 per year under IRC § 6038(b). The form requires disclosure of partnership income, deductions, and ownership structure.

IRS Voluntary Disclosure and the Streamlined Procedures

The IRS offers structured paths to compliance for taxpayers who have unreported foreign accounts and income — but the right path depends on whether your failure to report was willful or non-willful.

IRS Voluntary Disclosure Program (VDP)

The IRS Voluntary Disclosure Program is the appropriate path for taxpayers who have potential criminal exposure — those who knowingly failed to report foreign accounts, income, or assets. The IRS formalized its current VDP procedures in November 2018.

VDP is not a guarantee of civil treatment, but historically the IRS has not prosecuted VDP participants who make a truthful and complete disclosure. The program requires filing six years of amended returns, paying the full tax and interest, and resolving civil penalties under negotiated terms. The willful FBAR penalty in VDP is typically calculated at 50% of the highest aggregate account balance for one year — which is the statutory maximum but is usually imposed only once rather than across all years.

VDP is the most expensive path to compliance. It is also, for taxpayers with genuine willful exposure, the path most likely to result in no criminal prosecution.

Streamlined Filing Compliance Procedures

The Streamlined Procedures are available to taxpayers who can certify that their failure to disclose was non-willful — meaning it resulted from negligence, inadvertence, or a misunderstanding of the law, not from a deliberate decision to conceal.

There are two versions:

Streamlined Foreign Offshore Procedures (SFOP) — for taxpayers who meet the non-residency requirement: they lived outside the U.S. for at least one of the three most recent tax years (330 days outside the U.S. during that year). The penalty under SFOP is 5% of the highest aggregate balance of unreported foreign financial assets. If the 330-day requirement is met, that 5% is the entire offshore penalty.

Streamlined Domestic Offshore Procedures (SDOP) — for U.S. residents who do not meet the foreign residency requirement. The penalty is also 5% of the highest aggregate balance. The 5% is the same as SFOP, but U.S. residents must use SDOP rather than SFOP.

Both procedures require the taxpayer to certify that the failure to comply was non-willful. If the IRS later determines that the failure was willful — through subsequent audit or other investigation — the streamlined submission does not protect against the full statutory FBAR penalties, and criminal exposure may remain. The certification is a legal document. It should be reviewed carefully with counsel before filing.

Quiet Disclosure

A "quiet disclosure" means filing amended returns and FBARs without using VDP or the Streamlined Procedures — essentially coming into compliance without notifying the IRS that you are doing so. The IRS has identified quiet disclosures through its data analysis, and in some cases has opened criminal investigations as a result.

I discuss this option with clients so they understand what it is and what the risk looks like. For most taxpayers with material unreported foreign accounts, a structured procedure — Streamlined or VDP — is the appropriate path. Quiet disclosure is a risk assessment, not a safe harbor.

Delinquent FBAR Submission Procedures

For taxpayers who have unreported FBARs but who have reported all their income and have reasonable cause for the failure, the IRS offers a delinquent FBAR submission procedure that does not require using Streamlined or VDP. This procedure is narrow — it applies when the only issue is the FBAR filing itself, not unreported income — but it can result in no penalty when the facts support it.

Ongoing International Tax Issues

Beyond disclosure and compliance, there are several ongoing international tax rules that affect U.S. business owners and individuals with foreign investments.

Passive Foreign Investment Companies (PFICs) — IRC §§ 1291–1298

Foreign mutual funds and many other foreign investment vehicles are classified as Passive Foreign Investment Companies under IRC §§ 1291–1298. The default tax treatment for PFIC distributions and dispositions is punitive — gains are taxed at the highest ordinary income rates and subject to an interest charge. The two elections that avoid this treatment are the Qualified Electing Fund (QEF) election and the mark-to-market election, and both require timely action and ongoing annual reporting on Form 8621.

U.S. persons who own foreign mutual funds — including those inherited from family or held in a foreign brokerage account — often do not learn about the PFIC rules until they file with a U.S. preparer for the first time. At that point, cleaning up prior years requires careful analysis of which elections are still available and what the tax cost of each option looks like.

Global Intangible Low-Taxed Income (GILTI) — IRC § 951A

GILTI is a tax on the income of controlled foreign corporations (CFCs) that exceeds a 10% return on the corporation's tangible assets. It was enacted as part of the 2017 Tax Cuts and Jobs Act and applies to U.S. shareholders of CFCs — meaning U.S. persons who own 10% or more of a foreign corporation.

For U.S. business owners who operate through foreign subsidiaries, GILTI creates a current U.S. tax liability on income that has not been distributed. The planning implications — entity structure, the IRC § 962 election, the GILTI high-tax exclusion — require ongoing attention each year.

Subpart F Income — IRC §§ 951–965

Subpart F income is passive income earned by a CFC — interest, dividends, rents, royalties, and certain related-party sales income — that is taxable to U.S. shareholders in the year earned, regardless of whether the CFC distributes any money. IRC § 951 requires U.S. shareholders with 10% or more of CFC stock to include their pro-rata share of Subpart F income on their U.S. return each year.

Foreign Earned Income Exclusion — IRC § 911

U.S. citizens and resident aliens living and working abroad can exclude a portion of their foreign earned income from U.S. tax under IRC § 911. The exclusion for 2025 is $130,000. To qualify, the taxpayer must have foreign-source earned income and must meet either the bona fide residence test or the physical presence test (330 full days outside the U.S. during a 12-month period).

The exclusion requires an affirmative election on Form 2555. It does not apply to passive income (dividends, interest, capital gains), and it does not eliminate the obligation to file a U.S. return.

Foreign Tax Credit — IRC § 901

The Foreign Tax Credit under IRC § 901 prevents double taxation when a U.S. person earns income that is taxed by a foreign country. The credit is limited under IRC § 904 — the limitation is based on the ratio of foreign-source income to worldwide income — and the rules for categorizing income into the correct "basket" are complex. For taxpayers with significant foreign income, the Foreign Tax Credit calculation is one of the most important annual compliance tasks.

Tax Treaties

The U.S. has income tax treaties with approximately 68 countries. Treaties modify the default IRC rules on withholding rates, residency determinations, and income sourcing. A taxpayer taking a treaty position must disclose it on Form 8833 (Treaty-Based Return Position Disclosure). Treaty positions that are not disclosed can result in a $1,000 penalty per failure under IRC § 6712.

Treaties are interpreted under both domestic law and the Vienna Convention on the Law of Treaties. When treaty and domestic law conflict, the analysis requires looking at the treaty text, the technical explanation, and the relevant case law — not just one of those sources.

How Brotman Law Handles International Tax Defense

We represent clients at every stage of an international tax problem — from the initial compliance review to active IRS examination defense to penalty litigation.

The work we do in this area includes:

• FBAR penalty defense and litigation — including assessment appeals and U.S. District Court litigation for taxpayers contesting assessed FBAR penalties
• IRS Voluntary Disclosure Program submissions — including the full six-year amended return package, the preclearance request, and representation through the IRS examination of the VDP submission
• Streamlined offshore and domestic procedure filings — including the non-willfulness certification, the amended returns, and the delinquent FBARs
• IRS examination defense on international issues — FBAR, FATCA, Forms 5471, 3520, and related international penalties
• Foreign trust and gift reporting compliance — Forms 3520 and 3520-A, including representation in IRS audits of foreign trust transactions
• International business owners with foreign subsidiaries — ongoing GILTI, Subpart F, and Form 5471 compliance, plus representation if the IRS challenges the filing positions

For a deeper look at the substantive international tax rules, I have written a detailed guide: The Ultimate Guide to International Taxation.

The first step in most international tax matters is understanding exactly where you stand — what was filed, what was not, and what the IRS likely already has access to through FATCA data exchange or treaty information sharing. If you are not sure where to start, book a 15-minute call and we will go through the basics together. That call is free and it will tell you whether you have a problem that needs to be addressed, and roughly what addressing it looks like.