Tax professionals who advise clients on issues with FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), should become familiar with IRS Memorandum SBSE-04-0515-0025, “Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties” (5/13/15). The guidance is significant because it provides procedures to ensure consistency and efficiency in the IRS’s administration of the FBAR compliance program. The procedures include:
- A requirement that IRS examiners fully develop and adequately document their analysis of the civil FBAR willfulness penalty;
- Detailed instructions on how to calculate the penalty amount for willful violations and nonwillful violations of the FBAR rules, and limitations or caps on the penalty amounts in certain cases;
- Coordination of cases with technical specialists who have been designated to assist examiners with their FBAR cases, and coordination of cases with the IRS Chief Counsel’s Office in willfulness cases; and
- A civil FBAR penalty case file checklist, detailing what documents must be in the administrative case file.
The new interim guidance is to be incorporated into Part 4, Chapter 26, of the Internal Revenue Manual (IRM).
FBAR penalty background
If an individual has a financial interest in or signature authority over a foreign financial account (including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account) exceeding certain thresholds, the Bank Secrecy Act may require the individual to report the account annually to the Treasury Department by electronically filing Form 114.
FBAR civil penalties
If an individual fails to file the FBAR, the IRS can impose one of two civil penalties:
- A nonwillfulness penalty, not to exceed $10,000, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements (IRM §126.96.36.199.4); or
- A willfulness penalty may be imposed on any person who willfully fails to file the FBAR, with the ceiling on the penalty being the greater of $100,000 or 50% of the balance in the account at the time of the violation (IRM §188.8.131.52.5.1).
Significantly, the nonwillfulness penalty should not be imposed if an individual’s violation was due to reasonable cause and the balance in the account was properly reported on an FBAR (IRM §184.108.40.206.4).
A few highlights of the new FBAR guidance are discussed below.
Cases must be fully developed and adequately documented
A key issue in FBAR penalty cases is whether the IRS has carried its burden of proof when it imposes the civil FBAR willfulness penalty for failing to file the form, which it must prove by a preponderance of the evidence (McBride, No. 2:09-cv-378 DN (D. Utah 11/8/12)).
A central aspect of an FBAR case is that examiners are expected to exercise their discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and their amount (IRM §220.127.116.11.7). IRS revenue agents must use their “best judgment” and must “take into account all the available facts and circumstances of a case” when proposing FBAR penalties (SBSE-04-0515-002). Consequently, it can be difficult to predict with certainty what facts and circumstances will transform a case from one calling for a nonwillful penalty to one calling for a willful penalty, and, more importantly, when the IRS will seek to impose the FBAR willfulness penalty.
Under the guidance, IRS examiners are required to fully develop and adequately document in the examination workpapers their analysis of willfulness. The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval of this determination. The case file must include the examiner’s FBAR workpapers, penalty calculations, and, for willful cases, the Chief Counsel’s written advice memorandum and a summary memorandum explaining the FBAR penalties. The summary memorandum is sent to the taxpayer with a Letter 3709, FBAR 30 Day Letter.
There also is a new civil FBAR penalty case file checklist that the IRS agents must follow. The checklist details what information must be included in each FBAR examination case file, including the FBAR workpapers and penalty calculations.
The guidance is helpful in ensuring that there is an adequate administrative record and sufficient documentary evidence to support a finding of willfulness. Tax practitioners should attempt to obtain a copy of the administrative file and carefully review the examiner’s evidence supporting a willfulness determination.
Limitations on penalty for willful violations
Another practical issue in FBAR penalties is determining the monetary amount of the civil penalty (i.e., how much an individual must pay for failing to file the form). One problem is that the FBAR statute imposing the penalty has a ceiling for the penalty—a maximum amount that can be imposed—but no floor (31 U.S.C. §5321(a)(5)(C) (“the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—(I) $100,000, or (II) 50 percent of the amount determined under subparagraph (D)”).
Another problem is that “the total amount of penalties that can be applied under the FBAR statute can greatly exceed an amount that would be appropriate in view of the violation” (IRM §18.104.22.168). “FBAR penalties are determined per account, not per unfiled FBAR,” but examiners are expected to exercise discretion, according to the IRS (id.). This has created uncertainty and controversy as to exactly how much an individual reasonably would be required to pay for willfully failing to file the form.
Under the new guidance, a dollar limit now exists for most cases where the IRS seeks to impose the willfulness FBAR penalty. The total penalty amount for all years under examination will be “limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination” (SBSE-04-0515-0025). The IRS will then use a formula to allocate the total penalty amount to each year for which there is an FBAR violation.
The guidance is taxpayer-friendly.
Example 1: An individual has accounts with highest aggregate balances of $50,000, $100,000, and $200,000 for 2010, 2011, and 2012, respectively. Under the new guidance, the total penalty amount would be $100,000 (50% of $200,000, since this is the highest aggregate balance during the years under examination). However, in the past, the penalty could have been $175,000 (50% of $50,000 plus 50% of $100,000 plus 50% of $200,000). In short, the new rules provide more certainty and clarity as to the amount of the willfulness penalty.
The guidance, however, does state that an examiner may recommend a penalty that is higher or lower than 50% of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. Consequently, this provision provides tax practitioners with room to negotiate a penalty that is lower than 50%. That being said, there is a risk, however, that the examiner could seek a penalty amount higher than 50% in some cases.
Penalty amount for nonwillful violations
The memo also provides guidance on how to calculate the nonwillful penalty. In the past, there was controversy as to whether the IRS would seek to impose a nonwillful penalty for each unreported account—which would significantly drive up the penalty amount—and/or whether the case could be administratively resolved simply by imposing a single nonwillful penalty for all violations. Under the new rules, for cases involving multiple violations:
- Examiners will recommend one penalty for each open year, regardless of the number of unreported foreign financial accounts; and
- The penalty for each year will be determined based on the aggregate balance of all unreported foreign financial accounts, and the penalty for each year will be limited to $10,000.
The guidance also provides that if the facts and circumstances warrant it, the IRS may only impose a single penalty, not to exceed $10,000, for one year only. In making this determination, the IRS takes into account the conduct of the person who was required to file and the aggregate balance of the unreported foreign financial accounts.
Example 2: An individual has accounts with highest aggregate balances of $50,000, $100,000, and $200,000 for 2010, 2011, and 2012, respectively. Under the new guidance, the nonwillful penalty could be a single penalty that would not exceed $10,000 for 2010, $10,000 for 2011, and $10,000 for 2012. Thus, the total dollar amount of the penalty would not exceed $30,000 ($10,000 + $10,000 + $10,000) under one scenario. Alternatively, the total penalty could simply be $10,000 (or some lesser amount), which would be a single penalty for one year only.
For other cases, however, the guidance states that the facts and circumstances may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. Practitioners should attempt to work with the examining agent and try to show why this result is not warranted based upon the facts of the case.
In short, the guidance on how to calculate the FBAR penalty amount is a significant improvement and tax professionals advising clients on potential FBAR violations should review it carefully.
New FBAR coordinator
An operating division FBAR coordinator must now review FBAR cases after the examiner preliminarily determines the penalties to be asserted. Operating division FBAR coordinators are revenue agents or technical specialists whom an operating division has designated to assist examiners with their FBAR cases. The existence of operating division FBAR coordinators should provide some level of consistency and, hopefully, predictability about the administration of FBAR penalty cases.
Chief Counsel’s review of willfulness penalty
Chief Counsel is required to review cases for which willful penalties have been determined. The legal advice is limited to providing advice on whether:
- An FBAR violation occurred;
- The FBAR violation was willful; and
- The proposed penalty is within the statutory limits of 31 U.S.C. Section 5321(a)(5)(C).
Chief Counsel must provide a written memorandum setting forth the legal advice, which is part of the administrative file. This is an additional layer of review that hopefully will prevent the examining agent from seeking to impose a penalty where one is not justified.
It is important to remember that an individual has only two administrative opportunities to challenge an FBAR penalty. The first is during the examination phase, and the second is at IRS Appeals. If an individual disagrees with the examiner, the IRS will issue a Letter 3709, which gives the individual the option to file a protest with Appeals. This is really the individual’s last chance to cost-effectively resolve the case.
A trap for the unwary: The venue for challenging FBAR penalties is a U.S. district court or the Federal Court of Claims, not the U.S. Tax Court (IRM §22.214.171.124). Individuals seeking to challenge an FBAR penalty after it has been assessed may either (1) pay the penalty and file a refund suit or (2) wait until the government files a suit in district court to collect the penalty and challenge the assessment (id.). Consequently, the best course of action may be to attempt to settle the case at Appeals.
Unknown to some practitioners is that the Internal Revenue Code does not apply to the collection of an FBAR penalty, and so the government lacks its normal collection remedies under Secs. 6301–6344. The collection remedies for FBAR penalties are in Title 31, but they are not as robust as the remedies in the Code. For example, the IRS cannot file a federal tax lien or seize property.
At the same time, an individual cannot request an installment agreement or file an offer in compromise with the IRS. However, the IRS has the option of reducing the FBAR assessment to a civil judgment through the Justice Department. Once done, this opens up a new range of collection remedies for the government. The statute of limitation on bringing suit to collect the assessment of civil penalties is two years from the date of assessment or the date any judgment becomes final in any criminal action under 31 U.S.C. Section 5321(b)(2) (IRM §126.96.36.199.5). In short, individuals who owe FBAR penalties face an added level of complexity in finding a workable solution to pay the debt owed to the government.
The recent guidance issued by the IRS is a very important document to become familiar with for tax professionals who advise taxpayer’s on FBAR issues. It is worthwhile to take the time to carefully review the guidance.
Steven L. Walker, J.D., LL.M., is a tax attorney with the Law Offices of Steven L. Walker, A Professional Law Corporation, in San José, Calif., who specializes in civil and criminal tax litigation. For more information, see www.walk-law.com .
The penalties for failing to file an FBAR can be severe. For willful violations, the penalty can be as high as the greater of $100,000 or 50% of the account balance. Non-willful violations carry a penalty of up to $10,000 per violation. In some cases, criminal charges can also be filed.How is the penalty calculated for FBAR? ›
Criminal FBAR Penalties
The penalties for civil willful FBAR violations are up to a 50% maximum account value of the unreported accounts or $100,000 – whichever is higher. The FBAR regulation was recently updated to reflect the statute, which provides that it is the greater of the 50% maximum account value or $100,000.
According to the FBAR instructions, a person who previously filed an FBAR but mistakenly provided incomplete or inaccurate information on the form can file an amended FBAR. FinCEN Form 114 includes a box for providing a brief explanation of the error.What happens if I have more than $10000 in a foreign bank account? ›
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. The full line item instructions are located at FBAR Line Item Instructions.What is the largest FBAR penalty? ›
§ 5314; 31 C.F.R. §§ 1010.350(a), 1010.306(c). Taxpayers can be assessed a maximum FBAR penalty of $10,000 for a non-willful violation of their obligation to report their interests in foreign accounts. 31 U.S.C.What happens if I forgot to file FBAR last year? ›
What Happens If You Forget to File FBAR? Worst case scenario — you can be subject to significant penalties and even criminal charges for forgetting to file FBAR. But in many cases, you can file your late FBAR forms and get back into compliance without a lot of issues.What is the penalty for 100000 FBAR? ›
If the IRS deems the FBAR reporting violations willful, however, penalties expand exponentially, growing to the greater of $100,000 (adjusted for inflation) or 50 percent of the account balance at the time of the violation. These can be imposed on an annual basis.Is the FBAR penalty per form or per account? ›
United States: Non-willful FBAR Penalty Applies Per Form, Not Per Account.What triggers an FBAR audit? ›
There's no set trigger for an FBAR audit, but some common reasons include the following: Random selection: FinCEN may choose tax filers randomly to verify compliance. Discrepancies: Inconsistencies or errors in the FBAR filing may lead to an audit.Does late FBAR filing trigger an audit? ›
Will this action automatically get you audited by the IRS? Short answer: no. However, not filing an FBAR may increase the risk of an audit.
“FBAR audits” related to foreign income and asset non-compliance can be very intensive. The IRS can obtain records from you, your financial institutions, accountants, and other advisors. While it is still rare to see the IRS reach out for FBAR non-compliance, you do not want to be one of the unlucky few.What is reasonable cause for not filing FBAR? ›
In order to establish reasonable cause under paragraph (c)(1) of this section due to certain actions of the Internal Revenue Service, a filer must show that the failure was due to the filer's reasonable reliance on erroneous written information from the Internal Revenue Service.Can the IRS see my foreign bank account? ›
The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to report account numbers, balances, names, addresses, and identification numbers of account holders to the IRS.What is the penalty for not disclosing foreign bank account? ›
On February 28, 2023, the U.S. Supreme Court, in a narrow 5-4 opinion, determined that taxpayers who non-willfully fail to file annual Foreign Bank Account Reports (FBARs) face a maximum $10,000 penalty for each report they failed to file.Can U.S. seize foreign bank accounts? ›
Even without a branch in the US, the foreign bank account is not immune from seizure by the US government.What is an FBAR violation? ›
Filing Delinquent FBARs
Filing an FBAR late or not at all is a violation and may subject you to penalties. If the IRS hasn't contacted you about a late FBAR and you're not under civil or criminal investigation by the IRS, you should file late FBARs as soon as possible to keep potential penalties to a minimum.
Any person who fails to comply with the registration requirements may be liable for a civil penalty of up to $5,000 for each violation. Failure to comply includes the filing of false or materially incomplete information. Each day a violation continues constitutes a separate violation.