An FBAR penalty changes things the moment it is assessed. What had been under review turns into a legal issue with real deadlines and real consequences. After assessment, there is far less room to fix problems, and options can narrow faster than many taxpayers expect.

The guide explains what happens next, how to challenge FBAR penalties, which FBAR penalty defenses may still be available, and when an FBAR case can move from the IRS to federal court.

What Happens After an FBAR Penalty Is Assessed?

Once an FBAR penalty is assessed, the situation changes in a very real way. Up to this point, the penalty was still under review. After the FBAR penalty assessment, it is no longer a proposal. It is officially imposed, and what happens next depends largely on how the taxpayer responds.

Post-Assessment Notice Is Issued

After the assessed FBAR penalties, the taxpayer receives a notice and demand for payment, usually sent as Letter 3708 or Letter 3708-A. This notice confirms a few important things at once.

It tells you that the penalty amount is final, that the IRS has completed its examination process, and that the penalty is now legally enforceable. This is typically the point where the case moves out of review mode and into an enforcement-ready stage.

A Response Window Opens

Once that notice is issued, a response window opens, usually around 30 days. This is the period where decisions actually matter. The focus is no longer on explaining facts or correcting filings. It is now about how the penalty will be handled.

At this stage, a taxpayer is essentially choosing between three paths. You can deal with the penalty directly, you can take steps that keep the door open to challenge it later, or you can do nothing. Doing nothing may feel easier in the moment, but it often reduces flexibility as time passes.

Enforcement Becomes Possible

If the penalty is not resolved after assessment, the case can start moving toward enforcement. FBAR penalties do not follow the same collection process as regular tax debts, and that distinction matters.

These penalties are not handled in the U.S. Tax Court, and they are not collected through routine tax collection methods. If the matter remains unresolved, it may be referred for civil enforcement in federal court. At that point, the issue moves beyond administrative handling and into a legal setting.

Assessment does not mean the case is over. It simply marks a turning point where decisions start to matter more. 

Legal Framework Governing FBAR Penalties

FBAR penalties are governed by federal law that operates outside the regular U.S. tax system. They are not created under the Internal Revenue Code, which is why FBAR penalties follow a different legal path than income tax penalties.

Source of FBAR Penalty Authority

The requirement to report foreign financial accounts comes from the Bank Secrecy Act, a federal law focused on financial reporting and transparency. The authority to impose penalties for FBAR violations is set out in 31 U.S.C. § 5321.

This statute defines when penalties can be imposed and sets the legal limits for those penalties. Because this IRS FBAR authority comes from Title 31 of the U.S. Code, FBAR penalties exist independently from income tax enforcement.

Civil Nature of FBAR Penalties

Under the law, FBAR penalties are classified as civil penalties. Even when a violation is described as willful, the penalty itself remains civil in nature.

Criminal charges, if they arise at all, follow a separate legal process and are not automatic. This civil classification affects how FBAR penalties are enforced and reviewed.

Enforcement Authority and Administration

Although FBAR penalties do not arise under tax law, enforcement authority has been delegated to the Internal Revenue Service. The IRS examines FBAR compliance, assesses penalties, and takes enforcement action under Title 31 authority, not under the Internal Revenue Code.

This is why FBAR penalties follow procedures that differ from ordinary tax penalties.

Statutory Distinction Between Willful and Non-Willful Violations

The law draws a clear distinction between non-willful and willful FBAR violations. This distinction is written directly into the statute and affects how penalties are handled.

It controls:

• How are penalties calculated?
• How much discretion does the government have?
• How do courts review enforcement actions?

This classification is legal in nature, not discretionary, and many later disputes turn on whether this statutory line was applied correctly.

Jurisdiction and Legal Path

Because FBAR penalties do not arise under the tax code, they cannot be reviewed in U.S. Tax Court. Instead, disputes and enforcement actions proceed in federal district courts under civil enforcement rules.

This jurisdictional structure explains why FBAR cases follow a different legal path from standard tax disputes.

Administrative Options to Challenge FBAR Penalties

These administrative options apply to taxpayers who already have an assessed FBAR penalty and want to know whether the issue can still be addressed within the IRS, without going to federal court.

Administrative options are limited and do not apply in every case. When they are available, they focus on reviewing how the penalty was determined and whether relief is appropriate under IRS standards.

IRS Appeals Process for FBAR Penalties

In some cases, an assessed FBAR penalty may be reviewed by the IRS Office of Appeals. Appeals operates separately from the examination function and approaches disputes from a resolution standpoint rather than an enforcement mindset.

At this stage, Appeals may consider:

• Whether the facts were properly evaluated.
• Whether the violation was correctly classified.
• Whether the penalty amount makes sense based on the record.

IRS FBAR appeals do not reopen the entire case, but they can reconsider conclusions reached during the examination. The goal is to resolve disputes without civil litigation where possible.

This option is time-sensitive and may not be available once the administrative window closes.

Requesting FBAR Penalty Abatement or Reduction

Another administrative option is requesting a reduction or removal of the assessed penalty. This approach focuses on the taxpayer’s conduct and whether relief is appropriate under IRS guidelines.

FBAR penalty abatement requests typically raise issues such as:

• Whether the failure to file was non-willful.
• Whether there was reasonable cause.
• Whether the taxpayer acted in good faith.

These requests are reviewed internally by the Internal Revenue Service and are discretionary. Penalty mitigation is not guaranteed, but when supported by clear facts, abatement can reduce penalties without court involvement.

When Administrative Options End →

Administrative options do not remain available indefinitely. Once the appeals review is denied or administrative remedies are exhausted, the IRS process comes to an end.

From that point forward, any further challenge to FBAR penalties takes place outside the agency through formal legal channels.

Litigation Options After FBAR Penalty Assessment

FBAR penalty litigation is not automatic. It happens only when the government decides to enforce the penalty through legal action or when the taxpayer chooses to challenge the penalty formally after assessment.

When Do FBAR Cases Go to Federal Court?

An FBAR federal court case happens in two specific situations.

• First, the government files a civil lawsuit to collect an assessed FBAR penalty. These cases focus on whether the penalty was properly imposed and whether the amount is legally supported.
• Second, the taxpayer takes the first step by paying the penalty and then filing a refund FBAR lawsuit. This approach allows the taxpayer to challenge the penalty directly rather than waiting for FBAR enforcement action.

In both situations, the outcome is decided by a judge based on the law and the evidence, not by IRS discretion.

Burden of Proof in FBAR Litigation

Who has to provide the burden of proof for FBAR penalties depends on how the violation is classified:

• For non-willful violations, the government must show that the FBAR reporting requirement was not met. The taxpayer can still dispute how the penalty was calculated or applied.
• For willful violations, the government carries the burden of proving willfulness. Courts look closely at intent, knowledge, and conduct to decide whether the legal standard for willfulness has been met.

Once litigation begins, the case turns on evidence and legal standards. Internal IRS reasoning no longer controls the outcome. From here on, results depend on how the facts line up with the law and how well each side supports its position.

Constitutional Defenses to FBAR Penalties

In some FBAR cases, the main issue is not whether a form was missed or how the IRS applied the statute. The real concern is whether the penalty itself goes too far. This is where constitutional FBAR defenses come in, focusing on whether the penalty crosses limits set by the Constitution.

Are FBAR Penalties Considered Excessive Fines?

Courts have said that FBAR penalties can count as “fines” for constitutional purposes. Because of that, they fall under the Excessive Fines Clause of the FBAR of the Eighth Amendment.

Put simply, even when a penalty is allowed by law, it still has to be reasonable. A penalty can be legally authorized and still be unconstitutional if it is far out of proportion to the violation.

This question comes up most often when penalties are very large, cover several years, or end up being higher than the balances in the foreign accounts that were not reported.

Factors Courts Use to Evaluate Excessiveness

Courts do not use a fixed formula to decide whether there are excessive FBAR fines. Instead, they look at the overall situation and weigh a few key points together.

Common excessive FBAR penalty factors include:

• How does the penalty compare to the account balance?
• Was the violation willful or non-willful?
• What did the taxpayer’s intent and behavior look like?
• Is the penalty meant to punish rather than correct?

Courts also consider whether the penalty makes sense in light of how serious the reporting failure actually was. When the amount feels disconnected from the conduct, constitutional limits become harder to ignore.

Statutory Defenses Under Section 5321

Section 5321 is the law that authorizes civil FBAR penalties, but it also builds in specific limits and defenses. These FBAR statutory defenses focus on whether the penalty was imposed in a way the law actually allows.

In plain terms, the statute does not give unlimited power. It sets conditions, caps, deadlines, and exceptions that can be used to challenge or reduce an FBAR penalty.

Reasonable Cause Exception for Non-Willful Violations

For non-willful violations, Section 5321 allows a complete penalty waiver when reasonable cause for FBAR exists.

This applies when:

• The failure to file was due to a reasonable explanation, such as reliance on a professional or lack of familiarity with the requirement, and
• The foreign account was properly reported once the issue was discovered, usually through a corrected or late FBAR.

This defense is written directly into the statute and applies only to non-willful violations. It cannot be used once a violation is classified as willful.

Statutory Time Limits on Enforcement

Section 5321 places firm time limits on the government’s ability to act.

Under the Statute of Limitations:

• The IRS must assess an FBAR penalty within 6 years of the original FBAR due date, and
• Once a penalty is assessed, the government has 2 years to file a civil lawsuit to collect it.

If these deadlines are missed, the statute itself bars enforcement, regardless of whether a reporting failure occurred.

Maximum Penalty Caps Set by Law

The statute also sets clear limits on how large an FBAR penalty can be, as follows:

• For non-willful violations, penalties are capped at $10,000 per report, not per account.
• For willful violations, penalties are capped at the greater of $100,000 or 50 percent of the account balance, applied on a per-year basis.

If a penalty exceeds these limits or is calculated inconsistently with the statute, it can be challenged on statutory grounds.

Credit for Forfeiture in Certain Cases

In cases involving structuring or related conduct, Section 5321 requires coordination between penalties and forfeitures.

If money has already been forfeited to the government in connection with the same transaction, any civil FBAR penalty must be reduced by that amount. This prevents double recovery for the same conduct.

Discretion to Waive or Reduce Penalties

The statute uses permissive language, stating that the Secretary may impose an FBAR penalty. This wording matters.

It means penalties are not automatic. Even when a violation exists, the law allows penalties to be waived or reduced based on the facts and circumstances of the case.

Procedural Errors in FBAR Penalty Assessment and Enforcement

Even when the government has the authority to impose an FBAR penalty, it still has to follow a defined process. If that process is not followed correctly, the penalty or its enforcement can be challenged.

Procedural errors focus on how the IRS handled the case, not on whether the FBAR was missed or how severe the penalty should be.

Failure to Issue Required FBAR Notices

The FBAR penalty process involves specific notices at specific stages.

Before assessment, the IRS generally issues Letter 3709, which explains the proposed penalty and informs the taxpayer of appeal rights. After assessment, the IRS issues Letter 3708 or 3708-A, which serves as the formal notice and demand for payment.

Procedural problems can arise when:

• The required notice was never issued.
• The notice was issued after key deadlines.
• The notice was defective or unclear.
• The taxpayer was not properly informed of appeal rights.

If these notices were skipped or mishandled, IRS FBAR enforcement later on can be challenged.

Improper Handling of Appeals Rights

FBAR penalties are typically eligible for review by the IRS Office of Appeals, which is meant to be independent from the examination team.

Procedural issues arise when:

• The taxpayer was not offered an Appeals review.
• Appeals access was denied without a valid reason.
• The appeals review was limited in a way that prevented meaningful consideration.

This is not about whether the Appeals agreed with the taxpayer. It is about whether the taxpayer was given a fair chance to be heard.

Ex Parte Communication During Appeals Review

Once a case moves to Appeals, examiners are not supposed to influence the outcome behind the scenes.

Ex parte communication issues arise when:

• The examiner communicates directly with the IRS Appeals officer.
• Opinions or arguments are inserted into the case file to sway the appeals.
• The taxpayer or representative is excluded from those communications.

This matters because Appeals is supposed to make an independent decision based on the record, not on one-sided input.

Improper Delegation or Approval Authority

FBAR penalties are assessed under delegated authority. That means only certain IRS officials are legally authorized to approve or assert penalties.

A procedural issue can exist if

• The penalty was approved by someone without proper authority.
• Required internal approvals were skipped.
• The case did not go through the required review channels.

If the person who approved the penalty lacked authority, the assessment itself can be questioned.

Errors in Identifying the Taxpayer, Accounts, or Years

Procedural problems also occur at the record level.

These include:

• Assessing the penalty against the wrong individual.
• Linking penalties to incorrect foreign accounts.
• Applying penalties to the wrong reporting years.
• Using incorrect account balance figures in the case file.

Because FBAR enforcement depends on the accuracy of the administrative record, these errors can undermine enforcement later.

Failure to Follow Internal Review and Mitigation Procedures

The IRS has internal procedures for reviewing FBAR penalties, including mitigation guidelines and review steps for more serious cases.

Procedural concerns arise when:

• Mitigation factors were not reviewed at all.
• Reasonable explanations were ignored without evaluation.
• Required review steps were skipped.

The issue here is not whether mitigation should have been granted, but whether the IRS followed its own process in considering it.

Risks of Ignoring an Assessed FBAR Penalty

Ignoring an assessed FBAR penalty carries real FBAR enforcement risks. Because FBAR penalties fall under Title 31 of the Bank Secrecy Act, not the regular tax code, they are enforced differently from standard tax debts. Once the IRS issues a notice and starts the IRS FBAR collection, the situation can escalate quickly.

Interest and Additional Penalties Begin to Add Up

After Letter 3708 is issued, you usually have about 30 days to respond. If the penalty is not paid, interest begins to accrue on the balance. The government may also apply an additional 6 percent annual delinquency penalty, increasing the amount owed over time.

Federal Payments Can Be Taken Automatically

Unpaid FBAR penalties can be collected through the Treasury Offset Program without a court order. This allows the government to take future tax refunds, withhold up to 15 percent of Social Security benefits, and offset other federal payments.

The Case Can Move to the Department of Justice

If the penalty remains unpaid, the IRS may refer the matter to the Department of Justice. The government has two years from the assessment date to file a civil lawsuit. If it wins, it can enforce the judgment through liens or wage garnishment, and legal costs may also be added.

Settlement Options Become More Limited

FBAR penalties do not qualify for the standard Offer in Compromise programs. In larger cases, especially those over $100,000, the IRS cannot settle the penalty without approval from the Department of Justice.

Credit and Financial Impact May Follow

Unpaid FBAR penalties can be reported as delinquent government debt, which may affect credit scores and access to loans.

Travel Complications Can Arise After Judgment

FBAR penalties alone do not trigger automatic passport restrictions. However, once a federal judgment is entered, enforcement actions tied to that judgment can create complications for international travel.

Also Read → How the Civil Tax Litigation Process Works: What to Expect If the IRS or Tax Court Suits You 

When to Hire an FBAR Litigation Attorney?

Once an FBAR case reaches the penalty stage, the risk is no longer theoretical. At that point, the issue is no longer about filing forms or explaining mistakes. It becomes a legal matter where outcomes depend on how well the case is handled under federal law.

This is where an FBAR litigation lawyer becomes critical. This includes situations where:

• An FBAR penalty has already been assessed.
• Enforcement or collection action is likely.
• Willfulness is being alleged or implied.
• The penalty amount is substantial.
• The defense depends on statutory or constitutional arguments.

An FBAR litigation attorney’s role is not to reopen the examination or negotiate informally. Their job is to protect your legal position, control how the case moves forward, and present the strongest FBAR defense attorney if the matter reaches federal court.

Get FBAR Litigation Representation by Anthony N. Verni

When an FBAR case reaches this level, experience in both tax law and federal litigation matters is required. FBAR disputes are not routine tax cases. They involve Title 31 law, federal court procedure, and defenses that must be raised correctly and on time.

Anthony N. Verni brings that exact combination to FBAR litigation. As an attorney, CPA, and MBA, he approaches FBAR penalty cases from both a legal and financial standpoint, with a clear focus on protecting the taxpayer’s position once the case has moved beyond the IRS.

Reach out to Anthony N. Verni when your FBAR case requires a court-ready defense, not another round of IRS correspondence.