NAVIGATING THE FBAR PENALTY MITIGATION GUIDELINES
Failure to report your foreign financial accounts on Report of Foreign Bank Account Reports can result in the imposition of steep penalties. The FBAR penalty regimen, which provides for willful and non-willful penalty assessments against taxpayers who have failed to report their foreign financial accounts, is complex and requires careful financial and risk analysis.
If you are worried about the consequences of coming clean, it may be time to discuss your particular situation with an experienced tax professional. Depending upon the circumstances, it may be possible to use the FBAR penalty Mitigation Guidelines (the “Guidelines”) as a means of reducing the overall penalty burden.
The application of the Guidelines may impact your decision of whether to utilize the Streamlined Procedures or the Voluntary Disclosure Practice Rules (“VDP”). It also may impact a decision to opt out of the VDP. Consequently, deciding to make use of the Guidelines involves careful financial analysis, risk assessment and a quantitative comparison among various disclosure alternatives.
Failure to consider the application of the Guidelines can result in significant saving being left on the table. The discussion that follows is limited to the non-willful and willful penalties and does not include FBAR penalties that are applicable to financial institutions.
Under U.S. law, a U.S. person having a financial interest in or signature or other authority over a foreign financial account(s) in which the highest aggregate balance in U.S. Dollars exceeds $10,000 at any time during the year, must report these accounts on FinCEN Form 114, commonly referred to as an “FBAR” (See 31 CFR § 1010.350 for FBAR definitions and filing requirement).
The FBAR due date for 2015 and later years is April 15. Prior to 2015, the due date was June 30. The change brings the FBAR filing due date in alignment with the filing deadline for individuals. Where a taxpayer files an extension to file a federal income tax return, the due date for filing an FBAR is October 15 without the need for filing a separate extension.
Married taxpayers may report their foreign financial accounts on one FBAR if the following conditions are met:
- All the financial accounts that the non-filing spouse is required to report are jointly owned with the filing spouse;
- The filing spouse reports the jointly owned accounts on a timely, electronically filed FBAR; and
- Both spouses complete and sign Part I of FinCEN Form 114a, Record of Authorization to Electronically File FBARs. The filing spouse completes Part II of Form 114a in its entirety.
If all of the preceding conditions are not met, each spouse must file a separate FBAR reporting both individual and joint accounts.
Although the FBAR statutes are part of the Bank Secrecy Act under Title 31, authority for the assessment and collection of FBAR penalties has been delegated to the IRS under 31 CFR §1010.810(g).
The IRS Examiner is given discretion to determine whether the facts and circumstances of a particular case do not justify asserting a penalty and instead a “warning letter.” Furthermore, subject to Manager review and approval, the Examiner has discretion in determining the amount of the penalty. In certain cases, the facts and circumstances may be such that the Examiner may consider whether the issuance of a warning letter and the securing of delinquent and/or amended FBARs, rather than the determination of a penalty, will achieve the desired result of improving compliance with the FBAR reporting and recordkeeping requirements in the future (See IRM ¶ 22.214.171.124.2.1).
Factors to consider when applying Examiner discretion may include, but are not limited to, the following:
- Whether compliance objectives would be achieved by issuance of a warning letter;
- Whether the person who committed the violation had been previously issued a warning letter or assessed an FBAR penalty;
- The nature of the violation and the amounts involved;
- The filer’s conduct contributing to the violation;
- Whether the filer cooperated during the examination;
- The balance in each account during the year; and
- The total amount of all penalties to be asserted for all violations.
When a penalty is appropriate, an Examiner must consider whether assessment of multiple penalties is commensurate to the harm caused by the FBAR violation IRM 126.96.36.199.2.1(4).
Acknowledging that one size does not fit all, the IRS has developed the Guidelines to assist Examiners in determining: (i) whether the willful or non-willful FBAR penalty is applicable; and (ii) whether a lower amount is appropriate under the Guidelines. Discussion of the Guidelines can be found in IRM 188.8.131.52.3, IRM 184.108.40.206.4 and IRM 220.127.116.11.5. Under the Guidelines the determination of an FBAR penalty by an Examiner, is subject to close scrutiny by the Examiner’s Manager, prior to any assessment IRM 18.104.22.168.6 and will typically include consideration of the IRM 22.214.171.124.2.1(3) factors listed above.
31 USC 5321(a)(5)(B)(i) authorizes the imposition of a non-willful FBAR penalty up to $10,000 against any filer who violates or causes any violation of the FBAR filing, reporting and recordkeeping requirements. The penalty may be abated where the taxpayer can establish “reasonable cause” and the amount of the transaction or balance that caused the violation was properly reported 31 USC 5321(a)(5)(B)(ii).
Prior to determining the penalty amount for non-willful violations, an Examiner must first determine whether the Guidelines are met IRM 126.96.36.199.4.1(1). If the Guidelines are met, the Examiner must perform a preliminary calculation using the Guidelines and limiting the total mitigated penalties for each year to the statutory maximum for a single non-willful violation. The statutory maximum penalty for each year must be allocated among all violations IRM 188.8.131.52.4.1(2).
In the case of multiple owners of a foreign financial account, the Examiner must conduct a separate analysis for each owner and determine if a violation occurred and whether it was willful or non-willful.
The penalty authorized for a filer who either “willfully violates” or “willfully causes a violation of any provision of Section 5314,” is the greater of $100,000 or 50% of the balance in the account at the time of the violation 31 USC § 5321(a)(5)(D)(i)(II). The reasonable cause exception provided for in the case of the non-willful penalty is not applicable where the FBAR violation was willful 31 USC § 5321(a)(5)(D)(ii).
The Guidelines for non-willful violations provide the following:
- Level I-NW. Where the maximum aggregate balance for all accounts does not exceed $50,000 at any time during the year, the mitigated penalty is $500 per non-willful violation with a cap of $5,000 per year;
- Level II N.W. In cases where the maximum aggregate balance exceeds $50,000, but does not exceed $250,000, the mitigated penalty amount is $5,000 per violation.
- Level III N.W. Where the maximum aggregate account balance for all accounts exceeds $250,000, the penalty amount is equal to the statutory maximum ($10,000) per violation.
Where the Guidelines do not apply, the Government’s position is that a filer is subject to the $10,000 non-willful penalty for each violation rather than per form. Despite the overwhelming number of cases that have rejected the Government’s position, the U.S. District Court for the Southern District of Florida in a recent decision held that the non-willful FBAR penalty is per account rather than per form. United States v. Solomon, No. 20-82236-CIV-CAN, 2021 U.S. Dist. LEXIS 210602 (S.D. Fla. Oct. 27, 2021). The Solomon Court adopted the dissent in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) (Ikuta, J. dissenting). This issue will continue to be litigated, despite favorable decisions favoring the taxpayer.
Furthermore, where the Guidelines do not apply, the Government’s position with respect to cases involving spouses is that the penalty should be assessed against each spouse.
In cases involving willful violations, the Guidelines provide the following:
- Level I-Willful. In cases where the maximum aggregate balance for all accounts to which the willful violation related does not exceed $50,000, the mitigated penalty amount is the greater of $1,000 per year or 5% of the maximum aggregate balance of the accounts to which the violations relate. The total mitigated willful penalty is allocated among all willful violations being penalized in that year;
- Level II-Willful. Where the maximum aggregate balance exceeds $50,000 but does not exceed $250,000, the mitigated penalty is the greater of $5,000 or 10% of the maximum account balance during the calendar year at issue;
- Level III-Willful. In cases where the maximum aggregate balance exceeds $250,000 but does not exceed $1,000,000, the penalty for each account for which there is a violation, the penalty is the greater of 10% of the maximum aggregate account balance during the calendar year at issue or 50% of the account balance on the violation date; and
- Level IV-Willful. Where the maximum aggregate account balance for all accounts exceeds $1,000,000, the penalty is 50% of the account balance on the violation date or the statutory maximum penalty for willful violations.
Considering the Guidelines a means of reducing your overall FBAR penalty obligation is not a simple decision when deciding to come clean. Any such decision requires a careful analysis of the taxpayer’s situation including the account balances, source of account funds, the applicability of the Guidelines, the taxpayer’s residence, the overall cost of using the Guidelines compared to proceeding under an alternate method, whether making a disclosure presents any criminal risk and whether there are income tax consequences associated with failure to report foreign financial accounts. Consequently, consulting with an experienced and knowledgeable tax attorney should be the first order of business.
Remember! The FBAR statutes, regulations and judicial decisions are complex and confusing and one size doesn’t fit everyone.