An Internal Revenue Service (IRS) Report of Foreign Bank and Financial Accounts (FBAR) penalty notice rarely feels sudden, but it always feels serious. One day, foreign accounts sit quietly in the background. Next, a letter arrives that puts timing, penalties, and legal position into focus. At that point, waiting or guessing no longer works.

An IRS FBAR penalty notice also brings a narrow window to act. The days that follow decide whether penalties can still be challenged, reduced, or discussed with the IRS on fair ground. Small choices during that period often carry long-term weight. The blog post ahead breaks down how that window works and where real options still exist before deadlines close in.

Introduction: The Urgency of an IRS FBAR Penalty Notice

An IRS FBAR penalty notice usually arrives after the IRS has already reviewed foreign account information and identified a potential reporting failure under FBAR rules. Before that point, FBAR obligations often sit in the background. People may know they exist, but they do not always feel immediate. Once the notice arrives, that changes. The IRS is no longer reviewing in general. It is asking for a response to a specific issue tied to foreign financial accounts.

This notice matters because it signals a shift in how the IRS is handling the situation. The focus moves from routine compliance to a penalty review process. From here, timing and accuracy begin to shape what options remain available. Understanding why the notice was issued and what the IRS expects next becomes the starting point for deciding how to respond.

Why the 30-Day Clock Is Your Most Critical Legal Deadline?

After issuing an FBAR penalty notice, the IRS typically sets a response deadline, most often 30 days. This window is critical because it controls what you can still do next.

During this period, you can still:

• Respond to the IRS’s position.
• Explain facts the IRS may not have considered.
• Challenge the proposed penalty.
• Preserve your right to further review or appeal.

Once this deadline passes, those options can narrow quickly. The IRS may move forward with assessment, and reversing course later becomes much harder.

Overview of Verni Tax Law’s Approach to Penalty Defense

When an FBAR penalty notice is issued, Verni Tax Law starts by identifying exactly what the IRS is alleging and how it reached that position. This involves a close review of the FBAR filing history, the foreign accounts involved, and the facts tied to how those accounts were reported.

From there, Verni Tax Law structures the response around three core priorities:

• Accuracy, so the facts are presented clearly and correctly.
• Alignment with FBAR legal standards, based on how the IRS applies penalty rules in practice.
• Timely action, so responses stay within IRS deadlines and preserve available options.

The goal is not to send forms back and forth without direction. Instead, the focus is on addressing the IRS’s concerns directly and using the legal paths available to challenge or reduce the penalty where appropriate.

Understanding the Threat: Penalties and the Willfulness Standard

An IRS FBAR penalty notice centers on how the IRS classifies the reporting failure connected to foreign financial accounts. That classification determines the penalty exposure and the legal path that follows, including whether the issue can still be challenged or reduced.

The Anatomy of an IRS FBAR Penalty Notice

An IRS FBAR penalty notice focuses on the details the IRS believes support a penalty assessment. Instead of discussing general filing duties, the notice narrows in on specific foreign financial accounts and how they were reported under the Financial Crimes Enforcement Network Form 114 (FinCEN Form 114).

The notice typically identifies:

• The foreign financial accounts are under review.
• The tax years involved.
• Whether the IRS is treating the conduct as willful or non-willful.
• The penalty authority applied under 31 U.S.C. § 5321.

These elements shape how the IRS evaluates the case. Once they appear in the notice, the discussion moves away from correcting filings and toward determining how the reporting issue fits within FBAR penalty rules and what level of penalty exposure applies.

Non-Willful Penalties and the Impact of Bittner v. United States

Non-willful FBAR penalties apply when the IRS believes the failure resulted from a mistake, oversight, or negligence rather than intentional conduct. In these cases, the penalty exposure is more limited.

After the Supreme Court’s decision in Bittner v. United States, non-willful penalties are capped per report, not per account, with an annual maximum adjusted for inflation. For recent years, that cap is $16,536 per year, even if multiple accounts were involved.

This ruling significantly changed how non-willful penalties apply and reduced the risk of excessive penalties where the facts support a non-willful classification.

Willful Penalties and Why the Standard Matters

Willful FBAR penalties carry much higher exposure. When the IRS determines a violation was willful, the penalty can reach the greater of $100,000 or 50% of the account balance at the time of the violation, per year.

Willfulness does not require an admission of intent. The IRS may argue willfulness based on fraud/criminal conduct it views as reckless or deliberately indifferent, such as ignoring known reporting obligations. Because of this, how the facts are framed and supported becomes critical when responding to an IRS FBAR penalty notice.

Civil vs. Criminal FBAR Penalties

Most FBAR penalty notices involve civil penalties, not criminal charges. Civil penalties focus on financial consequences and administrative enforcement.

Criminal FBAR penalties arise only in limited cases involving intentional concealment or related criminal conduct and follow a separate legal process. An IRS FBAR penalty notice by itself does not mean criminal enforcement is underway, but understanding the distinction helps keep the situation in proper context.

Read More → What Are the Penalties for Not Filing an FBAR? 

Strategic Defense: How to Challenge FBAR Penalty Assessments

Challenging an FBAR penalty assessment is not about reacting quickly. It is about responding in the right order, with the right information, and within the structure that the IRS itself follows during penalty reviews.

Phase 1: Immediate Steps Upon Receiving the Notice

The first phase focuses on understanding exactly what the IRS is relying on and making sure communication happens through the proper channel.

This stage usually involves two core actions.

Obtaining and Reviewing the Administrative File

The IRS builds an internal record before issuing an FBAR penalty notice. That record includes account information, prior filings, correspondence, and notes from the examiner. Reviewing this file helps clarify:

• Which foreign financial accounts are under review?
• How did the IRS interpret the reporting history?
• Whether the IRS is leaning toward a willful or non-willful view.

Without this context, it becomes difficult to challenge an FBAR penalty in a focused way.

Filing a Power of Attorney (Form 2848)

Once the IRS issues a penalty notice, direct communication often becomes limited. When an FBAR was filed by a representative, the IRS may also look for proper authorization records, which is where FinCEN Form 114a becomes relevant as proof that the filer had permission to submit the FBAR on the account holder’s behalf. Filing Form 2848 allows authorized counsel to communicate with the IRS on your behalf, request records, and respond formally within the required timeframes.

This step matters because IRS examiners rely on written positions, not informal explanations. Clear communication through proper authorization keeps the process structured and avoids missteps early on.

Phase 2: Building Your Defense: Establishing a Reasonable Cause Argument

For non-willful cases, the core defense often centers on reasonable cause. This is not a general explanation or a statement of intent. It is a fact-based argument that explains why the reporting failure occurred despite an effort to comply.

Required Evidence for Penalty Abatement

The IRS evaluates reasonable cause by looking at supporting documentation. This may include:

• Prior tax filings show consistent reporting behavior.
• Records demonstrating how accounts were managed.
• Evidence showing a lack of awareness rather than disregard.

The goal is to align the facts with how the IRS applies non-willful standards during penalty review.

When Reliance on a Professional Advisor is a Valid Defense

In some cases, taxpayers relied on a Certified Public Accountant (CPA) or tax preparer who failed to advise them properly about FBAR requirements. When supported by records and timing, reliance on professional advice can play a role in penalty abatement.

The IRS does not accept this argument automatically. It examines whether the reliance was reasonable and whether full information was provided to the advisor at the time.

Phase 3: Contesting the Willfulness Designation

Willfulness is the dividing line that drives penalty exposure. Contesting a willfulness finding often becomes the central part of the defense.

The IRS may argue willfulness based on conduct it views as reckless or indifferent rather than intentional. That makes the framing of facts critical. The defense focuses on showing how actions align with non-willful conduct rather than deliberate avoidance.

Judicial Precedents in FBAR Willfulness Cases

Courts have shaped how willfulness is interpreted in FBAR cases. These decisions influence how the IRS applies its standards during enforcement.

Judicial guidance helps define:

• The difference between willful and non-willful behavior.
• How recklessness is evaluated.
• When penalties exceed what the facts support.

Using these precedents allows the defense to challenge FBAR penalty assessments within the same legal framework the IRS must follow.

Also Read → FBAR Penalty Relief For Taxpayers. Non-Willful FBAR Penalty Is To Be Assessed Per Form 

FBAR Penalty Negotiation and Appeals Strategy

The IRS allows taxpayers to dispute FBAR penalties at different stages. Each stage has its own rules, timing, and risks, so understanding where the case stands makes a real difference.

Pre-Assessment Appeals Through the IRS Appeals Office

Before the IRS formally assesses the FBAR penalty, taxpayers often have the opportunity to raise the issue with the IRS Appeals Office. This stage matters because Appeals operates separately from the examination team and looks at the case from a resolution standpoint.

At this stage, the goal is to explain why the proposed penalty does not match the facts or the law. This may involve pointing out factual gaps, misclassification, or circumstances that support penalty abatement. The IRS Appeals Process exists to resolve disputes without litigation, and many FBAR penalty negotiation efforts begin here.

Drafting a Protest Within the 30-Day Window

To access Appeals, a written protest is usually required within the response deadline stated in the notice. This protest lays out the facts, the legal position, and the reason the penalty should be reduced or withdrawn.

The content of this submission matters. It frames how Appeals views the case and whether meaningful settlement discussions can follow. Missing the deadline or submitting an incomplete response can limit access to this stage.

Settlement Considerations During FBAR Penalty Negotiation

During Appeals review, the IRS may consider reducing penalties based on the strength of the facts and how the law applies. This is where penalty abatement becomes a real possibility, depending on the circumstances.

Settlement discussions focus on whether the proposed penalty reflects the actual level of risk, conduct, and reporting history. Not every case settles, but this stage often presents the best opportunity to resolve the issue without court involvement.

Post-Assessment Options: Pay, Claim, and Sue

If the IRS assesses the FBAR penalty and Appeals does not resolve the issue, the options narrow but do not disappear. At this stage, the penalty becomes final for administrative purposes, and different procedures apply.

One option is to pay the assessed penalty and then file a claim for refund. If the IRS denies that claim, the case may proceed to litigation in federal district court. This path raises cost and timing considerations, but it remains a valid way to continue challenging the penalty.

Litigation Versus Administrative Resolution

Litigation involves weighing legal strength against expense, time, and uncertainty. Courts review whether the IRS applied the law correctly and whether the penalty aligns with statutory limits and precedent.

Timing also matters here, particularly in relation to the FBAR statute of limitations. Once certain deadlines pass, available remedies may change.

Using Voluntary Disclosure (VDP) and Streamlined Procedures (If Applicable)

Not every FBAR issue moves straight into penalty negotiation or appeal. In some situations, the IRS still allows taxpayers to correct past FBAR problems through specific compliance paths, but only when the facts and timing support it.

These options apply before enforcement begins and depend mainly on two things: how the reporting failure occurred and whether the IRS has already contacted the taxpayer.

Broadly, the IRS recognizes three paths in this stage:

• Voluntary Disclosure Program (VDP): VDP is used when willfulness may be a concern. This program allows taxpayers to come forward proactively and resolve FBAR issues within a structured process before the IRS initiates enforcement.
• Streamlined Filing Procedures: Used when the failure was non-willful. These procedures allow taxpayers to correct missed FBARs and related filings with reduced or no FBAR penalties, depending on residency and facts. The IRS offers two streamlined tracks based on residency, known as Streamlined Domestic Offshore Procedures (SDOP) for U.S. residents and Streamlined Foreign Offshore Procedures (SFOP) for taxpayers living abroad.
• Delinquent FBAR Submission Procedures (DFSP): DFSP is used when income was properly reported, but FBARs were missed. This option allows late FBAR filing without penalties, provided the IRS has not already started an examination or issued a notice.

Each option serves a different situation, but all share one limitation: they are available only before the IRS moves into enforcement.

When Is It Too Late for a Delinquent or Streamlined Submission?

Timing determines whether these compliance paths remain open.

Once the IRS issues an FBAR penalty notice, initiates an examination, or formally contacts the taxpayer about FBAR noncompliance, voluntary and streamlined options generally close. At that point, the case shifts into penalty defense, negotiation, or appeal.

Because that line is firm, determining whether VDP, streamlined filing, or delinquent submission remains available requires a careful review of IRS communications and case status. Acting after enforcement begins can remove options that would otherwise reduce or avoid penalties.

Conclusion: Taking Decisive Action for FBAR Compliance

An IRS FBAR penalty notice signals that decisions now matter more than explanations. The IRS has already taken a position, and the outcome depends on how the facts, timing, and legal standards are handled from here.

Anthony N. Verni reviews FBAR penalty matters with a clear understanding of how the IRS applies penalty rules in real cases. As a tax attorney, CPA, and Master of Business Administration (MBA), he evaluates the notice, filing history, and surrounding facts in a way that aligns with how FBAR penalty reviews actually work.

If you have received an IRS FBAR penalty notice and need clarity before deadlines narrow your options, a confidential consultation with Verni Tax Law can help you understand where you stand and what steps remain available.

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