IRS Updates FBAR Reference Guide to Reflect Increased Inflation – Adjusted Non-Willful and Willful Penalty Amounts by Michel Stein
The IRS has updated its Reference Guide on Foreign Bank Account Reports (“Guide”) to help U.S. persons and tax professionals with FBAR filing obligations. The Guide also supports IRS examiners in their efforts to administer the various IRS FBAR examination and penalty programs. Most importantly, the Guide for the first time also reflects increased inflation-adjusted penalties for the already severe Non-Willful and Willful FBAR violations.
U.S. Persons who have 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, may be required by the Bank Secrecy Act to report the account each year to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).
The Updated IRS FBAR Reference Guide is available at https://www.irs.gov/pub/irs-utl/irsfbarreferenceguide.pdf
A significant modification to the Guide is the penalty chart, which now reflect inflation-adjusted civil and criminal penalties. These increased penalty amounts apply to penalties assessed after August 1, 2016, whose associated violations occurred after November 2, 2015.
For example, the maximum amount for each Non-Willful Violation is shown to have been increased to $12,459 (from $10,000) for violations occurring after November 2, 2015. The minimum Willful Violation is shown to have been increased to $124,588(from $100,000).
For those violations occurring on or before November 2, 2015, the IRS may assess a civil penalty not to exceed $10,000 per violation for Non-Willful Violations that are not due to reasonable cause. For Willful Violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.
The increase in the FBAR penalty amounts makes an already onerous penalty regime that much more severe on the non-compliant taxpayer. While the FBAR penalty statute affords agents discretion to apply penalty amounts of less than the maximum amount (by virtue of its “up to” language), in practice we have seen that IRS agents generally apply the maximum penalties allowed by statute and internal IRS guidelines.
The Guide is also modified to reflect the new FBAR filing deadline contained in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (“Act of 2015”). The FBAR is a calendar year report and now must be received by the Department of Treasury on or before April 15 of the year following the calendar year being reported. The Act of 2015 changed the FBAR filing due date to April 15 and mandated a maximum six-month extension of the filing deadline. To implement the statute with minimal burden to the public, FinCEN will grant filers failing to meet the FBAR annual due date of April 15 an automatic extension to October 15 each year. Accordingly, specific requests for this extension are not required. Prior to the Act of 2015, the filing deadline for calendar year 2015 and earlier reports was June 30, and there was no provision for requesting an extension of time to file an FBAR.
IRS Offshore Voluntary Disclosure Program. On January 9, 2012, the IRS reopened its Offshore Voluntary Disclosure Program following continued interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program offers people with unreported taxable income from offshore financial accounts or other foreign assets an opportunity to fulfill their tax and information reporting obligations, including the FBAR. Although the program does not have a closing date, the IRS may end the program at any time.
Streamlined Filing Compliance Procedures. On September 1, 2012, the IRS implemented new streamlined filing compliance procedures that were available only to non-resident U.S. taxpayers who failed to file required U.S. income tax returns. Taxpayer submissions were subject to different degrees of review based on the amount of tax due and the taxpayer’s response to a risk questionnaire.
On June 18, 2014, the IRS announced the expansion of these procedures. The expanded procedures are available to a wider population of U.S. taxpayers living outside the country and, for the first time, certain U.S. taxpayers residing in the United States; reference IR-2014-73. For eligible U.S. taxpayers residing outside the United States, all penalties will be waived. For eligible U.S. taxpayers residing in the United States, the only penalty will be a miscellaneous offshore penalty equal to five percent of the foreign financial assets that gave rise to the tax compliance issue. For more information, go to Streamlined Filing Compliance Procedures.
Delinquent FBAR Submission Procedures. Taxpayers who have not filed a required FBAR and are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about a delinquent FBAR, should file any delinquent FBARs according to the FBAR instructions and include a statement explaining why the filing is late. All FBARs are required to be filed electronically through FinCEN’s BSA E-Filing System. Select a reason for filing late on the cover page of the electronic form or enter a customized explanation using the ‘Other’ option.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if income from the foreign financial accounts reported on the delinquent FBARs is properly reported and taxes are paid on your U.S. tax return, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.
Help in completing the FBAR is available Monday through Friday, 8 a.m. to 4:30 p.m. Eastern Time, at 866-270-0733 (toll-free inside the U.S.) or 313-234-6146 (not toll-free, for callers outside the U.S.). Questions regarding the FBAR can be sent to FBARquestions@irs.gov.
Help with electronic filing questions is available at BSAEFilingHelp@fincen.gov or through the BSA E-Filing Help Desk at 866-346-9478. The E-Filing Help Desk is available Monday through Friday from 8 a.m. to 6 p.m. Eastern Time.
As the Government continues to refine the reporting rules for foreign accounts and assets, one should expect continued attention in this area. Anyone lacking in compliance, should consult a tax professional with experience and expertise with these matters.