NEW IRS Guidance Limits FBAR Penalties!
Posted by Hochman Salkin Toscher Perez P.C. 
Posted on Friday, June 12, 2015
U.S. persons having a financial interest in or signature authority over one or more foreign financial accounts – including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account – having an aggregate value exceeding $10,000 at any time during 2014 is generally required by the Bank Secrecy Act to report their interest in the account by electronically filing by June 30, 2015, a “Report of Foreign Bank and Financial Accounts” (FBAR).[i]
Note that, by statute, these FBAR provisions apply to all U.S. persons and are not limited by the residency of the person since the laws of the U.S. are applicable to all U.S. citizens; U.S. residents; entities, including but not limited to, domestic corporations, partnerships, or limited liability companies created or organized in the U.S. or under the laws of the U. S.; and trusts or estates formed under the laws of the United States. Many non-U.S. residents feel that the FBAR requirements should be limited to U.S. persons residing in the U.S. since the “foreign account” of a non-resident U.S. person is typically located in their country of residence and, as such, is not “foreign” in the common sense of the term. This article merely addresses the statutory requirements without opining on the practical aspects associated with non-resident U.S. persons.
FAILURE TO FILE THE FBAR. The failure to timely file the FBAR can be subject to civil penalties and possibly criminal sanctions (i.e., imprisonment). The statutory civil penalties might be $10,000 per year for a non-willful failure but a willful failure to file could, by statute, be subject to civil penalties equivalent to the greater of $100,000 or 50% of the balance in an unreported foreign account, per year, for up to six tax years.[ii] Non-willful penalties might be avoided if there is “reasonable cause” for the failure to timely file the FBAR.
NEW INTERIM GUIDANCE LIMITING FBAR PENALTIES. The IRS recently issued interim guidance to implement procedures to improve the administration of the Service’s FBAR other than determinations arising from participation in the ongoing IRS Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures.[iii] The statutory FBAR penalty provisions only establish maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount below that threshold based on the facts and circumstances of each case. In this regard, IRS examiners are instructed to use their best judgment when proposing FBAR penalties, taking into account all the available facts and circumstances of a case.[iv]
(a). Willful FBAR Violations. For cases involving willful violations over multiple years, IRS examiners will recommend a penalty for each year for which the FBAR violation was willful. In most cases, 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. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C) for each year.
Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. The IRS guidance provides that in no event will the total willful penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
(b). Nonwillful Violations. For most cases involving multiple nonwillful violations, examiners are told to recommend one penalty for each open year, regardless of the number of unreported foreign financial accounts. In those cases, 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.
For some cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager’s approval, may assert a single penalty, not to exceed $10,000, for one year only.
For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval, may assert a separate penalty for each account and for each year.
The IRS guidance provides that in no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination. A nonwillful penalty will not be recommended if the examiner determines that the FBAR violations were due to reasonable cause and the person failing to timely file correct and complete FBARs later files correct and complete FBARs.
(c). IRS Mitigation Guidelines. In determining the appropriate penalty, IRS examiners are to first determine whether the mitigation threshold conditions in Internal Revenue Manual[v] are satisfied. If the mitigation threshold conditions are met, examiners are to make a preliminary penalty calculation based upon the mitigation guidelines in IRM,[vi] except that the penalty for each year will be limited to $10,000. Unless the facts and circumstances of a case warrant a different penalty amount, this is the penalty amount to be asserted.
If the IRM mitigation threshold conditions are not met, the mitigation guidelines do not apply and examiners are told to not make a preliminary penalty calculation based upon the guidelines. Examiners, with the group manager’s approval, are told to assert a separate penalty for each account and for each year. However, the IRS guidance provides that in no event will the total amount of the nonwillful penalties exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.
(d). Co-Owned Accounts. Where there are multiple owners of an unreported foreign financial account, the IRS guidance provides that examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful. For each co-owner against whom a penalty is determined, the penalty will be based on the co-owner’s percentage ownership of the highest balance of the foreign financial account. If examiners are unable to determine a co-owner’s percentage ownership, the penalty will be based on the amount determined by dividing the highest account balance equally among the co-owners.
NO EXTENSION OF TIME TO FILE FBAR. There is no extension of time available for filing an FBAR beyond June 30. Extensions of time to file federal tax returns do NOT extend the time for filing an FBAR. If a delinquent FBAR is filed, attach a statement explaining the reason for the late filing.
NEED FBAR FILING HELP? Assistance regarding the electronic filing of an FBAR 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).
Help in completing an FBAR is available by telephone at 866-270-0733 (toll-free within the U.S.) or 313-234-6146 (from outside the U.S., not toll-free) from 8 a.m.—4:30 p.m. Eastern time, or by sending an e-mail to FBARquestions@irs.gov.
Additional information, including Frequently Asked Questions, is available at https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FAQs-Regarding-Report-of-Foreign-Bank-and-Financial-Accounts-(FBAR)—Filing-Requirements#FR5
[i] Financial Crimes Enforcement Network (FinCEN) Form 114.
[ii] 31 U.S.C. § 5321(a)(5) establishes civil penalties for violations of the FBAR reporting and recordkeeping requirements. 31 U.S.C. § 5321(b) sets forth the 6-year statute of limitations, determined whether the FBAR is filed or not; 31 U.S.C. § 5321(d) confirms that civil penalties and criminal sanctions may be imposed with respect to the same FBAR violation.
[iii] See Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties, (May 13, 2015), Control Number: SBSE-04-0515-0025; https://www.irs.gov/pub/foia/ig/spder/SBSE-04-0515-0025%5B1%5D.pdf
[iv] See IRM 4.26.16.4.7, FBAR Penalties – Examiner Discretion.
[v] Internal Revenue Manual (IRM) 4.26.16.4.6.1 and IRM 4.26.16.4.6.2
