New IRS Guidance Limits FBAR Penalties!

Abstract

The IRS recently issued interim guidance to implement procedures to improve the administration of the IRS’s FBAR other than determinations arising from participation in the ongoing IRS Offshore Voluntary Disclosure Program (OVDP) or the Streamlined Filing Compliance Procedures (“Streamlined Procedures”). Penalties determined under the IRS OVDP or the Streamlined Procedures are referred to as a “miscellaneous penalty” (rather than an “FBAR penalty”) determined in lieu of all the penalties a taxpayer is avoiding by entering the OVDP or filing through the Streamlined Procedures.Statutorily, civil FBAR penalties might be $10,000 per year per account 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 percent of the balance in an unreported foreign account, per year, for up to six tax years. Non-willful penalties might be avoided if there is “reasonable cause” for the failure to timely file the FBAR.Under the new IRS guidance, for most cases involving multiple non-willful violations, examiners are now 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.The new IRS guidance provides that in no event will the total amount of the penalties for non-willful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination. A non-willful 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.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 now be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.In determining the appropriate penalty, IRS examiners are to first determine whether the mitigation threshold conditions in Internal Revenue Manual (IRM) are satisfied. If the mitigation threshold conditions are met, examiners are to make a preliminary penalty calculation based upon the mitigation guidelines in IRM, [iv] 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.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.Generally, 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 have been timely paid on the U.S. tax return, and the taxpayer has 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.