FBAR Penalties: In recent years, the Internal Revenue Service has significantly increased the assessment and enforcement of FBAR Penalties for undisclosed foreign bank and financial accounts. When it comes to enforcement, the IRS has procedural safeguards on their side that limit a taxpayer’s ability to fight the penalty. That is because the taxpayer does not have the opportunity to take an FBAR matter to Tax Court (the FBAR has nothing to do with tax and in fact is not even an IRS form per se). After the taxpayer has been assessed penalties and all administrative procedures have expired — the US government enforces the penalty by filing a lawsuit in Federal Court.
New Hope for Non-Willful Taxpayers in 2020/2021
There has been a nationwide disparity in FBAR non-willful penalty Court rulings, as the courts have not been consistent in how FBAR violation penalties should be applied – which also makes it difficult for the taxpayer to ascertain their chances in prevailing at the District Court level. A recent round of cases in Giraldi, Boyd, and Kaufman all reflect a growing trend of courts’ limiting the non-willful FBAR Penalty to a per-form penalty and not a per-violation penalty. Unfortunately, the news is less kind for “willful” taxpayers under a recent Court of Appeals in the Federal Circuit ruling in Kimble.
A (Brief) Introduction to FBAR
The FBAR is a FinCEN Form. FinCEN is the Financial Crimes Enforcement Network. The FBAR (aka FinCEN Form 114) is covered under Title 31 (Money and Finance) of the US code and not Title 26 (Internal Revenue Code). The primary goal of the FBAR is to minimize money laundering and other financial crimes by requiring US persons with certain ownership, co-ownership, or signature authority over foreign accounts to report the account information to the US government each year on the annual FBAR — nothing to do with tax. The form is required to be filed at the same time that a taxpayer files a tax return — with two caveats:
- Even if a person does not have to file a Tax Return, they may still have to file an FBAR; and
- Currently the FBAR is on automatic extension (to October).
Civil & Criminal FBAR Penalties
The majority of the time, when the US government issues FBAR penalties — they are civil in nature. Criminal FBAR penalties are rare, and they tend to only rear their ugly head in situations in which a taxpayer is being investigated for other crime-related issues such as money laundering, smurfing, structuring, and tax evasion. Stated another way, just having a few unreported foreign accounts and possibly making some mistakes on filing Schedule B and other related forms is not a criminal situation per se – even if the IRS alleges it is “willful” (civil willful and criminal willfulness are not the same thing).
31 USC 5321 et seq. Civil FBAR Penalties: Willful or Non-Willful
The two types of civil FBAR penalties are: willful and non-willful. While the non-willful penalties are more common — and range extensively on how they are assessed and enforced — they are generally less brutal than the willful penalty counterpart.
Taxpayer Tip: Criminal vs. Civil Willfulness
One rather distasteful strategy that some fear-mongering attorneys use is to scare unsuspecting taxpayers into believing that if they are willful, then they are criminals and that means they may be subject to incarceration. Civil willfulness is not the same as criminal willfulness — and in order to be criminally willful, there still must be an element of intent and the government must prove the violation beyond a reasonable doubt — which is not required for a civil willful penalty.
Non-Willful FBAR Penalties
The penalty generally starts at $10,000 per violation, although technically the $10,000 penalty is the “maximum violation amount.” Even though the $10,000 penalty is the maximum penalty per violation, penalties tend to start based on that $10,000 value — no matter what the facts and circumstances are. IRS agents and examiners have discretion to reduce or minimize the penalty. The $10,000 adjusts for inflation.
What does Non-Willful Mean?
There is no direct definition of the term non-willful. There is no bright-line test that can be used to punch in the facts and derive a conclusion as to whether or not a taxpayer was non-willful. Instead, it is based on the Totality of the Circumstance analysis. While at first glance this may not seem too complicated, the IRS has done its part to make it incredibly ambiguous and difficult, especially since the term “violation” can have different meanings and outcomes.
What does Per Violation Mean?
The FBAR range for violations of foreign account reporting compliance is as follows:
- warning letter in lieu of penalty;
- a $10,000 penalty that encompasses all the violations for all years;
- a $10,000 per year; or
- a $10,000 penalty per violation per year.*
*The $10,000 penalty per violation per year caps at 50% value of the account values (see IRM).
What do the Courts Say?
When it comes to non-willful violations, oftentimes penalties will hinge on a nuance. And, when it comes to the FBAR, the nuance is what is defined as a violation. Does a non-willful FBAR violation mean that the form was not filed and the taxpayer should be penalized for not filing the form — or does it mean that each account was not reported, and therefore the taxpayer should be subject to a penalty for each account that was not properly reported? While courts are split, there have been four recent decisions that all favor the taxpayer and the non-willful FBAR penalty being limited to a “per form” and not a “per account” violation. Here are four recent cases and links to our articles summarizing each case:
- Kaufmnan (District Court)
- Giraldi (District Court)
- Bittner (District Court)
- Boyd (Court of Appeals)
Willful FBAR Penalties
When the IRS can prove that the taxpayer was willful, the penalties are much more damaging and can reach upwards of 50% of the maximum account value per year (but the total penalty for all years is limited to 100% value). A recent court of Federal Court of Claims Appeal case made it even easier for the US government to prove willfulness by proving reckless disregard — although it should be noted that in that case, the Taxpayer had entered OVDP, been assessed a penalty, dropped out of the program, and never even paid the Penalty.
Lower Standard of FBAR Willfulness
When it comes to civil FBAR willfulness penalties, intent is not required. In fact, actual knowledge is not necessarily required either. This can make it incredibly difficult when it comes time to evaluate a taxpayer’s options on how to deal with the penalty.
- Reckless Disregard (Willful): Which means the person acted without actual intent.
- Willfully Blind (Willful): Which means the person did not actually know of the violation at the time it happened
Why is this important? The reason this is so important is because even though there is no bright-line test to determine willful from non-willful, agents, and examiners may differ on their analyses and conclusions as to what would be considered aggravated negligence (but still non-willful) and what may be considered reckless disregard (willful) for example.
What if You Were Assessed FBAR Penalties?
If the IRS assessed FBAR penalties against you, it is important to work to get those penalties removed or minimized as quickly as possible. The US government generally has two years to bring a lawsuit to enforce the penalty — and since it is not a tax form, Tax Court is unfortunately not an option in terms of litigating the penalty. Instead, the taxpayer will have to duke it out with the US government in District Court or the Court of Federal Claims.
FBAR Enforcement is a Key Priority
In conclusion, the US government continues to assess and enforce FBAR penalties as a key compliance initiative. If you have been hit with penalties or are concerned you will be penalized, you should consider one of the amnesty programs to get into compliance — if you have not been penalized or are currently not under audit (or under ancillary investigations).
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance. Contact our firm for assistance.