New IRS Guidelines Limiting FBAR Penalties
Penalties for failure to file required FBAR reports disclosing foreign financial accounts for taxpayers who do not participate in one of the available Offshore Voluntary Disclosure Programs are severe. Civil penalties for non-willful failure to file, where "reasonable cause" can be shown, could be $10,000 per year, while willful failure to file could result in statutory penalties of up to the greater of $100,000 or 50% of the balance in the unreported account, per year, for up to six years. Only the maximum penalties are established by law – the IRS examiner is given the discretion to determine the appropriate penalty based on the facts and circumstances of each case.
In May 2015 the IRS issued an internal Memorandum (Control No. SBSE-04-0515-0025) intended to provide interim guidance to improve the administration of FBAR penalty determinations outside of the OVDP and Streamlined Filing Compliance Procedures. Total penalties for willful FBAR violations will now generally be limited to 50% of the highest aggregate balance of all unreported foreign financial accounts during the years under examination, with the penalty for each year for which the FBAR violations were willful being determined by allocating the total penalty using the ratio of the annual highest aggregate balance over the total of the highest aggregate balances. Examiners will be permitted to recommend a penalty higher or lower than 50% of the highest aggregate balance for all years, but the total willful failure penalty may not exceed 100% of the highest aggregate balance of all accounts for all years.
For non-willful FBAR violations, examiners are to recommend one penalty for each open year regardless of the number of unreported accounts. This penalty is the sum of all aggregate balances up to a maximum of $10,000 per year. In cases where separate penalties for each year is not warranted based on the taxpayer’s conduct, the examiner may, with managerial approval, impose a single penalty not to exceed $10,000.
Although not a new concept, the Memorandum also emphasizes that, when asserting an FBAR penalty, the burden is on the IRS to show that a violation occurred and was in fact willful. Procedures have been added to promote consistency and effectiveness in the administration of FBAR penalties by requiring that examiners’ determinations be adequately supported by the facts and circumstances and penalties imposed in a fair and consistent manner.
I encourage you to learn more about FBAR, FATCA and Offshore Voluntary Disclosure Initiatives and how they may affect you. For a consultation with a tax attorney about your particular situation, contact me at my Philadelphia office.