Would You Rather Pay Many Smaller FBAR Penalties, or One Big One?

Frayed cables breaking apart at the last strand.

When tax attorneys came together at the New York University Tax Controversy Forum, everyone was talking about recent cases over the upper limit of willful FBAR penalties on a single account. But for one speaker, the question was which was worse: being charged 14 smaller FBAR penalties, or one big one?

How We Got Here: The Argument Over Maximum FBAR Penalties

The IRS and several taxpayers’ attorneys have been battling over a technical detail in how the Bank Secrecy Act interacts with Secretary of Treasury regulations on foreign financial bank reports (FBARs). The issue centers around how much the IRS can levy for willful FBAR violations. While the statute was amended in 2004 to increase those maximum FBAR penalties, the regulations governing the IRS policies and practices were not. That created a conflict over whether the IRS can voluntarily place a lower limit on itself by doing nothing, or whether the statutory amendment overwrote the existing regulation automatically.

This blog has covered several federal court decisions on the issue, including a series of posts that laid out each side’s strongest arguments. There have been no fewer than five cases in the past year on this issue alone. With federal judges coming down on both sides, the issue seems ready for a Supreme Court challenge. And that created a lot of attention at the Tax Controversy Forum.

The Case of the Many Penalties

But these weren’t the only cases making waves. Another topic of conversation centered on whether non-willful FBAR penalties were assessed per year, or per account. That issue came about in United States vs Boyd, a California federal district court case. There the IRS imposed 13 separate non-willful FBAR penalties against Ms. Boyd for the tax year 2010: one for each of her 13 undisclosed accounts in the United Kingdom (she had one other account, but it did not meet the minimum reporting value threshold of $10,000).

Until 2015, the IRS had all but promised it would not do this to taxpayers. It had taken the position that, except in certain circumstances, the Bank Secrecy Act only allowed the Department of the Treasury to issue one penalty per year. But then in Boyd, the IRS changed its tune. It argued that the power to assess penalties applied to each account where the penalty applied, and it accrued each year.

The trial court agreed and issued an opinion allowing the IRS to impose as many penalties as there were violations of the FBAR reporting requirement. The case is now on appeal to the Ninth Circuit court, where the issue will almost certainly be hotly debated.

Which is Worse for Taxpayers: Higher Penalty Limits or Many Smaller FBAR Penalties?

Boyd and the conflicting opinions over the maximum FBAR penalties were big news at the recent New York University Tax Controversy Forum. Many gave their opinions on whether the IRS or the taxpayers’ attorneys were right about the maximum penalty issue, echoing the arguments presented in the various district and tax courts across the country. Lindsey Stellwagen, IRS special counsel, international, held the party line, quoting U.S. v. Garrity and saying the U.S. Treasury Department “could not override Congress’ clear directive to raise the maximum willful FBAR penalty by declining to act and relying on a regulation parroting an obsolete version of the statute.”

Steven R. Toscher of Hochman Salkin Toscher Perez, PC, said there was a bigger issue at stake. The “real issue” he said, was the government’s decision to “assert the nonwillful penalty, which is a much lower standard, when there’s multiple accounts.” As he sees it, facing multiple penalties for the same tax year could add up to a bigger problem than if the IRS had simply imposed a single, higher maximum penalty.

Which is worse really depends on the individual taxpayer and his or her financial circumstances. For taxpayers who control one large financial account, a lower maximum willful FBAR penalty reduces the risk that a poor decision could wipe out their offshore investments. But in a world where most financial advisors recommend diversifying investments, many other taxpayers with money overseas will face the risk of death by a thousand cuts. While each individual non-willful FBAR penalty may be relatively low, added up, they could end up being more severe than the single maximum willful FBAR penalty attorneys have been fighting over all year.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are facing FBAR penalties across multiple foreign financial accounts, contact Joe Viola to schedule a free consultation.

Categories: FBAR