A New FBAR Update 2024 (Filing, Reporting, Penalty & Cases)

2024 FBAR Update: Filing, Reporting, IRM, Penalty, and Cases

FBAR Update 

With 2024 just around the corner, our international tax lawyers will provide an updated guide regarding foreign bank and financial account reporting for the new year. The tax year 2023 brought some very important changes as to how the Internal Revenue Service can enforce penalties due to the Supreme Court case in Bittner, and the Internal Revenue Manual has been updated to reflect changes in the enforcement policies and procedures. Let’s look at the differences in FBAR reporting for the new year with a focus on the new IRS limitations on penalties and how the enforcement procedures have changed.

2023 FBAR Supreme Court Case

One of the first important changes that came about in 2023 was the method by which the Internal Revenue Service is authorized to issue penalties for non-willful violations of foreign account reporting. The annual FBAR is used to report foreign bank and financial accounts. Prior to the Supreme Court case ruling in Bittner, some IRS agents and examiners issued non-willful penalties based on the number of accounts that were missed each year and not based on a ‘per form’ penalty.  For reference, even if a taxpayer has 23 accounts, they still only file one annual FBAR. The Supreme Court in Bittner limits the penalties to one $10,000 penalty per year, noting that the $10,000 adjusts for inflation. This impacts the overall compliance methods when it comes to amnesty and late disclosures. Each of the different strategies should be discussed in detail with a Board-Certified Tax Law Specialist prior to submitting based on potential risks and rewards.

FBAR Filing Requirements and Due Date

At the current time, the filing due date is presumably still the same, which is April 15th. But, for the past several years the filing of the FBAR has been on automatic extension. That means, that taxpayers typically have until the middle of October to file the FBAR and taxpayers do not have to submit an extension form such as a 4868 or 7004 in order to obtain an extension.

Penalties for FBAR

Expanding upon the penalty issue, based on the recent ruling in Bittner, the Internal Revenue Manual has been supplemented as well and is in the process of being updated on matters involving FBAR compliance. The general theme is that unless there are mitigating factors, taxpayers will be penalized for each year that they missed the FBAR (typically up to six years) at the maximum annual penalty amount. In addition, if multiple people are required to submit an FBAR, then the IRS should consider penalizing everyone who should have filed the FBAR. In other words, if there is a single account with five joint owners, the penalty should not be limited to just the account, but to each person who should have filed the form — in order to combat this type of penalty, taxpayers may want to consider submitting to the Streamline Procedures which currently limits the penalty to five percent per account.

IRM (Internal Revenue Manual)

Here is a brief summary of the updates to the Internal Revenue manual on the issue of non-willful FBAR enforcement and penalties:

IRM 4.26.16.5, FBAR Penalties Revise Paragraph (4) 

• • • There may be multiple civil FBAR penalties if more than one person is required to file an FBAR reporting their interest in, or signature or other authority over, an account, such as if a person other than the account owner has signature or other authority over the foreign account.

    • Each person responsible for filing an FBAR reporting the account can be liable for the full amount of the penalty for failing to file an FBAR.

Prior Paragraph (4)

• • • There may be both a reporting and a recordkeeping violation regarding each account. Examiner discretion applies in determining whether to penalize both violations for a single account, but examiners must consult with Counsel before making a final decision to assert penalties for both violations.

IRM 4.26.16.5.4.1, Penalty for Non-Willful Violations

Delete paragraphs (1) through (3), Renumber previous paragraph (4) as paragraph (1) and revise to read as follows:

• • • In most cases of non-willful violations, examiners will recommend one $10,000 penalty (adjusted for inflation as described in IRM 4.26.16.5.4(5)) per violation.

    • In ascertaining the penalty amount for non-willful violations (assuming the reasonable cause exception does not apply), examiners should use their discretion to calculate a penalty commensurate with the facts and circumstances of a case. See IRM 4.26.16.5.2.1 for more information about examiner discretion.

    • The provisions in paragraph (4) below apply to this paragraph. 4 Any text marked with a # is Official Use Only Attachment 1, SBSE-04-0723-0034: Revisions to IRM 4.26.16 and IRM 4.26.17 

Renumber previous paragraph (5) as paragraph (2) and revise to read as follows:

• • • The examiner’s workpapers must support each penalty determination and document group manager approval and operating division FBAR Coordinator concurrence.

Renumber previous paragraph (6) as paragraph (3) and revise to read as follows:

• • • Where there are multiple owners of an unreported foreign financial account, 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. See IRM 4.26.16.5.2 for additional information.

    • Renumber previous paragraph (7) as paragraph (4) and revise to read as follows: In no event will the total amount of the penalties for non-willful violations (among all open years) exceed 50 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate for the years under examination. The “highest aggregate balance” is calculated as described in IRM 4.26.16.1.6.

Prior Paragraphs  1 -7

1. 1. In ascertaining the penalty amount for non-willful violations (assuming the reasonable cause exception does not apply), first determine whether the mitigation criteria in Exhibit 4.26.16-2are met.

   2. If the mitigation criteria are met, make a preliminary penalty calculation using the mitigation guidelines in Exhibit 4.26.16-2, except limit the total mitigated penalties for each year to the statutory maximum for a single non-willful violation. Allocate the total penalty amount for each year among all violations in that year for which a penalty is recommended. This is the penalty amount, unless, in the examiner’s discretion as noted in IRM 4.26.16.5.2.1, the facts and circumstances of a case warrant a different penalty amount. The provisions in paragraph (7) below apply to this paragraph.

   3. If the mitigation criteria are not met, the mitigation guidelines do not apply. Do not make a preliminary penalty calculation using the guidelines in Exhibit 4.26.16-2.

   4. If the mitigation criteria are not met, or are met but the facts and circumstances of a case warrant a different penalty amount than calculated in paragraph (2), examiners will consider, as appropriate:

      • • Asserting penalties, totaling (in each year for which non-willful violations are being penalized) no more than the statutory maximum penalty amount for a single violation, regardless of the number of non-willful violations. Since FBAR penalties are determined under the statute on a per-violation basis, the total penalty amount for each year should be allocated among all non-willful violations for which a penalty is recommended.

        • If asserting penalties computed under subparagraphs (a) and (c) are not warranted, asserting penalties, totaling (for all years for which non-willful violations are being penalized) no more than the statutory maximum penalty amount for a single violation, regardless of the number of non-willful violations. Allocate the total penalty amount among all years for which non-willful violations are being penalized. Since FBAR penalties are determined under the statute on a per-violation basis, the total penalty amount allocated to each year should be further allocated among all non-willful violations for which a penalty is recommended.

        • If asserting penalties computed under subparagraphs (a) and (b) are not appropriate, asserting penalties for each non-willful violation in each open year, with a penalty amount for each violation up to the statutory maximum penalty amount.

        • In determining an appropriate penalty amount, consider the facts and circumstances of the case and apply discretion as appropriate. See IRM 4.26.16.5.2.1for more information about examiner discretion.

        • The provisions in paragraph (7) below apply to this paragraph.

   5. The examiner’s workpapers must support each penalty determination and document the group manager’s approval.

   6. Where there are multiple owners of an unreported foreign financial account, 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. See IRM 4.26.16.5.2for additional information.

   7. Except in egregious cases, the penalty asserted for an account should not exceed 50 percent of the account’s maximum value during the year (see IRM 4.26.16.2.2.2) in which a penalty is being asserted. In no event will the total amount of the penalties for non-willful violations (among all open years) exceed 50 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate for the years under examination. The “highest aggregate balance” is calculated as described in IRM 4.26.16.1.6.

Willfulness FBAR Cases

Currently, the Internal Revenue Service can still issue penalties upwards of 50% of the maximum account value per year for willfully failing to file the FBAR. Unfortunately, there is no bright line test to determine if a person is willful or non-willful. Rather the determination of willful vs non-willful is based on the totality of the circumstances of each taxpayer. Thus, it is entirely feasible that two agents or examiners at the IRS could see the same set of facts and come to two different consultations. In other words, whereas one may agent believe that the taxpayer is willful, the other examiner may determine the taxpayer is non-willful while looking at the same set of facts . It is also important to note that willfulness is not limited to acting intentionally. In fact, several courts across the different circuits have affirmed the fact that taxpayers can be subject to willfulness penalties even if they acted with reckless disregard or willful blindness — and not actual intent.

Burden of Proof in FBAR Cases

It is also important to note that unlike civil tax fraud which requires clear and convincing evidence, the government is only required to meet the preponderance of the evidence standard in order to successfully litigate FBAR penalties.  Many taxpayers have challenged this concept, especially based on the fact that a prior memorandum circulated by the IRS itself opined that the standard should be clear and convincing evidence and not merely preponderance of the evidence (lowest level of proof required). Nevertheless, most courts have taken the position that since FBAR penalties — as exorbitant as they can be– still only amount to monetary penalties — the standard of review is still preponderance of the evidence.

Defenses to FBAR

There are various tactics and strategies that a taxpayer can pursue to try to avoid or minimize penalties. Each taxpayer will have their own specific set of facts and circumstances and depending on whether the taxpayer is seeking to avoid penalties before they are assessed or pre-assessed would dictate whether they qualify for one of the amnesty programs, a reasonable cost submission, or delinquency procedures.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.