Summary Review Guide of an IRS FBAR Violation Penalty
FBAR Penalties: When a person never files the FBAR or files it delinquent (or late), the IRS may issue an FBAR violation penalty. Oftentimes, when a person is non-compliant with the FBAR, it is for multiple prior years of non-filing or incomplete filing. The delinquent FBAR, late filed & unfiled FBAR penalties are the same.
U.S. persons with offshore accounts may have to file an FBAR form. The FBAR is the Foreign Bank and Financial Account Reporting form aka FinCEN Form 114. In 2003, FinCEN authorized the IRS to enforce the FBAR Penalties under Title 31, Sections 5314 and 5321. When a person does not file an FBAR, the IRS is authorized to assess, issues and enforce penalties.
How is an FBAR Penalty Assessed
The FBAR Penalty assessment process is complex. This is primarily due to the fact that enforcement is under U.S.C. Title 31 not U.S.C. Title 36. An FBAR violation penalty can range from a warning letter in lieu of penalty, all the way up to $100,000 minimum willful FBAR penalty. The Internal Revenue Service has developed numerous offshore voluntary disclosure options to achieve FBAR and tax amnesty.
FBAR Statutory Authority
Report of Foreign Bank and Financial Accounts (FBAR) is authorized by statute.
31 U.S.C. §5314(a) directs the Secretary to require residents or citizens of the United States, or a person in and doing business in the United States, to keep records and/or file reports when the person makes a transaction or maintains a relationship with a foreign financial agency.
Section 5314(b) authorizes the Secretary of the Treasury to carry out this mandate by issuing regulations prescribing the application of the reporting requirements, including to whom the requirements apply.
FBAR Overview 126.96.36.199 (09-27-2018)
As provided by the IRM
A United States person must file an FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) if that person has a financial interest in or signature authority over any financial account(s) outside of the United States and the aggregate value of the account(s) exceeds $10,000 at any time during the calendar year. Failure to file this form may result in civil and/or criminal penalties. The civil penalties may be appealed administratively.
Effective July 1, 2013, filers must electronically file the FBAR through FinCEN’s Bank Secrecy Act (BSA) E-Filing System.
What if you do Not File the FBAR?
If you do not file the FBAR, or file the FBAR late, you may be subject to an FBAR Penalty. The penalties may range from a warning letter in lieu of penalty (Form 3800), all the way up to a multi-year, 50% maximum balance penalty
Was the FBAR Non-Compliance Willful?
The main factor in deciding between issuing a willful and non-willful FBAR penalty is whether the IRS believes the Taxpayer is willful or non-willful.
- Willful FBAR Penalty
- Non-Willful FBAR Penalty
Non-Willful FBAR Penalty
The non-willful FBAR penalty is typically the least severe penalties. An FBAR non-willful penalty is a “lower-level” penalty for not filing the FBAR. The non-willful penalties can be high, BUT, typically they are not as high as willful penalties.
Willful FBAR Penalty and (Reduced) Willfulness
The Willful FBAR Penalty is typically more severe. An FBAR Willful Penalty is penalty for acting willful, willfully blind, or with reckless disregard in not filing the FBAR. We have provided detailed explanations and analyses in our free International Tax Law library about these different terms, and what they mean.
Civil FBAR Penalty (31 U.S.C. § 5321 et seq.)
The FBAR Penalty will be either a Civil FBAR Penalty and/or Criminal FBAR Penalty. They can then be broken down further, but the threshold question, is whether the IRS will get you for Civil (money) or Criminal (money, and worse).
The civil FBAR penalty is limited to monetary penalties. A civil FBAR Penalty is a penalty that is focused on monetary fines or warning letters (waivers) — without any risk of criminal investigation or prosecution.
|U.S. Code citation||Civil Monetary Penalty Description||Current Maximum|
|31 U.S.C. 5321(a)(5)(B)(i)||Foreign Financial Agency Transaction – Non-Willful Violation of Transaction||$12,921|
|31 U.S.C. 5321(a)(5)(C)||Foreign Financial Agency Transaction – Willful Violation of Transaction||Greater of $129,210, or 50% of the amount per 31 U.S.C.5321(a)(5)(D)|
|31 U.S.C. 5321(a)(6)(A)||Negligent Violation by Financial Institution or Non-Financial Trade or Business||$1,118|
|31 U.S.C. 5321(a)(6)(B)||Pattern of Negligent Activity by Financial Institution or Non-Financial Trade or Business||$86,976|
Criminal FBAR Penalty (31 C.F.R. §103.59)
A criminal FBAR Penalty may include monetary penalties and incarceration. This is when the IRS refers the matter to the Department of Justice (DOJ) or other 3 letter government faction for criminal investigation and possible prosecution. These are not very common, but unfortunately they are on the rise.
|U.S. Code citation||Criminal Violation & Description||Criminal Penalty|
|31 C.F.R. §103.59(b)||Willful – Failure to File FBAR or retain records of account||Up to $250,000 or 5 years or both|
|31 C.F.R. §103.59(c)||Willful – Failure to File FBAR or retain records of account while violating certain other laws||Up to $500,000 or 10 years or both|
|31 C.F.R. §103.59(c)||Knowingly and Willfully Filing False FBAR||$10,000 or 5 years or both|
|Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d).||See Statutes||See Statutes|
Do You Qualify for Delinquent FBAR Submission Procedures?
Some individuals may escape FBAR penalties “the easy way” by submitting to the Delinquent FBAR Submission Procedures.
As provided by the IRS:
Taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
- have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F 90-22.1),
- are not under a civil examination or a criminal investigation by the IRS, and
- have not already been contacted by the IRS about the delinquent FBARs
Follow these steps to resolve delinquent FBARS
- Review the instructions
- Include a statement explaining why you are filing the FBARs late
- File all FBARs electronically at FinCEN
- On the cover page of the electronic form, select a reason for filing late
- If you are unable to file electronically, contact FinCEN’s Regulatory Help line at 1-800-949-2732 or 1-703-905-3975 (if calling from outside the United States) to determine possible alternatives to electronic filing.
The IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have 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.
FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
Recent Updates to FBAR Penalties
A few important considerations:
- Most courts have held that the maximum annual FBAR willful penalty is not limited to $100,000.
- If the court believes you acted with Reckless Disregard, they can still penalize you with a willful FBAR penalty.
- If the court believes you acted with Willful Blindness, they can still penalize you with a willful FBAR penalty.
- Even in a non-willful setting, the court can issue $10,000 per account, per year penalty
Common Client FBAR Penalty Questions
Here are some more of the common questions we receive about the FBAR Penalty
2018 & 2019 FBAR Penalty Updates
There has been increased enforcement, with three very important updates:
– Courts are holding that willful penalties are not limited to $100,000 per year.
– Courts are holding that non-willful penalties are not limited to $10,000 per year; and
– There has been an increase in willful penalties and criminal investigations.
What is the FBAR Late Filing Penalty?
Technically, there is no “late filing penalty.’ Rather, the IRS can penalize you for not filing the FBAR at the time it is due. In other words, it is not a “Late Filing Penalty,” because you cannot file the FBAR late, unless you submit using one of the programs. Each program has its own associated FBAR penalty structure or waiver.
How does FBAR Penalty Collection Work?
Generally, the IRS will issue the FBAR penalty or penalties against you. Then, the IRS will give you a certain amount of time to pay, before the IRS sues you, to reduce the FBAR penalty to a civil judgment.
Is there an Amended FBAR Penalty?
Technically, no. Rather, once the FBAR is not filed timely, the FBAR Penalty kicks in, and it is up to you to try to limit the penalties by using one of the approved amnesty or offshore disclosure methods.
Can I go to Tax Court to Challenge the FBAR?
As provided in the IRM (Internal Revenue Manual)
“The taxpayer cannot fight the FBAR penalty in tax court. Rather, the taxpayer will usually have to pay the penalty and seek a claim for refund, or be sued – and then fight the matter in court.”
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.