- 1 The IRS can Issue an Annual $10,000 Per Account FBAR Non-Willful Penalty
- 2 Case: Boyd (No. 2:18-cv-00803)
- 3 What are Willful Penalties for FBAR?
- 4 What are Non-Willful Penalties for FBAR?
- 5 What is an OVDP Opt-Out?
- 6 Opt-Out Procedure Basics
- 7 Why Was She Allowed to Appeal?
- 8 The Case May Not Be Over
- 9 Beat the IRS To The Punch to Minimize FBAR Penalties
- 10 Safely Get Into IRS Offshore Compliance
- 11 Golding & Golding, A PLC
While the Court upheld a non-willful FBAR Penalty on a per account basis, it is important to note it is based on a very specific fact pattern.
The IRS can Issue an Annual $10,000 Per Account FBAR Non-Willful Penalty
The taxpayer was not just audited in her everyday life and held to a per account basis.
Taxpayer had entered OVDP (prior to Streamlined Domestic Offshore Procedures were available)
Rather, the Taxpayer OPTED OUT of an OVDP and found to have acted non-willful. If she was willful, she may have been hit with presumably much higher Willful Penalties, Instead, she received non-willful penalties — which is still a win.
Case: Boyd (No. 2:18-cv-00803)
In 2012, Boyd submitted an application to participate in the Internal Revenue Service’s (“IRS”) Offshore Voluntary Disclosure Program (“OVDP”), an IRS initiative intended to provide a predictable and uniform penalty structure for taxpayers who wished to voluntarily report previously undisclosed offshore financial accounts. (Plaintiff’s UF No. 10).
Boyd was accepted into the OVDP and submitted, in October of 2012, a delinquent FBAR for the 2010 calendar year. (Id. No. 11).
Around the same time, Boyd amended her 2010 federal income tax return to reflect the interest and dividends she received from the U.K. accounts. (Id. No. 12). In March of 2014, Boyd requested to opt out of the OVDP. (Id. No. 13).
The IRS agreed to allow Boyd to opt out of the OVDP. (Id. No. 14). Opting out of the OVDP meant that the IRS would examine Boyd’s income tax returns for the years for which no FBAR was submitted. (Id. No. 15).
In addition, the IRS would determine whether to assert FBAR penalties against Boyd. (Id. No. 16).
The IRS eventually concluded that Boyd had committed thirteen FBAR violations but that she had not violated her reporting requirements willfully.
What are Willful Penalties for FBAR?
As provided by the IRS:
126.96.36.199.5 – Penalty for Willful FBAR Violations
– The penalty for willful FBAR violations may be imposed on any person who willfully violates or causes any violation of any provisions of 31 USC 5314 (the FBAR filing and recordkeeping requirements). 31 USC 5321(a)(5)(C).
– The penalty applies to individuals as well as financial institutions and nonfinancial trades or businesses for all years.
– For violations occurring after October 22, 2004, the statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation.
– There may be both a reporting and a recordkeeping violation regarding each account.
– The date of a violation for failure to timely file an FBAR is the end of the day on June 30th of the year following the calendar year for which the accounts are being reported. This date is the last possible day for filing the FBAR so that the close of the day with no filed FBAR represents the first time that a violation occurred. The balance in the account at the close of June 30th is the amount to use in calculating the filing violation.
– The date of a violation for failure to keep records is the date the examiner first requests records. The balance in the account at the close of the day that the records are first requested is the amount used in calculating the recordkeeping violation penalty. The date of the violation is tied to the date of the request, and not a later date, to assure the taxpayer is unable to manipulate the amount in the account after receiving a request for records. The balance in the account at the close of the day on which the records are first requested is the amount to use in calculating the penalty for failing to keep records as required by statute.
– IRS developed guidelines for the exercise of the examiner’s discretion in arriving at the amount of a penalty for a willful violation. See discussion of mitigation, below.
What are Non-Willful Penalties for FBAR?
As provided by the IRS:
– For violations occurring after October 22, 2004, a penalty, not to exceed $10,000 per violation, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements. 31 USC 5321(a)(5)(B).
– The penalty should not be imposed if:
– The violation was due to reasonable cause, and
– The person files any delinquent FBARs and properly reports the previously unreported account.
– Examiners have discretion in determining the penalty amount and should use the mitigation guidelines in making their determinations. See the discussion of the mitigation guidelines below. See Exhibit 4.26.16-1. Examiners should take the facts and circumstances of each case into account when determining if a warning letter or penalties that are less than the mitigation guidelines are appropriate. The purpose of FBAR penalties is to promote compliance with the FBAR reporting and recordkeeping requirements.
After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate.
For multiple years with nonwillful violations, examiners may determine that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a single penalty, not to exceed $10,000, for one year only.
For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a separate penalty for each account and for each year. The examiner’s workpapers must support such a penalty determination and document the group manager’s approval.
In no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.
What is an OVDP Opt-Out?
The OVDP Opt-out is an approved method for trying to obtain a reduced OVDP Penalty if you are already within the IRS Offshore Voluntary Disclosure Program (especially if you do not qualify for Transitional Treatment).
Despite the fact that the IRS will not negotiate the value of the penalty if you are planning on signing the Closing Letter (906), if you decide to Opt-Out of the traditional OVDP Penalty Structure — you may be able to significantly reduce the IRS OVDP Penalty.
IRS OVDP Opt-Out Procedures for FBAR and/or FATCA Form 8938 Penalties can be a risky proposition – but for some people “Opting-Out” of the established OVDP penalty structure is the only way to get a fair penalty issued.
OVDP Opt-Out Summary
The opt-out procedure has become less common ever since the Internal Revenue Service and Department of Treasury introduced the modified Streamlined Offshore Disclosure Program for non-willful applicants. Nevertheless, for those who may have not heard of the streamlined program, do not qualify for the streamlined program, or did not transition into the streamlined program from OVDP — opting out is the only option to try to reduce penalties.
For some people, the Offshore Voluntary Disclosure Program is a get out of jail free card. It is an opportunity for individuals, estates, and businesses who knowingly/willfully failed to disclose and report foreign accounts and offshore income to come-clean, with little chance of IRS prosecution.
Nevertheless, the penalty structure behind OVDP is so intense that for individuals who may be on the cusp of willful or non-willful – but enter OVDP anyway – the OVDP penalty structure may prove to be too much.
For example, if a person had $1 million overseas that was unreported in a non-bad bank and only generated $10,000 a year in income, the person would still have a minimum FBAR penalty of $275,000; if it was in a “Bad Bank” the penalty would be $500,000.
Opt-Out Procedure Basics
OVDP FAQ 49 Question
If the taxpayer and the IRS cannot agree to the terms of the OVDP closing agreement, will mediation with Appeals be an option with respect to the terms of the closing agreement?
OVDP FAQ 49 Answer:
No. The penalty framework for offshore voluntary disclosure and the agreement to limit tax exposure to an eight year period are nonnegotiable terms under the OVDP. If any part of the closing agreement is unacceptable to the taxpayer, the taxpayer may opt out and the case will be examined and all applicable penalties will be imposed (see FAQ 51).
After a full examination, any tax and penalties imposed by the Service may be appealed, but the Service’s decision on the terms of the OVDP closing agreement may not be appealed.
Why Was She Allowed to Appeal?
As provided by the IRS:
After a full examination, any tax and penalties imposed by the Service may be appealed,
The Case May Not Be Over
Boyd still has the opportunity to appeal the matter, and with the IRS FBAR Penalty court rulings all over the board, she may still be able to successfully avoid the penalties.
Beat the IRS To The Punch to Minimize FBAR Penalties
Whether it is because you did not you had to report foreign accounts, thought you were below the threshold for filing, did not realize non-bank accounts were required to be reported, and/or have other unreported income, accounts, investments or assets – we can help.
Safely Get Into IRS Offshore Compliance
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
Golding & Golding, A PLC
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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.