Golding & Golding specializes in FATCA and FBAR Penalty Mitigation and Avoidance. With FBAR Mitigation, our specialist team works to limit and avoid FBAR penalties.
What is FBAR Penalty Mitigation?
FBAR penalty mitigation is used when a person has been assessed FBAR penalties — whether it is pre-assessment or post-assessment enforcement (although the strategies are different)
IRM 4.26 (Internal Revenue Manual)
The procedures for seeking FBAR penalty mitigation is set forth in IRM 4.26.16, provided below)
The Bank Secrecy Act (BSA) allows the Secretary of the Treasury some discretion in determining the amount of penalties for violations of the FBAR reporting and record keeping requirements. There is a penalty ceiling but no minimum amount. This discretion has been delegated to the FBAR examiner.
- The examiner may determine that the facts and circumstances of a particular case do not justify a penalty.
- If there was an FBAR violation but no penalty is appropriate, the examiner must issue the FBAR warning letter, Letter 3800.
When a penalty is appropriate, IRS established penalty mitigation guidelines to ensure the penalties determined by the examiner’s discretion are uniform. The examiner may determine that:
- A penalty under these guidelines is not appropriate, or
- A lesser amount than the guidelines otherwise provide is appropriate.
The examiner must make this determination with the written approval of that examiner’s manager.
The examiner’s workpapers must document the circumstances that make mitigation of the penalty under these guidelines appropriate. When determining the proper penalty amount, the examiner should keep in mind that manager approval is required to assert more than one $10,000 non-willful penalty per year, and in no event can the aggregate non-willful penalties asserted exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue.
Similarly, manager approval is required to assert willful penalties that, in the aggregate, exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue, and in no event can the aggregate willful penalties exceed 100% of the highest aggregate balance of all accounts to which the violations relate during the years at issue.
Two Common Examples of FBAR Penalties
The IRS has the authority to penalize you upwards of $10,000 per violation, per account for violations that were non-willful. In other words, if you didn’t even know you were supposed to file the form and report your annual maximum balance on an FBAR statement, the IRS can still penalize you upwards of $10,000 per account, per year.
Sounds absurd, right?
Take this Example: David is a Legal Permanent Resident (Green Card recipient) who relocated to the United States for work when he was 42 years old. David was transferred by his company to the United States initially on an L-1 visa due to his proficiency in science and management. David earned several million dollars during the first 20 years of his career, which he staggered over seven different accounts. These accounts earn about $50,000 in year in passive income.
Under the current state of the law, David could be penalized upwards of $70,000 per year for the six years of unreported FBARs – that is a whopping $420,000 penalty solely because he was unaware of the rule. He will also have to pay taxes, fines and penalties on the unreported income — along with additional fines for unreported FATCA form 8938.
If the IRS reserves the power to penalize you $10,000 per violation, per account, per year for a non-willful violation – would you like to take a guess at what the penalty would be if they think you were fraudulent?
Answer: The penalty can reach $100,000 or 50% of the account value – whichever is greater.
Therefore, in a multiyear audit, you could easily be penalized 100% value of the account balances. But, at least you can take some solace in the fact that the IRS has reduced the maximum penalty from 300% down to 100%. In other words, using the six-year statute of limitations explained above, in prior years, the IRS could penalize you 300% value (50% per year, for a total of six years). How to Qualify for FBAR Penalty Mitigation
FBAR penalty mitigation has 4 elements or “requirements”:
A. The person has no history of criminal tax or BSA convictions for the preceding 10 years and has no history of prior FBAR penalty assessments.
B. No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.
C. The person cooperated during the examination.
D. IRS did not determine a fraud penalty against the person for an underpayment of income tax for the year in question due to the failure to report income related to any amount in a foreign account.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance with getting compliant.