I have been Assessed an FBAR Penalty by IRS (How to Navigate)

I Have Been Assessed an FBAR Penalty by IRS (How to Navigate)

I Have Been Assessed an FBAR Penalty by IRS  

The FBAR form refers to Foreign Bank and Financial Account Reporting Form (aka FinCEN Form 114).  Even though the Internal Revenue Service is tasked with enforcement of FBAR non-compliance, the FBAR is not an IRS tax form. As a result, the enforcement procedures for an FBAR-assessed penalty are different than other types of tax penalties. If you have been assessed an FBAR penalty, you have various options available and opportunities to dispute the penalty (although unfortunately, US Tax Court is not usually an option). While it can be tough to navigate a response to an FBAR-assessed (or pre-assessed) penalty — we are here to help you through the FBAR labyrinth.

FBAR Warning Letter (Letter 3800)

For those taxpayers who tend to be luckier than other taxpayers, they may receive an FBAR warning letter instead of a notice of a proposed FBAR penalty. The warning letter arrives by way of an IRS Letter 3800 and essentially warns the taxpayer about noncompliance — without proposing any penalties against the taxpayer. These have become less common as the IRS has significantly increased enforcement for missed FBAR reporting.

Letter 4265: FBAR Appointment Letter Form

Sometimes taxpayers will first receive an IRS Letter 4265 about scheduling an FBAR Audit or Examination. While the number of warning letters has been on the decline, the number of IRS FBAR audits has significantly increased over the past few years. When a taxpayer receives an IRS Letter 4265, it is important that they take the matter very seriously because this is the taxpayer’s opportunity to try to sidestep a potential FBAR penalty. 

IRM 4.26.17.3.3 FBAR Examination – Initial Contact 

      • The examiner should notify the filer that an FBAR examination has started and document that notification in the Examiner’s Activity Record. Written notification is advised using Letter 4265, FBAR Appointment Letter, mailed to the filer’s last known address.

Before FBAR Penalty Is Assessed

Before the penalty is assessed — but while it is looming — the Taxpayer may receive a Letter 3709.

Letter 3709: FBAR 30-Day Letter (Proposed Assessment)

The IRS letter 3709 comes before the letter 3708 and has very important timing implications because Letter 3709 is a proposed assessment whereas Letter 3708 is a post-assessment letter. As with anything in life, it is easier to try to avoid a penalty than it is to remove or abate the penalty.

Here is some common language from an IRS Letter 3709:

      • “We are proposing a penalty for violating the reporting or record-keeping requirements relating to accounts you maintain with financial institutions overseas. Below are paragraphs describing related penalties. We have check-marked the box alongside the paragraph(s) describing the penalty that applies to you.

      • Please review this proposed assessment and let us know whether or not you agree by following the directions provided toward the end of this letter.”

Disagree With Letter 3709?

When you disagree with Letter 3709, you have the opportunity to request an appeals conference in order to try to avoid the penalty. One very important aspect of the FBAR penalty appeal is that you only get one opportunity for an FBAR appeal  — whether it is before the penalty is assessed or after the penalty is assessed. Since you do not have the opportunity to litigate the FBAR penalty in tax court, you have to very carefully evaluate the timing issues and what your follow-up plan will be if your appeal was denied.

Here is some additional language from an IRS Letter 3709 regarding an appeal:

      • “If you do not agree to the assessment and collection of the proposed penalty or penalties, you can request a conference with our Appeals Office.

      • To do so, forward a written protest in duplicate before the designated response date, which is listed in the header of this letter, and mail it to the revenue agent indicated above.”

Only One Opportunity for an FBAR Appeal

As mentioned above, it is important to note you only get one opportunity for an appeal.

As provided by the IRM:

      • A taxpayer is afforded only one administrative appeal on FBAR cases, whether it is pre-assessed (penalties were not assessed prior to coming to Appeals) or post-assessed.

      • The U.S. government has 2 years from the date of assessment to file civil suit to collect the FBAR penalty. (31 U.S.C. § 5321(b)(2)).

Letter 3708: Notice and Demand for Payment of FBAR Penalty

If you have not yet requested an appeal, you would receive Letter 3708. If you receive an IRS Letter 3708 and have not already undergone an appeal (in response to a 3709 Letter), you would have the opportunity to seek an appeal at this time.

Letter 3708-A: Notice for Demand and Payment of FBAR Penalty after Appeal Denial

If you requested an appeal and it is denied, then you will receive a Letter 3708-A. At this point, you are limited on options because the penalty has now been assessed and your appeal has already been rejected.

Form 13448, Penalty Assessments Certification Summary

For statutory purposes, the assessment date commences from the date of Form 13448. Generally, the US Government has two years from the date of the assessment to initiate a civil action on FBAR penalties. If you are considering litigating the FBAR penalty then this letter is very important because it starts the countdown for when the IRS can initiate a civil action — which would be handled in federal court. It is also important to determine whether you prefer to be on the offensive and choose your forum or whether you are content on being on the defensive and defending (and possibly cross-complaining) against the US government.

Litigating an Assessed FBAR Penalty

It is important to note that taxpayers cannot generally litigate FBAR penalties in tax court – where taxpayers have the opportunity to file a tax court petition without prepaying the debt as is generally required in tax litigation cases (aka Flora Rule). But, a recent court case (Mendu) allowed the taxpayer to pursue a federal case against the US government for FBAR penalties without first pre-paying the amount due under the Flora Rule. The Court took the position that if taxpayers cannot pursue litigation in US Tax Court since an FBAR violation is not a ‘tax’ per se, then the inverse is true as well and the IRS cannot require prepayment to litigate in Federal Court — since an FBAR violation is technically not a tax debt.

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 that specializes exclusively in these types of offshore disclosure matters.

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