IRS Factors for Issuing Unreported Foreign Account Penalties (2018)
- 1 Foreign Account Penalties (FinCEN 114)
- 2 4 Civil Penalties for FBAR Violations
- 3 Practice Pointer: The June 30th Day is Outdated
- 4 Practice Pointer: Reasonable Cause and Filing Past FBARs
- 5 Practice Pointer: The $10,000 “FinCen 114 is Outdated”
- 6 Recommended Penalties – Nonwillful Violations
- 7 Penalty for Willful FBAR Violations
- 8 Willful Penalty Mitigation
- 9 Mitigation Threshold Conditions
- 10 Be Proactive – IRS Offshore Voluntary Disclosure
- 11 Golding & Golding, A PLC
IRS Factors for Issuing Unreported Foreign Account Penalties (2018)
As tax filing season begins, many people are beginning to feel overwhelmed and scared – especially on issues involving unreported/undisclosed foreign account penalties.
Oftentimes, the information that you read published online is garbage. These websites will lead you to believe that merely because you have undisclosed foreign accounts, it means you’re going to jail for five (5) years.
How come these same sites don’t also tell you that if you have no unreported income, you may avoid all offshore disclosure and simply submit FBARs or other informational returns under the “delinquent international informational return procedures” to report the foreign accounts?
Foreign Account Penalties (FinCEN 114)
Unfortunately, some individuals will get hit with the penalties for failing to properly report foreign accounts. These penalties can range anywhere from warning letter in lieu of penalty all the way up to 100% penalty in a multiyear audit situation, in which the person is found to be willful (which is not common)
Essentially, undisclosed foreign account penalties are like the wild West of the IRS. With that said, while the IRS will not tell you exactly how they were determined each person’s penalty calculation, they will provide you some idea of how the penalties are assessed.
The following is a breakdown summary from information published by the IRS:
4 Civil Penalties for FBAR Violations
Here are four civil penalties available for FBAR violations:
– 31 USC 5321(a)(6)(A).
– Pattern of negligent activity. 31 USC 5321(a)(6)(B).
– Penalty for non-willful violation. 31 USC 5321(a)(5)(A) and (B).
*Note: Although the term “non-willful” is not used in the statute, we use it to distinguish this penalty from the penalty for willful violations.
– Penalty for willful violations. 31 USC 5321(a)(5)(C).
A filing violation occurs at the end of the day on June 30th of the year following the calendar year to be reported (the due date for filing the FBAR). A recordkeeping violation occurs on the date when the records are requested by the IRS examiner if the records are not provided. A civil money penalty may be imposed for an FBAR violation even if a criminal penalty is imposed for the same violation. 31 USC 5321(d).
Practice Pointer: The June 30th Day is Outdated
It is important to note that until 2017 (when tax year 2016 FinCen 114 reporting was due), the due date for reporting foreign accounts was June 30. Currently, the reporting date is the same date as your tax return due date – and typically the IRS issues automatic extensions so that it is not due until the last day to file your tax return on extension is due (October if you reside in the U.S.0 – but you need to check this each year.
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.
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.
Practice Pointer: Reasonable Cause and Filing Past FBARs
This is a very important point. There is a case, Jarnagin, in which the court upheld penalties in a situation in which the individuals received bad advice from their CPA. Essentially, the CPA was not aware of the specific requirements and the court held that taxpayers cannot rely on an uninformed CPA for not filing.
Many people took this to mean that you can no longer rely on reasonable cause to get out of penalties, but as of now that is incorrect. What is important to note from that case is that the court mentioned that the main reason that the Court would not consider reasonable cause was because Jarnagin never went back to file the old FBARs.
Therefore, if you are making a reasonable cause submission, please note you still have to file the late/old FBAR(s).
Practice Pointer: The $10,000 “FinCen 114 is Outdated”
As provided by the IRS: For penalties that are assessed after August 1, 2016, whose associated violations occurred after November 2,2015, the IRS may assess an inflation-adjusted civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause.
Recommended Penalties – Nonwillful Violations
– 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.
Penalty for Willful FBAR Violations
– For violations occurring after October 22, 2004, a penalty for a willful FBAR violation may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation, 31 USC 5321(a)(5)(C). For cases involving willful violations over multiple years, examiners may recommend a penalty for each year for which the FBAR violation was willful.
– After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year.
Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate
– Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner’s workpapers must support all willful penalty determinations and document the group manager’s approval.
– If an account is co-owned by more than one person, a penalty determination must be made separately for each co-owner. The penalty against each co-owner will be based on his her percentage of ownership of the highest balance in the account. If the examiner cannot determine each owner’s percentage of ownership, the highest balance will be divided equally among each of the co-owners.
Willful Penalty Mitigation
The statutory penalty computation provides a ceiling on the FBAR penalty. The actual amount of the penalty is left to the discretion of the examiner. IRS has adopted mitigation guidelines to promote consistency by IRS employees in exercising this discretion for similarly situated persons. Exhibit 4.26.16-1.
Mitigation Threshold Conditions
For most FBAR cases, if IRS has determined that if a person meets four threshold conditions, then that person may be subject to less than the maximum FBAR penalty depending on the amounts in the accounts.
For violations occurring after October 22, 2004, the four threshold conditions are:
-The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as no history of past FBAR penalty assessments.
-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.
-The person cooperated during the examination (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews; and the taxpayer back-filed correct reports).
-IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.
Be Proactive – IRS Offshore Voluntary Disclosure
If you are out of compliance for one or more years, you may consider entering one of the IRS offshore voluntary disclosure programs, or making a reasonable cause submission before it is too late.
Once you are under audit or examination by the IRS you can no longer submit to the program. In addition, with more than 110 countries and more than 300,000 foreign financial institutions proactively reporting account holder information to the IRS under FATCA, the window for submission maybe closing soon.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
- Learn more about the Board-Certified Tax Law Specialist credential
- Learn more about Golding & Golding’s Case Accomplishments
- Learn more about Golding & Golding Testimonials from prior clients
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.