Annual Non-Willful “Per Account” FBAR Penalties May Exceed $10K
- 1 IRS Not Limited to $10,000 Annual Non-Willful FBAR Penalty
- 2 Background — U.S. Person with U.K. Accounts
- 3 *Special Fact – Taxpayer Entered and Opted-Out of OVDP
- 4 What are Willful Penalties for FBAR?
- 5 What are Non-Willful Penalties for FBAR?
- 6 What is an OVDP Opt-Out?
- 7 Opt-Out Procedure Basics
- 8 Why Was She Allowed to Appeal?
- 9 The Case May Not Be Over
- 10 What if I am Out of Offshore Disclosure Compliance?
- 11 What Should You Do?
- 12 5 Common International IRS Forms You May Have to File
- 13 FBAR (FinCEN 114)
- 14 Form 8938
- 15 Form 3520
- 16 Form 5471
- 17 Form 8621
- 18 4 Types of IRS Voluntary Disclosure Programs
- 19 How do Attorney’s Fees for Offshore Disclosure Work?
Annual Non-Willful “Per Account” FBAR Penalties May Exceed $10K
Court Ruling: Non-Willful “Per Account” Aggregate Penalty is not 10K: Our Board Certified Tax Law Specialist Team explains Non-Willful penalties.
IRS Not Limited to $10,000 Annual Non-Willful FBAR Penalty
In this situation, Taxpayer had entered OVDP (prior to the Streamlined Domestic Offshore Procedures becoming available).
And, the Taxpayer OPTED OUT of an OVDP and was found to have acted non-willful.
If she was willful, she may have been hit with presumably much higher Willful Penalties — but instead she received non-willful penalties, which is still a win.
Background — U.S. Person with U.K. Accounts
As provided by Tax Law 360 (David Hansen):
The penalty for failing to file foreign bank account reports is not limited to $10,000 per year, a California district court ruled in upholding nearly $50,000 in penalties imposed by the Internal Revenue Service on a woman for undeclared accounts in the U.K.
The IRS determined that Boyd racked up a total of 13 separate FBAR violations, but said they were non-willful, and calculated she owed $47,279 in penalties. The amount was based on a penalty of 10% of each account balance and $5,000 for accounts exceeding $50,000, according to the order.”
Judge Fitzgerald said the relevant statute, Internal Revenue Code Section 5321 , is ambiguous as to whether the penalty applies to each year or to each account, but decided the IRS’ position was more reasonable. Section 5321 penalizes a taxpayer for each account that is not reported, the judge said. Because Congress chose to use the singular version of account, it is reasonable that it intended for taxpayers to accrue multiple penalties on multiple accounts, he said.
It is unnecessary to determine if the IRS should have mitigated the penalty down to a single fine of $5,000 since it can apply more than one $10,000 penalty per year, the judge added.
*Special Fact – Taxpayer Entered and Opted-Out of OVDP
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:
18.104.22.168.5 – 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.
What if I am Out of Offshore Disclosure Compliance?
If you are out of FBAR compliance, the penalties can be severe. Therefore, you may consider entering the IRS offshore voluntary disclosure/tax amnesty, before it is too late.
What Should You Do?
Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.
5 Common International IRS Forms You May Have to File
The following is a list of the more common forms you may have missed:
FBAR (FinCEN 114)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:.
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,076.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
How do Attorney’s Fees for Offshore Disclosure Work?
Learn about how experienced and reputable specialist (your Offshore Disclosure Attorney should be a Board Certified Tax Law Specialist) charge attorney and tax preparation fees.
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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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)