Non-Willful FBAR Penalty

Non-Willful FBAR Penalty: Understanding how the IRS issues a non-willful FBAR penalty(s) can be complex. In recent years, the IRS has taken an aggressive position towards foreign accounts compliance. When a U.S. person has not properly reported their offshore accounts, assets, investments or income, they may be subject to FBAR Penalties.

The main determining factor is whether the taxpayer is found to be non-willful vs. willful.

In order to reduce penalties, the Internal Revenue Service has developed FBAR Amnesty. The FBAR amnesty programs are collectively referred to as Voluntary Disclosure, and the main programs, include:

Non-Willful FBAR Penalties: 2020 IRS Enforcement Update

Non-Willful FBAR Penalties: 2020 IRS Enforcement Update

The IRS non-willful FBAR penalty can be severe.

In one recent case, the court went so far as to confirm that a non-willful FBAR Penalty in which the IRS issued penalties on 13 out of 14 accounts (in a single year) was not unreasonable — noting that the matter may be appealed, and the facts were a bit “case specific.”

Not all FBAR Penalties are the same. Sometimes, the IRS penalties for unfiled or late FBARs are bad, and sometimes, well…they’re not so bad. You may even receive a Warning Letter in Lieu of Penalty. It jut depends on the different facts and circumstances of your situation

FBAR Penalties can be Civil or Criminal. They can then be broken down further, but the threshold question, is whether the IRS will get you for Civil (money) or Criminal (money, and worse).

IRS Non-Willful Definition

The difference between willful and non-willful has not fully been vetted and defined by the IRS.

It is a ‘Totality of the Circumstances‘ test based on whether or not your specific facts and circumstances reflect that you knew, or should have known that you were required to disclose and report your foreign accounts and offshore income — and made the decision not to disclose.

Generally, if a person was unaware that there was a foreign account/foreign income/foreign asset reporting requirement, the client begins in the “non-willful” category, but more analysis is needed.

How to Evaluate if you were Non-Willful

  • What is your U.S. status?
  • How long have you been in the United States for?
  • How many years have you filed U.S. tax returns?
  • What types of investments do you have overseas?
  • Do you utilize a financial planner?
  • Do you have a CPA or EA?
  • Is your CPA or EA experienced in international tax?
  • Did your CPA or EA send you questions in writing asking about Foreign Accounts or Income?
  • Did you respond truthful to the CPA or EA?
  • Did you complete a schedule B?
  • Are you tax compliant in the country in which the accounts are maintained?
  • Did you have unreported income as well?

Civil Penalties Non-Willful (and Willful) 

Civil FBAR Penalties are limited to monetary penalties. A civil FBAR Penalty is a penalty that is focused on monetary fines or warning letters (waivers) — without any risk of criminal investigation or prosecution.

U.S. Code citation Civil Monetary Penalty Description Current Maximum
31 U.S.C. 5321(a)(5)(B)(i) Foreign Financial Agency Transaction – Non-Willful Violation of Transaction $12,921
31 U.S.C. 5321(a)(5)(C) Foreign Financial Agency Transaction – Willful Violation of Transaction Greater of $129,210, or 50% of the amount per 31 U.S.C.5321(a)(5)(D)
31 U.S.C. 5321(a)(6)(A) Negligent Violation by Financial Institution or Non-Financial Trade or Business $1,118
31 U.S.C. 5321(a)(6)(B) Pattern of Negligent Activity by Financial Institution or Non-Financial Trade or Business $86,976

Penalties for Civil FBAR can be Broken down into two (2) categories:

  • Willful Violations
  • Non-Willful Violations

Non-Willful FBAR Penalty Violations

These FBAR Penalties are typically the least severe penalties. An FBAR non-willful penalty is a “lower-level” penalty for not filing the FBAR. The non-willful penalties can be high, BUT, typically they are not as high as willful penalties.

Willful FBAR Penalty Violations

The Willful FBAR Penalty is typically more severe. An FBAR Willful Penalty is penalty for acting willful, willfully blind, or with reckless disregard in not filing the FBAR. We have provided detailed explanations and analyses in our free International Tax Law library about these different terms, and what they mean.

Criminal Penalties

Criminal FBAR Penalties may include monetary penalties and incarceration. This is when the IRS refers the matter to the Department of Justice (DOJ) or other 3 letter government faction for criminal investigation and possible prosecution. These are not very common, but unfortunately they are on the rise.

U.S. Code citation Criminal Violation & Description Criminal Penalty
31 C.F.R. §103.59(b) Willful – Failure to File FBAR or retain records of account Up to $250,000 or 5 years or both
31 C.F.R. §103.59(c) Willful – Failure to File FBAR or retain records of account while violating certain other laws Up to $500,000 or 10 years or both
31 C.F.R. §103.59(c)  Knowingly and Willfully Filing False FBAR $10,000 or 5 years or both
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d). See Statutes See Statutes

A few important considerations:

  • Most courts have held that the maximum annual FBAR willful penalty is not limited to $100,000.
  • If the court believes you acted with Reckless Disregard, they can still penalize you full Willful FBAR Penalties.
  • If the court believes you acted with Willful Blindness, they can still penalize you full Willful FBAR Penalties.
  • Even in a non-willful setting, the court can issue $10,000 per account, per year penalty

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