The IRS Issues New FBAR Penalty Guidance Memorandum

The IRS Issues New FBAR Penalty Guidance Memorandum

New FBAR Penalty Guidance 2023

As a result of the recent Supreme Court ruling in Bittner, the Internal Revenue Service is limited in the amount of non-willful penalties that it can issue each year. Previously, the IRS could take the position that each missed account within a required FBAR qualifies as a separate Foreign Bank and Financial Account reporting violation. But, as a result of Bittner, the Internal Revenue Service is more limited in the amount of non-willful penalties they can issue — and typically it will be a $10,000 penalty. As a result, the Internal Revenue Service was tasked with updating the Internal Revenue Manual on matters involving FBAR. It is important to keep in mind, that these references are specifically to non-willful penalties and do not refer to willfulness in which the penalty is still 50% maximum value for each unreported account. Let’s look at some of the key provisions of the updated Internal Revenue manual procedures for FBAR penalties.

IRM 4.26.16.5, FBAR Penalties Revise Paragraph (4) 

• • • There may be multiple civil FBAR penalties if more than one person is required to file an FBAR reporting their interest in, or signature or other authority over, an account, such as if a person other than the account owner has signature or other authority over the foreign account.

    • Each person responsible for filing an FBAR reporting the account can be liable for the full amount of the penalty for failing to file an FBAR.

Prior Paragraph (4)

• • • There may be both a reporting and a recordkeeping violation regarding each account. Examiner discretion applies in determining whether to penalize both violations for a single account, but examiners must consult with Counsel before making a final decision to assert penalties for both violations.

IRM 4.26.16.5.4.1, Penalty for Non-willful Violations

Delete paragraphs (1) through (3), Renumber previous paragraph (4) as paragraph (1) and revise to read as follows:

• • • In most cases of non-willful violations, examiners will recommend one $10,000 penalty (adjusted for inflation as described in IRM 4.26.16.5.4(5)) per violation.

    • In ascertaining the penalty amount for non-willful violations (assuming the reasonable cause exception does not apply), examiners should use their discretion to calculate a penalty commensurate with the facts and circumstances of a case. See IRM 4.26.16.5.2.1 for more information about examiner discretion.

    • The provisions in paragraph (4) below apply to this paragraph. 4 Any text marked with a # is Official Use Only Attachment 1, SBSE-04-0723-0034: Revisions to IRM 4.26.16 and IRM 4.26.17 

Renumber previous paragraph (5) as paragraph (2) and revise to read as follows:

• • • The examiner’s workpapers must support each penalty determination and document group manager approval and operating division FBAR Coordinator concurrence.

Renumber previous paragraph (6) as paragraph (3) and revise to read as follows:

• • • Where there are multiple owners of an unreported foreign financial account, examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful. See IRM 4.26.16.5.2 for additional information.

    • Renumber previous paragraph (7) as paragraph (4) and revise to read as follows: In no event will the total amount of the penalties for non-willful violations (among all open years) exceed 50 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate for the years under examination. The “highest aggregate balance” is calculated as described in IRM 4.26.16.1.6.

Prior Paragraphs  1 -7

1. 1. In ascertaining the penalty amount for non-willful violations (assuming the reasonable cause exception does not apply), first determine whether the mitigation criteria in Exhibit 4.26.16-2are met.

   2. If the mitigation criteria are met, make a preliminary penalty calculation using the mitigation guidelines in Exhibit 4.26.16-2, except limit the total mitigated penalties for each year to the statutory maximum for a single non-willful violation. Allocate the total penalty amount for each year among all violations in that year for which a penalty is recommended. This is the penalty amount, unless, in the examiner’s discretion as noted in IRM 4.26.16.5.2.1, the facts and circumstances of a case warrant a different penalty amount. The provisions in paragraph (7) below apply to this paragraph.

   3. If the mitigation criteria are not met, the mitigation guidelines do not apply. Do not make a preliminary penalty calculation using the guidelines in Exhibit 4.26.16-2.

   4. If the mitigation criteria are not met, or are met but the facts and circumstances of a case warrant a different penalty amount than calculated in paragraph (2), examiners will consider, as appropriate:

      • • Asserting penalties, totaling (in each year for which non-willful violations are being penalized) no more than the statutory maximum penalty amount for a single violation, regardless of the number of non-willful violations. Since FBAR penalties are determined under the statute on a per-violation basis, the total penalty amount for each year should be allocated among all non-willful violations for which a penalty is recommended.

        • If asserting penalties computed under subparagraphs (a) and (c) are not warranted, asserting penalties, totaling (for all years for which non-willful violations are being penalized) no more than the statutory maximum penalty amount for a single violation, regardless of the number of non-willful violations. Allocate the total penalty amount among all years for which non-willful violations are being penalized. Since FBAR penalties are determined under the statute on a per-violation basis, the total penalty amount allocated to each year should be further allocated among all non-willful violations for which a penalty is recommended.

        • If asserting penalties computed under subparagraphs (a) and (b) are not appropriate, asserting penalties for each non-willful violation in each open year, with a penalty amount for each violation up to the statutory maximum penalty amount.

        • In determining an appropriate penalty amount, consider the facts and circumstances of the case and apply discretion as appropriate. See IRM 4.26.16.5.2.1for more information about examiner discretion.

        • The provisions in paragraph (7) below apply to this paragraph.

   5. The examiner’s workpapers must support each penalty determination and document the group manager’s approval.

   6. Where there are multiple owners of an unreported foreign financial account, examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful. See IRM 4.26.16.5.2for additional information.

   7. Except in egregious cases, the penalty asserted for an account should not exceed 50 percent of the account’s maximum value during the year (see IRM 4.26.16.2.2.2) in which a penalty is being asserted. In no event will the total amount of the penalties for non-willful violations (among all open years) exceed 50 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate for the years under examination. The “highest aggregate balance” is calculated as described in IRM 4.26.16.1.6.

Same Account, Two Filers, Willful vs Non-Willful

It is important to note that two filers who are each required to report the same account can both be liable for FBAR penalties, with one filer labeled as non-willful penalties and the other filer deemed willful.

As provided in the updated IRM:  

• • • Where there are multiple owners of an unreported foreign financial account, examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful. See IRM 4.26.16.5.2 for additional information.

Willful Violations are Not Impacted by Bitter

It is also important to note, that the ruling in Bittner is limited to non-willful penalties only and does not impact willfulness. Based on this memorandum, the IRS has every in terms of moving forward with issuing her account penalties for willful violations, upwards of 50% maximum value of the unreported account.

• • • “While the Court’s holding pertained only to the calculation of penalties for non-willful reporting violations, the Court noted2: The statute then adds an even more specific rule for a subclass of willful violations-those that involve “a failure to report the existence of an account or any identifying information required to be provided with respect to an account.” In cases like that, the law authorizes the Secretary to impose a maximum penalty of either $100,000 or 50% of the “balance in the account at time of the violation”-whichever is greater. So here, at last, the law does tailor penalties to accounts.” Penalties for willful reporting violations apply per-account and guidance in IRM 4.26.16 regarding the calculation of penalties for willful reporting violations remains unchanged. The Court’s decision does not address FBAR recordkeeping violations.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

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.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.