FBAR Penalty Waiver – Warning Letter 3800 in Lieu of IRS Penalties
By this time, you probably relived that there is such a thing as Penalty Waiver, and you may qualify for it.
- 1 FBAR Penalty Waiver
- 2 FBAR Letter 3800? (Penalty Warning)
- 3 What is Non-Willful?
- 4 When is an FBAR Letter 3800 Issued?
- 5 Did you Have to File an FBAR?
- 6 Step 1 – Are you a U.S. Person?
- 7 Step 2 – Do You Meet the Threshold Requirements?
- 8 Step 3 – Identify What is an Account
- 9 Step 4 – How Many Accounts Do You Have?
- 10 Step 5 – What is Your relationship to the Account?
- 11 Step 6 – Categorize the Different Accounts
- 12 Step 7 – Determine the Maximum Balance
- 13 Step 8 – Use the Exchange Rate
- 14 Step 9 – Complete the FBAR
- 15 Step 10 – Filing a Late FBAR(s)
- 16 Golding & Golding: About our International Tax Law Firm
FBAR Penalty Waiver
If you have an FBAR Filing requirement, but are FBAR Non-Compliant, you may be penalized. Unfortunately, the penalties for FBAR can be drastic. Therefore, if you are out of FBAR compliance and facing Foreign Account penalties — you may qualify for an FBAR Penalty Waiver.
FBAR Letter 3800? (Penalty Warning)
An FBAR Letter 3800 is issued when the IRS has determined that you are out of compliance in reporting your foreign accounts, but the IRS will take mercy on you, and not issue penalties against you; rather, the IRS issues a “Warning Letter in Lieu of Penalties (aka FBAR Letter 3800).
In order to obtain an FBAR Letter 3800 (warning letter in lieu of penalty) it is important that the taxpayer’s attorney submit a convincing statement to the IRS — that your failure to comply was non-willful.
What is Non-Willful?
There is no bright-line test to determine willfulness.
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 Analyze Willful vs. 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?
When is an FBAR Letter 3800 Issued?
When the 3800 letters issued, it is not because the IRS determined there were no violations (sorry for the double negative). Rather, it is because even though the IRS determined there were violations, they decided to take mercy on you and waive the penalties.
As provided by the Internal Revenue Service:
The examiner may, after discussion with the group manager, issue an FBAR Warning letter, Letter 3800, if there is a violation of the FBAR requirements but no penalty is being asserted.
– The examiner may determine that there was a violation but that penalties are not warranted in view of the facts and circumstances of the case.
– A Letter 3800 is also issued when there is evidence of a negligent violation by an individual (not a business) prior to October 23, 2004.
– Letter 3800 is not used in Last Chance Compliance Initiative (LCCI) cases for the years when the FBAR penalties are forgiven as a part of the LCCI agreement.
If Letter 3800 is issued, the closing procedures are:
– The examiner will issue Letter 3800 and a copy to the person apparently in violation of the FBAR requirements and retain a copy in the file.
– This person will return any delinquent or corrected FBAR(s) and a copy of the warning letter to the examiner.
– Delinquent forms will be processed in accordance with instructions in this chapter. See IRM 18.104.22.168.8.
– The examiner will also complete a summary memorandum and FBAR Monitoring Document (FMD) and close the FBAR case file to the group manager.
The group manager will:
– Review the FBAR case file for both technical and procedural issues and note this on the activity record.
– Indicate on the FMD the date closed from the group.
– Forward on a 3210 the FBAR file to Internal Revenue Service, P.O. Box 33113, Detroit, MI 48232-0113.
Detroit Computing Center (DCC) will:
– Enter the information from the FMD into the FBAR database.
– Note on the FBAR database when a follow-up FBAR examination is needed.
– Remove the original FBARs for entry on CBRS and retention in the Federal Records System.
– Place the case file in the FBAR historic files.
Did you Have to File an FBAR?
The summary is basic, and there are many other factors that may impact your specific filing, especially if it is a late filing.
Step 1 – Are you a U.S. Person?
The form must be filed by U.S. persons. In order to confuse you, the IRS does not define US person to mean the same as U.S. Citizen. A US person typically falls into three categories: U.S. Citizen, Legal Permanent Resident, Foreign National who meets the IRS Substantial Presence Test (typically individuals on H-1B Visa, L-1 Visas, and E-2 Visas – although it is not a requirement to have one of these Visas).
If you are a US person, then you move on to step two.
Step 2 – Do You Meet the Threshold Requirements?
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 that total amount exceed 10,000? If it does, then you 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.
Step 3 – Identify What is an Account
This is one of the more difficult parts of the job. That is because when a person thinks of financial accounts, they typically think of a “Bank Account.” It makes sense, since the word “Bank” is included directly in the FBAR definition. Therefore, many people (understandably so) will only focus just on bank accounts. Unfortunately, you have to include all financial accounts unless it is otherwise excluded (and there are only a few exclusions).
Some examples of other accounts include:
- Stock accounts that have an Account Number
- Private Pension Accounts
- Investment Accounts
- Foreign Mutual Funds and ETF Accounts
- Foreign Life Insurance that has a Surrender Value
Step 4 – How Many Accounts Do You Have?
This is an important question, because if you have more than 25 accounts then you do not have to list all of the accounts on the actual form. Rather, you maintain your own records so that the IRS contacts you on a future date, you will have that information available.
Like most people, if you have less than 25 accounts then you would report all the accounts on the FBAR. It does not matter if your account has a zero balance, and it does not matter if the account was “dormant.” If the account is open and you are listed on the account, you have to report it.
Step 5 – What is Your relationship to the Account?
There are different sections of the FBAR. The sections are broken down into three main categories, which include ownership of the Account, co-ownership or joint ownership of the account, and signature authority and/or no monetary interest in the account.
The latter category typically includes people who may have been included on the account in emergency when a parent or elderly individual is getting on age. Also, if you are an employee and you have signature authority, that is included as well.
Step 6 – Categorize the Different Accounts
It is important that you prepare separate categories to identify each different type of account. That is to make sure that, for example, you do not report an account you have signature authority in this section that is labeled account ownership, because then the IRS and U.S. government will believe that the money listed is your own money — as opposed to money for which you may have no ownership over.
Step 7 – Determine the Maximum Balance
You are not required to search for the holy Grail of maximum balances. In other words, you should do the best you can. If you have bank statements for each month, then you would use each month statement to determine what the maximum value is. Likewise, if you have a passport account passbook account and you only get it updated when you enter the bank, then you will have to use the best value you can.
Thereafter, make sure you have identified the maximum balance available for each account.
Step 8 – Use the Exchange Rate
You are not required to use any specific exchange rate, but it has to be reasonable. Both the Department of Treasury and the IRS each publish their own annual exchange rates and feasibly, either exchange-rate would be okay to use.
It is important to make sure that you use the respective exchange rate for the year at issue. Sorry for those of you with euros, rupees or rubles who want to use current exchange rates for prior years.
If you are submitting to one of the offshore disclosure programs or a reasonable cause statement and have to go back six years, then you will have to use the rate that was available six years ago and not today’s rate for filing prior forms.
Step 9 – Complete the FBAR
The FBAR is a relatively simple from a preparation standpoint. In other words, for each account, you will identify the name of the institution, the address and the maximum balance. There’s not much more needed beyond this information.
If you are unable to access the maximum balance or even come up with your best estimate, you can mark off maximum balance unknown for each account of which this is applicable.
Keeping in mind, that the more you marked off “maximum balance unknown” the higher the chance that the FBAR might be further scrutinized. If you are in this type of situation, please be sure to speak with an experienced Offshore Disclosure Lawyer first.
Step 10 – Filing a Late FBAR(s)
At our International Tax Law Firm (Golding & Golding), offshore disclosure is all we do, and this includes Late FBAR Filings, and FATCA Compliance.
Filing a late FBAR outside of the offshore disclosure programs is typically considered a Quiet Disclosure and can land you in some real trouble. If you happen to have zero unreported income (that means zero unreported income from abroad and not zero tax liability) you may be able to qualify for the delinquency procedures, which results in a penalty waiver and a relatively simple submission procedure.
If you have any unreported income, you can still make a reasonable cause submission but it is different. Most individuals prefer to enter one of the approved programs such as streamlined filing compliance procedures or traditional OVDP — you may have multiple options available to you.
Depending on which program you qualify for, and/or which program you prefer to enter, you may qualify for reduced penalty for even a penalty waiver.
We do not recommend making any submission to the Internal Revenue Service regarding any foreign or offshore accounts without at least speaking with an experienced offshore disclosure lawyer first to evaluate and assess your facts.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.