FBAR Penalty Warning Letter 3800 in Lieu of IRS Penalties
Will the IRS Waive a FBAR Penalty? Sometimes, in certain circumstances the IRS (Internal Revenue Service) may waive the FBAR (FinCEN 114) Penalty. Usually, a FBAR Penalty Waiver will occur when a person has made a proactive Reasonable Cause Submission.
An FBAR is a Report of Foreign Bank and Financial Account. It is a form facilitated by FinCEN (aka Financial Crimes Enforcement Network).
While the failure to timely file a FBAR (Report of Foreign Bank And Financial Account) statement may not seem like much of a big deal (and often times it shouldn’t be)…your outlook may change once you receive notice that the IRS is going to enforce penalties against you (upwards of $10,000, per account, per year)
In fact, you may not have even been aware that you were required to report your foreign accounts, until you receive an FBAR Penalty Notice. If so, and depending on the facts and circumstances of your situation, you may qualify to receive an FBAR Letter 3800 in lieu of penalties.
What is an FBAR Letter 3800?
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?
While the IRS will not provide you a “concrete” definition of non-willfulness, it can essentially be summed up as follows: If you did not know you were required to report your foreign accounts (absent willful blindness or reckless disregard), then you cannot be considered willful. Why? Because in order to be willful you have to have intentionally fail to comply with Tax/Foreign Account reporting rule, and if you were unaware of the requirement to report, then technically you could not be willful.
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 188.8.131.52.8.
– 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.
The Basics of FBAR Reporting – Golding & Golding
Ever since the implementation of FATCA (Foreign Account Tax Compliance Act), FBAR (Report of Foreign Bank and Financial Accounts) reporting has become a major concern for U.S. Taxpayers with foreign accounts.
Golding & Golding are highly-respected International Tax Lawyers and FBAR (Report of Foreign Bank and Financial Account) Lawyers who have represented numerous individuals and businesses with FBAR compliance in accordance with IRS and DOT regulations.
Many unscrupulous law firms, CPAs and Lawyer/CPAs are providing the public with misinformation about the FBAR form in order to try and scare them into retaining these firms for FBAR representation.
Unfortunately, many people and businesses are getting into trouble because they relied upon a tax professional who really has no clue about international tax law or FBAR related experience beyond using Adwords and other marketing ploys to peddle their wares – only to get the client in a serious bind with the federal government.
We are providing you with a Free Summary of the common Frequently Asked Questions regarding questions we have received over the years. While the form itself has a set of instructions and frequently asked questions section, our Frequently Asked Question list is more of “FAQs from the trenches,” in which we will answer questions which are not really provided for by the government.
What is an FBAR Statement?
An FBAR statement is a Report of Foreign Bank and Financial Accounts form. It is electronically filed annually with the Department of the Treasury online. Before this year (2016) the form had to be filed no later than June 30th of the current tax year in order to report the accounts for the prior tax year (File in 2015 to report the 2014 Maximum Account Balances). The law is changing in 2016 which will be applicable in 2017, and will have a April 15, 2017 due date.
Is it more than $10,000 per account, or in Total?
An FBAR is required to be filed when a person or business (explained below) has an annual aggregate total of foreign accounts that exceeds $10,000. It does not matter if all that money is in one account or if a person had 11 accounts with $1000.00 in each account (you get the picture, right?). Once your overseas foreign accounts exceed $10,000, it is now time to report all of the foreign accounts.
Who or What is a U.S. Taxpayer?
This question can get more and more complex depending on who you speak to and what the context of the question is. To that end, if you are either a US citizen, Legal Permanent Resident, or Foreign National Subject to US tax such as a visa holder (if you meet the Substantial Presence Test), then you should most likely file the annual FBAR form.
*If you are unsure whether you should file the form or not, you should speak with an experienced by lawyer to evaluate your particular situation.
I did Not have to File a Tax Return?
This can also get confusing, but it is important to remember that the FBAR is not filed with your tax return. Rather, while your tax return is filed directly with the Internal Revenue Service (by mail or online), your FBAR is filed online electronically directly with the Department of Treasury. Even if you do not meet the threshold requirements for filing a tax return, it does not mean you do not have to file an FBAR. If your annual foreign account balances exceed $10,000, you should file the FBAR.
The Money in the Foreign Accounts is not Mine?
This is not unusual. It is very common in foreign countries to have children or other individuals with a Power of Attorney over another person’s account – even when the money does not belong to the POA holder. To that end, if a person’s name is on the account then they should still file an FBAR statement. There is a section of the FBAR reserved for individuals who have signatory authority or other type of authority on the account, but the money is not theirs.
I do not want to Report my Foreign Parents’ Name on the FBAR
We understand the importance of privacy. Generally, there are ways around reporting the information the FBAR where you disclose certain information but not all the requested information (while still being FBAR compliant).
The Money is from an Inheritance
It is important to remember that the FBAR is a reporting form. In other words, the Department of Treasury wants to know whether you have the money overseas in case there is no other way for the DOT to track it. In addition, under FATCA, many countries and foreign financial institutions have agreed to report accounts to the U.S.
Thus, even if the money was inherited, you are required to report the account information on the FBAR. If you fail to do so and get stuck in the IRS/DOT crosshairs as a result of the foreign financial institution reporting the account in accordance with FATCA, it will be much harder to explain the situation at that time versus simply filing the FBAR timely or entering into OVDP or the Streamlined Program.
**That does not mean you should file a late FBAR (please see below)
My Accounts are in the name of a Foreign Corporation
This is where the FBAR starts to get more complicated. The most important thing to remember is the concept of the FBAR is to promote financial transparency. Therefore, if no matter how you structure the business in the end the money is yours, then you should file the FBAR.
This can be distinguished from a company in which you are merely an employee and have signatory authority, which would require a comprehensive analysis of the business and your rights to the business and money before determining whether you should file.
My Accounts are in the name of a Foreign Holding Corporation
It does not matter that the accounts are in a Foreign Holding Corporation – this is not sufficient to avoid filing the FBAR statement. Otherwise, a US taxpayer could simply open a BVI Holding Corp and put the holding Corp. as the owner of the account and thus not to have the file the FBAR – even though all of the account money belongs to the US taxpayer – which is directly contradictory to the purpose of the FBAR.
If you are the “true owner” of the money, then filing the FBAR is required.
My Accounts are in the name of a Foreign PFIC Corporation
The same thing goes for a Passive Foreign Investment Company. Depending on which country you are in and how the country titles the foreign company, these companies come in all shapes and sizes. Back in the 80s, they were used primarily to avoid detection by the United States government of foreign account and asset information. There is no exception to filing an FBAR simply because you transferred your money into the PFIC.
My Accounts are in the name of a Foreign Trust
As you can imagine, foreign trusts are not immune from having to file an FBAR statement either – in addition to possibly a 3520 and 3520A. Whether the purpose of the foreign trust was “harmless,” and/or you thought you could avoid US detection or possibly to form the foreign credit shelter trust or foreign asset protection, a foreign trust does will not negate your requirement to file an FBAR; if the accounts are in a foreign trust, in which you are the owner of the foreign trust then you have to report the account on the FBAR.
What Types of Accounts must be Reported on an FBAR?
Essentially, any account that is maintained at a foreign financial institution must be reported on the FBAR – but this does not mean every income generating asset has to be included. Here’s an example: if you have a Foreign Bank Account at a Foreign Financial Institution it has to be reported on the FBAR. Conversely, if you have a foreign rental property that is earning foreign rental income, while the foreign rental income must be reported on your tax return, the value of the home need not be reported on the FBAR.
Do I have to report my Life Insurance Policy?
This is another complex area of the FBAR. Essentially, if the life insurance policy (or life assurance policy as it is called in many countries) has a surrender value for sale value insofar as you could sell the policy on the open market – it should most likely be reported on the FBAR.
In situations like this where there is a reporting requirement, it is better to err on the side of caution.
Reporting on the FBAR vs. Paying Tax on the Money
This is a question we receive often and so we distinction must be made. Just because you are reporting a foreign account on an FBAR does not mean there is a taxable event taking place. For example, the money may have been inherited, received as a gift and/or earned with income tax already having been paid on the earnings.
Thus, the key issue to remember with an FBAR is that the FBAR is a reporting requirement for you to update the Department of Treasury with your foreign accounts that you maintain overseas; it has nothing to do with whether there is a taxable event taking place.
I do not know my Maximum Account Value?
When you are reporting on the FBAR, you are supposed to provide the maximum value of the account balance for the year. Depending on which country you are in, and whether the account provides you statements (or if it is a passbook account) that information may not be available. When that information is not available you may either click the box that reads maximum account balance unknown or you may also consider using the balance that you have available, and explaining why you cannot obtain the maximum value in the box provided on the first page of the FBAR.
Can If I file a Late FBAR Statement?
This is a very complex issue. Technically, you are not allowed to file a late FBAR statement. Some people have done so in accordance with submitting a Quiet Disclosure, which can result in extremely high fines and penalties.
The Internal Revenue Service a Department of treasury are taking foreign account compliance very seriously and it is a major priority for the IRS. If you have not filed your FBAR statements, you have three main alternatives: Reasonable Cause Statement, Streamlined Disclosure, or OVDP (these are briefly discussed below)
Late FBAR Filings and a Reasonable Cause Statement
If you have not filed your FBAR timely, the first option is to submit the FBAR late accompanied by a Reasonable Cause Statement. The failure to file an FBAR can have extremely high penalties. Therefore, if you opt for the reasonable cause statement as opposed to one of the approved programs discussed below, then you are essentially submitting the account information and asking for forgiveness from the IRS for any penalty.
Two things to keep in mind his first, the IRS is not very sympathetic, and second, if the IRS disagrees with your reasoning you have now disclosed all of your account information to the IRS with no protection from penalties or criminal investigation.
Late FBAR Filings and the Streamlined Program
Under the streamlined program, a person will amend their tax returns for three years as well as file six years of unreported past FBAR statements (assuming that they are a US taxpayer for six years; if they have only been a US taxpayer for four years they would only file four years of past FBAR statement). This program is reserved for taxpayers who were non-willful (in other words, they were unaware of the requirement to file FBAR and report their foreign income).
For more information about the Streamlined Program please Click Here for a summary provided by Golding & Golding.
Late FBAR Filings and OVDP
OVDP is the Offshore Voluntary Disclosure Program. It is a program designed for individuals, businesses and trusts that knowingly intentionally failed to report their foreign account information and foreign income earnings. The program requires the applicant to fil eight years of past FBAR statements along with eight years of original and/or amended tax returns.
For more information about OVDP please click here for a summary provided by Golding & Golding.
Is the FBAR the same as an 8938 form?
No. While the forms are similar, they do have key differences. The 8938 (Statement of Specified Foreign Financial Assets) is filed with your tax return and has different threshold requirements (much higher than the $10,000+ for an FBAR), which will be dependent on whether the taxpayers are filing married filing jointly, married filing separate, single — as well as whether they reside in the United States or overseas.
We hope this summary will assist you understand the general concepts and requirements of filing an annual FBAR statement. This list is by no means comprehensive and if you have a specific question which was either not answered here (or is unclear) please feel free to schedule a consultation with one of our knowledgable International Tax Lawyers.