In an attempt to fight money laundering in the U.S., Congress passed the Bank Secrecy Act in 1970. Among the Act’s requirements was the filing of FinCEN Form 114 (formerly Treasury Department Form 90-22.1) Report of Foreign Bank and Financial Accounts (FBAR). For many decades, compliance was low. This changed in 2004—the law was amended to include new penalties for non-willful FBAR violations and the IRS was given authority to enforce FBAR compliance.
FBAR rules and penalties
U.S. taxpayers with financial interests in or signatory authority over foreign accounts that exceed $10,000 at any time during the year are obligated to file an FBAR. Failure to do so generally results in a penalty of $10,000 for each nonwillful violation, $100,000 or 50% of the balance in the account if the violation is found to be willful (the burden is on the IRS to establish willfulness).
Each violation is counted separately, and each year that a taxpayer fails to file a required FBAR is treated as a separate violation. However, if the violation is found to be nonwillful, the total penalty will not exceed 50% of the highest aggregate balance of all of the taxpayer’s unreported foreign accounts in the years at issue.
Criminal penalties are $250,000 and 5 years in prison, doubled to $500,000 and 10 years imprisonment if another law (including a tax law) is violated. For many taxpayers, a good way to avoid criminal FBAR tax penalties is to make a voluntary disclosure through the IRS’ Offshore Voluntary Disclosure Program (OVDP) before the IRS makes the discovery itself.
Examiner has discretion to waive FBAR penalties
The purpose of FBAR penalties is to encourage compliance with FBAR reporting. In some cases an FBAR penalty is not justified and the IRS examiner has the discretion to waive the penalty and issue an FBAR warning letter (Letter 3800) instead. In exercising this discretion, the examiner analyzes the following:
- If the taxpayer has been issued a warning letter in the past
- If the taxpayer has been assessed an FBAR penalty in the past
- The nature of the FBAR violation
- The amounts involved
- Whether or not the taxpayer has been cooperative during the course of the examination
Note that if the examiner determines that an FBAR penalty is warranted, they still have discretion to reduce its amount. Our next blog post wiII focus on FBAR penalty mitigation and defenses.
Our tax attorneys are highly experienced in handling FBAR issues
FBAR penalties are extremely high and it is crucial that you have experienced legal representation to help you resolve these matters. The attorneys at Moskowitz, LLP have extensive experience working with taxpayers who have not filed FBARs and can determine the best option in your circumstances. Contact our San Francisco office today for a consultation.