FBAR Penalties & the IRS
FBAR Penalties: Foreign bank account penalties are on the rise, and can range extensively. U.S. persons who violate FBAR filing rules by filing late or delinquent foreign bank account reporting form FinCEN Form 114 may be subject to significant IRS civil penalties.
Non-Willful violations range from a warning letter in lieu of penalty, to a $10,000 per account violations, per year penalty. Willful penalties are the greater of 50% maximum balance or $100,000.
Criminal enforcement is rare, but may result in extensive fines and penalties, including confinement.
We will summarize FBAR Penalties and how the IRS requirements have been updated.
*The $10,000 and $100,000 penalties adjust every few years for inflation, and are currently set at ~$13,000 and ~$126,000.
IRS Offshore Enforcement
Since 2003, the IRS has taken responsibility for enforcing FBAR penalties involving Foreign Bank and Financial Account Reporting (aka “FBAR” or “FinCEN Form 114) violations against taxpayers (account holders) who are out of compliance.
In general, the Internal Revenue Service has become more aggressive in Offshore penalties when a taxpayer is caught having committed a foreign account violation.
More than ever in the past, the U.S. Government has taken formal legal action against account holders in Federal District court — here are some of the recent FBAR Penalty Cases.
How does the IRS Penalize You?
31 U.S.C. §5314(a) directs the Secretary to require residents or citizens of the United States, or a person in and doing business in the United States, to keep records and/or file reports when the person makes a transaction or maintains a relationship with a foreign financial agency.
Section 5314(b) authorizes the Secretary of the Treasury to carry out this mandate by issuing regulations prescribing the application of the reporting requirements, including to whom the requirements apply.
Title 31 U.S.C. Penalty Assessment
The assessment process for FBAR Penalties is complex. This is primarily due to the fact that enforcement is under U.S.C. Title 31 not U.S.C. Title 36. An FBAR violation penalty can range from a warning letter in lieu of penalty, all the way up to $100,000 minimum willful FBAR penalty. The Internal Revenue Service has developed numerous offshore voluntary disclosure options to achieve FBAR and tax amnesty.
Civil Penalty Violations (31 U.S.C. 5321 et seq.)
The FBAR Penalty will be either a Civil FBAR Penalty and/or Criminal FBAR Penalty.
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).
The civil FBAR penalty is 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.
The non-willful FBAR penalties are typically the least severe penalties — but still pretty bad.
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.
Criminal Penalty Violations (31 CFR 103.59)
FBAR Penalties that are criminal 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.
Avoiding & Minimize FBAR Penalties
FBAR penalties can be dealt with. The IRS has developed various voluntary disclosure “amnesty” programs to assist U.S. persons with getting into compliance and limiting — or even avoiding — FBAR violations.