Any US taxpayer with an interest in, or signatory authority over, a foreign financial account must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) where the aggregate value of all foreign financial accounts exceeds $10,000 during a tax year. FBARs must be submitted to the IRS by June 30th of each tax year. This filing deadline cannot be extended, unlike filing of federal income tax returns.
Both civil and criminal penalties may be imposed on FBAR violations. The civil penalty for willfully failing to file the FBAR can be up to the greater of $100,000 or 50% of the account balance at time of violation. The civil penalty for a non-willful violation can be up to $10,000 per year. Non-willful penalties may be avoided where “reasonable cause” exists for the failure to timely file the FBAR. There have been two recent updates regarding non-willful civil FBAR penalties:
“Maximum” Non-willful FBAR Penalty
Based on recent case law, the imposition of penalties for non-willful failures to file the FBAR may require more information from the IRS. Previously, the IRS had discretion in imposing a penalty of up to $10,000 based on the facts and circumstances of the taxpayer’s late FBAR submission. However, in many cases this penalty was enforced as a standard penalty rather than the maximum penalty for the most egregious non-willful violations. The recent court decisions imply that the IRS has broad discretion in assessing penalties against taxpayers as long as an explanation is provided regarding the penalty amount. This means taxpayers may be able to take measures to ensure that penalties are not arbitrarily assessed by requesting for explanations behind the penalty amounts. Once the reasoning for the penalty amount is disclosed taxpayers will have a better understanding of how to dispute the amount.
Multiple FBAR Penalties in a Tax Year
The IRS recently issued new guidance regarding the number of FBAR penalties that can be assessed against a taxpayer each year. Previously, the $10,000 penalty could be imposed each year on each bank account required to be reported on the taxpayer’s FBAR. The new guidance states that the IRS will now assess only one $10,000 penalty per FBAR per year, as opposed to $10,000 per bank account per year. Taxpayers should be cautioned that while this is a very favorable development and likely the correct reading of the tax law, the IRS still has the right to pursue the $10,000 penalty per account even if they are not choosing to at this time.
If you have questions about FBAR requirements, filings, or penalties, contact Hone Maxwell LLP today for a comprehensive review of your case.
