IRS Issues Guidance on Foreign Bank Account Report / FBAR Penalties

U.S. persons are required to file the FinCEN Form 114 Report of Foreign Bank and Financial Accounts (FBAR) to report a financial interest in or signature authority over foreign accounts. There is a $10,000 civil penalty for the non-willful failure to the file the FBAR. The penalty for the willful failure to file the FBAR is the greater of $100,000 or 50% of the balance in the foreign account at the time of the violation. Under the statutory authority for such penalties, the monetary penalty for the willful failure to file the FBAR applies for each year.  Criminal penalties such as criminal prosecution and imprisonment also may apply for the willful failure to file the FBAR.

On May 13, 2015, the IRS issued Interim Guidance to IRS employees regarding the procedures for the administration of FBAR penalties. These procedures recognize that IRS examiners have the discretion to determine whether FBAR violations are willful. In most cases, with willful violations over multiple years, the total penalty amount for all years under examination will be limited to 50% of the highest aggregate balance of all unreported foreign accounts during the years under examination. The IRS guidance states the following example to demonstrate the calculation of the penalty.

IRS Example: Assume highest aggregate balances of $50,000, $100,000 and $200,000 for 2010, 2011 and 2012, respectively. The total penalty amount is $100,000 (50% of the $200,000 highest aggregate balance during the years under examination).

Based on these procedures, the 50% penalty is not applied to each year. However, the IRS examiner is allowed to recommend a penalty that is higher or lower than 50% of the highest aggregate balance of all unreported foreign accounts based on the facts and circumstances. The total penalty will not exceed 100% of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

For non-willful violations, the penalty will be determined for each year based on the aggregate balance of all unreported financial accounts subject to a $10,000 limitation per year. The IRS guidance states that the IRS examiner with certain internal approvals may assert a single $10,000 penalty for one year only in the case of non-willful FBAR violations as warranted under the facts and circumstances. The procedures note that some facts and circumstances may warrant asserting the $10,000 penalty for each year in the case of non-willful violations.

The publication of these IRS procedures may be particularly helpful to U.S. taxpayers in the Offshore Voluntary Disclosure Program who are considering whether to opt out of the OVDP penalty structure.

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