FBAR Penalties Compared: Willful, Non-Willful & Criminal

FBAR Penalties Compared: Willful, Non-Willful & Criminal

FBAR Penalties Compared

FBAR penalties have become an integral topic for any US Person who has unreported foreign accounts, assets, or investments that were required to be reported on the FBAR (FinCEN Form 114) – but may have been missed. Foreign bank account penalties are generally civil in nature. So, while the monetary penalties may be staggering, imprisonment is (usually) not on the table; however, sometimes a Taxpayer may be considered willful and the IRS believes that willfulness reached the level of being criminal. After a Special Agent Investigation concludes, the government may then recommend criminal prosecution (but this is rare). When criminal FBAR is involved, it usually involves more complex issues involving tax evasion, structuring, or money laundering – and not just a missed bank account. Unfortunately, the Internet is littered with garbage information about FBAR — and if you are stuck going down one rabbit hole and into the next, it can make your head spin. Let’s take a look at the basics of civil non-willful FBAR penalties, civil willful FBAR penalties, and criminal FBAR penalties.

Civil FBAR Statute 31 USC 5321(5)

      • (5) Foreign financial agency transaction violation.

      • (A) Penalty authorized.

        • — The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

      • (B) Amount of penalty.

        • (i) In general.—

          • Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

        • (ii) Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—

          • (I) such violation was due to reasonable cause, and

          • (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

      • (C) Willful violations.

        • In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

          • (i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

            • (I) $100,000, or

            • (II) 50 percent of the amount determined under subparagraph (D), and

          • (ii) subparagraph (B)(ii) shall not apply.

      • (D) Amount. 

      • The amount determined under this subparagraph is—

          • (i) in the case of a violation involving a transaction, the amount of the transaction, or

          • (ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

Non-Willful Civil FBAR Penalties

The most common type of foreign banking financial account penalty is the non-willful civil FBAR penalty. The problem with the non-willful FBAR penalty is that there are ambiguous definitions of what the term “violation” means, and different circuits across the nation interpret the concept of violation differently. Generally, a violation results in a $10,000 penalty, and that amount adjusts for inflation. The question then becomes, is a violation based on a missed account or a missed form. In the Ninth Circuit, the Court of Appeals held that when a missed FBAR form has several undisclosed accounts but the form was subsequently filed accurately, the penalty should be limited to the form and not each account on the form. Conversely, the Fifth Circuit Court of Appeals came to the opposite conclusion and ruled that the defendant could be liable per account, per year — up to the statutory maximum. It is important to note that not all civil non-willful FBAR cases result in penalties; oftentimes FBAR amnesty can be used to reduce or eliminate the penalties and IRS agents have the discretion to reduce the FBAR penalty.

Willful Civil FBAR Penalties 

The next rung on the ladder is willful civil FBAR penalties. These types of penalties are still civil in nature and so, there is no confinement or threat of imprisonment for violating this portion of the statute either. Willfulness will typically result in a 50% penalty against the maximum aggregate value of unreported accounts. Even if it is a multi-year violation, Taxpayers are typically limited to a 100% penalty, even if it is 50% over multiple years – whereas it used to be a 50% penalty per year up to 300% value. What makes the world of willful FBAR violations so complicated is that a person can be willful without being intentional — and courts have confirmed that if the government can merely show the Taxpayer acted with reckless disregard or willful blindness, the Taxpayer may be subject to the same willful penalties as someone who acted with intent. While oftentimes the initial willful FBAR penalty is issued at 50%, IRS agents have the discretion to mitigate the penalties.

Criminal FBAR Statute – 31 USC 5322 (a)

      • (a) A person willfully violating this subchapter or a regulation prescribed or order issued under this subchapter (except section 5315, 5324, or 5336 of this title or a regulation prescribed under section 5315, 5324, or 5336), or willfully violating a regulation prescribed under section 21 of the Federal Deposit Insurance Act or section 123 of Public Law 91–508, shall be fined not more than $250,000, or imprisoned for not more than five years, or both.

Criminal FBAR Penalties

A Taxpayer can also be subject to criminal FBAR penalties (although criminal FBAR penalties are relatively rare) and tend to involve much more complicated fact patterns involving crimes such as tax evasion, tax fraud, money laundering, and structuring. As with any criminal case, the government must prove beyond a reasonable doubt that the Taxpayer committed the crime. If the Taxpayer did commit the crime and is convicted, they may be subject to imprisonment as a result of criminal FBAR violations — as well as significant monetary violations as well. If a Taxpayer is concerned that they may have violated the criminal statute, they will want to consider entering into the IRS Voluntary Disclosure Program, which is designed to bring Taxpayers who do not qualify as non-willful, into compliance with FBAR and other international information reporting non-compliance — while avoiding prosecution.

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