- 1 The Defenses to FBAR Penalties
- 2 Non-Willfulness
- 3 Reasonable Cause Defense to Non-Willfulness
- 4 A Warning Letter In lieu of Penalties
- 5 Reduced Non-Willful Penalties (See IRM)
- 6 Willfulness
- 7 Is the Taxpayer Non-Willful?
- 8 Mitigating Willful Penalties
- 9 Pre-Penalty Avoidance with FBAR Amnesty
- 10 Late Filing Penalties May be Reduced or Avoided
- 11 Current Year vs Prior Year Non-Compliance
- 12 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 13 Need Help Finding an Experienced Offshore Tax Attorney?
- 14 Golding & Golding: About Our International Tax Law Firm
The Defenses to FBAR Penalties
This article will serve as a follow-up to a previous article we authored a few years back regarding defenses to FBAR penalties. Over the past several years, foreign bank and financial account reporting penalties have become an enforcement mainstay for both the Internal Revenue Service and the Department of Justice. Recently, there have been many new FBAR litigation cases spread across the different circuits, and even a Supreme Court ruling in the case of Bittner — in which the court ruled that the IRS was limited to issuing annual per form FBAR penalties and not per-account penalties on matters involving non-willfulness. It is important to note that the Supreme Court case did not rule on issues involving willfulness, in which penalties can reach up to 50% of the maximum value of the unreported accounts. Let’s walk through some of the basic defenses and strategies to avoid or minimize FBAR penalties.
Let’s begin with non-willful penalty defenses since non-willfulness is the most common type of FBAR penalty.
Reasonable Cause Defense to Non-Willfulness
First, taxpayers may be able to avoid FBAR penalties altogether if they are able to prove that their noncompliance was due to reasonable cause and not willful neglect. In other words, if a taxpayer can establish reasonable cause, then they qualify for the reasonable cause exception to FBAR penalties — and possibly avoid any FBAR penalties being issued at all (or abated if they have already been issued). Reasonable cause is a complex submission process that involves presenting facts and law based on the totality of the circumstance. There is no specific form that is used for this type of submission. The Internal Revenue Manual is a good place to start.
A Warning Letter In lieu of Penalties
Just because the IRS can issue penalties for non-willful FBAR violations does not mean they always will issue penalties. Some Taxpayers may skate by with a warning letter in lieu of penalties.
As provided by the IRM:
‘When there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, Warning for Report of Foreign Bank and Financial Accounts (FBAR) Apparent Violations, or determine a penalty.’
Reduced Non-Willful Penalties (See IRM)
Even if the IRS is determined to issue at least some FBAR penalties, they do have some leeway in terms of the total amount of penalties they will issue. Typically, the statute of limitations for FBAR penalties is six (6) years, with the maximum FBAR penalty per year being $10,000 — although the $10,000 adjusts for inflation. It is important to note that IRS agents do have some discretion to reduce and minimize penalties. Sometimes, the penalty can be for all six years, and other times it may be for only one year — and even for that one year the agent may have discretion to reduce the penalty from $10,000 to a smaller amount. Noting, that it typically requires the approval of the supervisor, and these days, many supervisors are reluctant to issue anything less than the maximum FBAR penalty allowable by law.
While willfulness penalties are less common, they can be much more severe and can reach upwards to seven and eight figures depending on the value of the taxpayer’s assets.
Is the Taxpayer Non-Willful?
First, if a person is considered to be willful by the IRS, then they are not able to meet the reasonable cause exception. Therefore, the first step for any taxpayer who is alleged to have acted willfully is to present facts to show they are non-willful if at all possible. Unfortunately, there is no bright line test for the taxpayer to follow in order to establish non-willfulness. Thus, it is very important that the taxpayer dig deep into all the facts and circumstances involving the noncompliance in order to prove that they are non-willful.
*Many taxpayers can be unnecessarily hard on themselves and presume that they should have known about FBAR filing — and believe they are willful, even when they are really non-willful. Nobody has 20/20 hindsight and therefore, it is important to carefully dissect the facts and circumstances to try to establish non-willfulness if possible.
Mitigating Willful Penalties
Even though willfulness penalties are much harsher than non-willful penalties, IRS agents still have the discretion to reduce the penalties. Typically, it can be difficult to convince an agent who believes that the Taxpayer is willful that the penalty should be anything less than the 50% value of the maximum balance in the account. But, it is important to note that not all agents are the same and some agents may be more amenable to reducing the penalty — especially if there are some mitigating factors such as health and family-related issues.
Pre-Penalty Avoidance with FBAR Amnesty
As with most things in life, it is typically better to try to avoid the penalty in the first place or minimize it at the outset. The Internal Revenue Service offers various offshore amnesty programs to assist taxpayers with getting into compliance. Depending on the taxpayer’s specific facts and circumstances, such as whether they are willful or non-willful and whether or not they have unreported income as well as missed accounts and assets will help determine which program they qualify for.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.