When it comes to foreign bank and financial account reporting, the FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114) is the most common form required for taxpayers to file each year. While the form itself is not necessarily as complicated at some of the other international reporting forms such as Form 5471 and 8865, the penalties associated with noncompliance can be devastating. While the form has been around for 50+ years, it was only recently that the FBAR became a key enforcement priority for the Internal Revenue Service — noting that it is not a tax form but rather a reporting form. Here are five important facts about FBAR penalties as they currently stand.
No Income Tax Required
One important aspect of FBAR penalties is that even though the form is required of US persons who qualify as a US person for tax purposes and the form is enforced by the IRS, the FBAR is not a tax form. Therefore, US taxpayers who meet the threshold for having to file the FBAR are still required to file the form in any year that they qualify as a US taxpayer, even if they do not meet the threshold for filing a tax return and even if the foreign accounts do not generate any income. A common misconception is that only accounts that generate income have to be included on the FBAR, but that is incorrect and can lead to avoidable fines and penalties due to lack of filing.
Civil Non-Willful Penalties Can Range
There have been several cases in the past few years regarding non-willful civil FBAR penalties, and the key issue always seems to involve whether or not penalties are limited to $10,000 per year or $10,000 per account per year. Typically, the statute of limitations for FBAR enforcement is six years; therefore, depending on the number of accounts and their values, the penalties can be significant. The reason why the value of the accounts is important is that typically non-willful FBAR penalties can go up to 50% value for the entire time-period. Thus, penalties for taxpayers who have significantly higher-value accounts and several accounts, the penalties can be very substantial. While some court cases such as Boyd in California limit penalties to $10,000 per account per year, it is important to note that it is not statutory law and other jurisdictions such as the Fifth Circuit and Bittner take a contrary view – and find that it can be a per account, per year penalty and not just one $10,000 penalty per year ($10,000 adjusts for inflation)
Civil Willfulness Standard is (Relatively) Low
As we have written about before on several occasions, it is important to keep in mind that in order to be considered willful, a person does not have to acted intentionally. If the person acted with reckless disregard or willful blindness, they can also be held to the same willful penalty standard. With that said, the majority of violations tend to be non-willful, so it is important to avoid any fear-mongering by attorneys or other tax professionals who are convincing you that you are willful — when in your heart you believe you are non-willful even if you don’t necessarily have the best facts.
Updated FBAR Regulations
There was some confusion in prior years regarding whether a civil willful penalty was limited to $100,000 per year (or even in total) or whether $100,000 represented the minimal penalty. Based on the updated regulation, it is clear that the government takes the position that $100,000 (adjusted for inflation) is the minimum penalty and not the maximum penalty. Therefore, taxpayers with high-dollar-value accounts can be in for a significant penalty, although it is always important to keep in mind that whether it is willful or non-willful penalties, IRS examiners and agent have discretion to mitigate and reduce overall FBAR penalties.
Criminal Penalties Are Rare But Can Be Serious
In some rare instances, taxpayers may cross the line from a civil FBAR violation to a criminal violation — and therefore could be considered for prosecution and possible confinement if found guilty. Most of the time violations are going to be considered civil in nature, even when they are willful. This is because as was with any criminal case, the US government must prove the criminal FBAR violation occurred by meeting the beyond a reasonable doubt standard. Oftentimes, when a person violates the criminal FBAR statute, it is in conjunction with other criminal violations such as structuring, smurfing, tax evasion, and money laundering.
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