- 1 FBAR Penalties
- 2 FBAR Penalties for Late Filing
- 3 Civil Willful vs Non-Willful FBAR
- 4 Non-Willful FBAR Penalties
- 5 2023 Bittner Supreme Court Ruling (Civil Non-Willful Penalties)
- 6 Willful FBAR Penalties
- 7 What if You Were Assessed FBAR Penalties?
- 8 FBAR Enforcement is a Key Priority
- 9 Golding & Golding: About our International Tax Law Firm
*This 2021 article has been updated in 2023.
Noncompliance with disclosing Foreign Bank and Financial Accounts may lead to FBAR penalties. In recent years, The FBAR (FinCEN Form 114) has taken the spotlight due to the sheer amount of penalties US Person Taxpayers can be liable for if they have not properly reported in prior years. The penalty for late filing the FBAR can range from a Warning Letter in Lieu of Penalties — all the way to a 50% willfulness penalty on the maximum value of the unreported values. Making matters more complex is the fact that Courts across the nation are split on what is considered “reckless disregard” and whether non-willful violations can be penalized per account or per form. While FBAR penalties for late filing and delinquent forms can be tough, the IRS has also developed various International and Offshore Tax Amnesty Programs to facilitate Taxpayers safely getting into compliance for prior year noncompliance with FBAR reporting requirements.
FBAR Penalties for Late Filing
The majority of the time, when the US government issues FBAR penalties — they are civil in nature. Criminal FBAR penalties are rare, and they tend to only rear their ugly head in situations in which a taxpayer is being investigated for other crime-related issues such as money laundering, smurfing, structuring, and tax evasion. Stated another way, just having a few unreported foreign accounts and possibly making some mistakes on filing Schedule B and other related forms is not a criminal situation per se – even if the IRS alleges it is “willful” (civil willful and criminal willfulness are not the same thing).
Civil Willful vs Non-Willful FBAR
The two types of civil FBAR penalties are: willful and non-willful. While the non-willful penalties are more common — and range extensively on how they are assessed and enforced — they are generally less brutal than the willful penalty counterpart.
Non-Willful FBAR Penalties
The penalty generally starts at $10,000 per violation, although technically the $10,000 penalty is the “maximum violation amount.” Even though the $10,000 penalty is the maximum penalty per violation, penalties tend to start based on that $10,000 value — no matter what the facts and circumstances are. IRS agents and examiners have the discretion to reduce or minimize the penalty. The $10,000 adjusts for inflation.
What does Non-Willful Mean?
There is no direct definition of the term non-willful. There is no bright-line test that can be used to punch in the facts and derive a conclusion as to whether or not a taxpayer was non-willful. Instead, it is based on the Totality of the Circumstance analysis. While at first glance this may not seem too complicated, the IRS has done its part to make it incredibly ambiguous and difficult, especially since the term “violation” can have different meanings and outcomes.
What does Per Violation Mean?
The FBAR range for violations of foreign account reporting compliance is as follows:
warning letter in lieu of penalty;
a $10,000 penalty that encompasses all the violations for all years;
a $10,000 per year; or
a $10,000 penalty per violation per year.*
What do the Courts Say?
When it comes to non-willful violations, oftentimes penalties will hinge on a nuance. And, when it comes to the FBAR, the nuance is what is defined as a violation. Does a non-willful FBAR violation mean that the form was not filed and the taxpayer should be penalized for not filing the form — or does it mean that each account was not reported, and therefore the taxpayer should be subject to a penalty for each account that was not properly reported? While courts are split, there have been decisions that favor limiting the non-willful FBAR penalty to a “per form” and not a “per account” violation.
2023 Bittner Supreme Court Ruling (Civil Non-Willful Penalties)
It is not often that the United States Supreme Court hears matters involving taxes or tax-related issues. In addition, the Supreme Court has not issued any recent rulings on matters involving FBAR, so the fact that the Supreme Court granted the Petition for Writ of Certiorari in the case of US v Bittner is a big deal in the world of international tax law. The key issue involves the definition of the term FBAR violation when it involves civil non-willful Foreign Bank and Financial Account Penalties. The lower court ruled that the penalty should be limited to $10,000 per form ($10,000 adjusts for inflation). The Court of Appeals for the Fifth Circuit ruled that FBAR penalties should not be limited to $10,000 per year, but rather, penalties could be issued on a per account, per year basis for the six-year statute of limitations. This ruling conflicts with a Court of Appeals ruling in the Ninth Circuit in the case of Boyd –- which limits FBAR penalties to a per form, per year.
Willful FBAR Penalties
When the IRS can prove that the taxpayer was willful, the penalties are much more damaging and can reach upwards of 50% of the maximum account value per year (but the total penalty for all years is limited to 100% value). When it comes to civil FBAR willfulness penalties, ‘intent’ is not required. In fact, actual knowledge is not necessarily required either. This can make it incredibly difficult when it comes time to evaluate a taxpayer’s options on how to deal with the penalty.
Reckless Disregard (Willful): This means the person acted without actual intent.
Willfully Blind (Willful): This means the person did not actually know of the violation at the time it happened
Why is this important? The reason this is so important is that even though there is no bright-line test to determine willful from non-willful, agents, and examiners may differ in their analyses and conclusions as to what would be considered aggravated negligence (but still non-willful) and what may be considered reckless disregard (willful) for example.
What if You Were Assessed FBAR Penalties?
If the IRS assessed FBAR penalties against you, it is important to work to get those penalties removed or minimized as quickly as possible. The US government generally has two years to bring a lawsuit to enforce the penalty — and since it is not a tax form, Tax Court is unfortunately not an option in terms of litigating the penalty. Instead, the taxpayer will have to duke it out with the US government in District Court or the Court of Federal Claims.
FBAR Enforcement is a Key Priority
In conclusion, the US government continues to assess and enforce FBAR penalties as a key compliance initiative. If you have been hit with penalties or are concerned you will be penalized, you should consider one of the amnesty programs to get into compliance — if you have not been penalized or are currently not under audit (or under ancillary investigations).
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance.
Contact our firm for assistance.