The FBAR Penalty is Unfair To Foreign Account Holders 

The FBAR Penalty is Unfair To Foreign Account Holders

The FBAR Penalty is Unfair To Foreign Account Holders 

There was a time when FBAR Penalties were relatively rare — and when they were issued, relatively benign. In fact, non-willful FBAR penalties were not introduced until the early 2000s. The FBAR refers to Foreign Bank and Financial Account Reporting — which taxpayers are required to file annually on FinCEN Form 114. With the (near) demise of Switzerland as an offshore tax haven, along with the introduction of FATCA (Foreign Account Tax Compliance Act) came a renewed interest in the enforcement of foreign accounts compliance. In order for taxpayers to be best prepared for compliance and noncompliance amnesty submissions, it is important to take note of these five facts:

Preponderance of Evidence

In order for the US government to prove an FBAR violation, they are merely required to show it occurred by a preponderance of the evidence — which is the lowest standard available. It was previously believed that the US government would have to show clear and convincing evidence — and in fact, it was even surmised by IRS Counsel in their own memoranda that it should be clear and convincing evidence — but courts have boiled it down to the fact that FBAR violations — even willful violations — are not equivalent to tax fraud (which does require clear and convincing evidence) and it is simply a monetary fine — and preponderance of the evidence is all that the Government is required to prove.

Per Account or Per Form?

Unfortunately, with the recent ruling by the 5th circuit appellate court in Bittner, there is a new twist to the FBAR penalty situation — depending on which jurisdiction the defendant resides in. Prior to the Bittner Appellate Court Ruling in the fifth circuit, there was a more taxpayer friendly ruling by the 9th Circuit Court of appeals in Boyd — which found that penalty should only be issued per form and not per account.

Willfulness is Just a Step Away

Common sense dictates that when a person thinks of the term willful, it would conjure up visions of a person acting “intentionally” — such as intentionally avoiding the filing or reporting of foreign accounts, but that is not the case. When it comes to FBAR willfulness and the even higher noncompliance penalties, it is important to note that the US government must only show that the taxpayer acted with reckless disregard (no intent) in order to prove willfulness.

No Tax Court for FBAR Litigation

Since the FBAR is not a tax form, unfortunately, Tax Court is not a proper jurisdiction to litigate the FBAR penalty — but hopefully one day that will change. In the meantime, it is important to note that in a recent ruling at the federal court, it was held that since the Taxpayers does not have an opportunity to go to Tax Court to fight the FBAR (Tax Court does not require prepayment of the penalty), the Flora Rule would not apply to FBAR litigation — Flora requires Taxpayers to make payment to the US government in full first before filing in the Federal Court.

Filing an Accurate FBAR(s) is “Required”

A final takeaway from some of the more recent cases, is that in order to qualify for reduced scrutiny by the courts — it is important for Taxpayers to make sure that they do file accurate FBARs — even if they are filed late. To assist taxpayers with getting into compliance, there are various FBAR amnesty programs available which can help a taxpayer safely file late FBARs — and oftentimes reduce or minimize penalties.

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