To moderate the draconian Foreign Bank and Financial Accounts (FBAR) violation penalties under Title 31 of the U.S. Code, the IRS just published guidance that significantly reduces willful and non-willful FBAR violations. Pursuant to the new guidance, the maximum willful FBAR violation penalties may not exceed 100 percent of the highest aggregate balance of all unreported foreign accounts at issue. The maximum non-willful FBAR violation penalties may not exceed 50 percent of the highest aggregate balance of all accounts at issue.
If you are a U.S. citizen (or green card holder), and you have a financial interest in or signature authority over foreign bank accounts, then you must file FinCEN Form 114, "Report of Foreign Bank and Financial Accounts," if the aggregate balance of your accounts at any time during the year exceeds $10,000. Failure to file the form or to disclose all foreign bank and financial accounts on the form can subject you to civil or even criminal penalties.
The civil penalty of failure to file FBARs could be very hefty. For instance, if a failure to file an FBAR was willful, then under a literal reading of the statute, each FBAR violation could result in a penalty up to the greater of $100,000 or 50 percent of the balance in the foreign account at the time of the violation. In addition, under the statute, FBAR penalties are determined per account, not per unfiled FBAR. Thus, when multiple accounts and multiple years of violations are involved, the civil penalty could bear no relationship to the amounts unreported and could even exceed the entire balance of all accounts.
In light of the draconian effect of the FBAR penalties, on May 13, 2015, the IRS issued new guidance (Memorandum SBSE-04-0515-0025) on FBAR violation penalties. In particular, the new guidance significantly reduces the maximum willful and non-willful FBAR violation penalties, especially when multiple years and multiple accounts are involved.
Maximum Willful FBAR Violation Penalties
According to the new guidance, in most cases involving willful violations over multiple years, the total penalty for all years will be limited to only 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years at issue. The penalty for each year would be determined by allocating the total penalty among all relevant years based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balance for all years. In no event can the amount of total penalty for a willful FBAR violation exceed 100 percent of the highest aggregate balance of all unreported foreign accounts during the years at issue. In explaining how this new rule works, the IRS provided the following example:
Assume highest aggregate balances of $50,000, $100,000 and $200,000 for 2010, 2011 and 2012, respectively. The total penalty amount is $100,000 (50 percent of the $200,000 highest aggregate balance during the years under examination). The total of the highest aggregate balance for all years combined is $350,000. The penalty for 2010 is $14,286 ($50,000/$350,000 x $100,000). The penalty for 2011 is $28,571 ($100,000/$350,000 x $100,000). The penalty for 2012 is $57,143 ($200,000/$350,000 x $100,000).
Absent the new guidance, the total amount of willful FBAR violation penalties under the above described example could be $300,000, assuming only one account was involved each year. For each year, the penalty would be the greater of $100,000 or 50 percent of balance in the account at the time of violation. Thus, for years 2010, 2011 and 2012, the penalties could be $100,000 for each year, totaling $300,000, which exceeds the highest balance of the account overall years at issue. If multiple accounts were at issue, the penalties could be even higher. Thus, the new guidance significantly reduces the maximum penalty imposed on willful FBAR violations.
Maximum Non-Willful FBAR Violation Penalties
Similarly, the guidance significantly reduces the maximum penalty that can be imposed upon non-willful FBAR violations.
Under the current statute, each non-willful FBAR violation can result in a penalty up to $10,000 per year per account. Non-willful FBAR violation penalties could easily exceed $10,000 when multiple accounts and multiple years of violations were at issue.
However, under the new guidance, the IRS clarified that with respect to multiple non-willful FBAR violations, only one non-willful penalty should be imposed for each year, regardless of the number of accounts involved. Therefore, the non-willful FBAR violation penalty is essentially capped at $10,000 per year. In addition, the total amount of penalties for all years is further capped at 50 percent of the highest aggregate balance of all accounts at issue.
The guidance is effective upon issuance and applies to all open cases where FBAR penalties are at issue. Therefore, if you are under audit, and the IRS has imposed willful or non-willful FBAR violation penalties against you, the penalties might be significantly less due to this newly-released IRS guidance.