In recent years, one of the more worrisome tax matters has been FBAR reporting. The Report of Foreign Bank and Financial Accounts (FBAR), which is a required filing for U.S. persons with financial accounts in a foreign country, where they either have an interest in the account or have signatory authority with the account and there the account is worth more than $10,000.
The dangerous element for taxpayers is if they are determined by the Internal Revenue Service to be in “willful” violation of the filing requirement, the penalties can become draconian. In some cases, the IRS has threatened to impose penalties of 150 percent of the value of the unreported foreign accounts.
In a case from Florida last month, the Service obtained a verdict with a penalty of 50 percent of the value of the account for each of four years. This has created a penalty of 200 percent of the total value of the unreported account.
The IRS has issued guidance for its examiners, in an apparent effort to place caps on the civil penalties that can be imposed for FBAR noncompliance, and avoid running afoul of the constitutional prohibition against excessive fines, an issue which has been raised in the Florida case.
For willful violations, the guidance states, “total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.”
The guidance also indicates that the maximum fine for multiple years of non-willful violations will be $10,000, per year, regardless of the value of the accounts. Some cases, based on their facts, could receive lesser penalties, and with special approval, they could be subject to a single penalty, which would also be limited to $10,000.
This is a very complex and potentially extraordinarily expensive area for a taxpayer and should you be involved in discussions with the IRS regarding FBAR noncompliance, you want well-qualified tax counsel to assist with your negotiations.
Source: accountingtoday.com, “IRS Issues New Guidance on FBAR Penalties,” Michael Cohn, June 3, 3025
