Since the early 1970’s the Bank Secrecy Act (BSA) has been requiring US taxpayers to report certain foreign financial accounts and retain detailed records about them. Many individuals now know about the notorious “FBAR” (FinCEN Form 114, Report of Foreign Bank and Financial Accounts). It comes as a surprise to many, however, to learn that the penalties for not filing this form can be sky high. Just how high the penalties can soar depends on various factors and sadly, this is a very gray area surrounded by much uncertainty as to ultimate outcome. Among other factors, such as the inclination of the Internal Revenue Service (IRS) agent to apply certain agency-issued mitigation guidelines permitting reduced penalties, the amount in the account(s), and the individual’s prior violations, two main factors will impact the ultimate penalty: 1) Whether the violation of the statute was “willful” or “non-willful” and 2) which court is deciding the case!
The penalty for a “willful” FBAR violation is up to $100,000 (as adjusted for inflation) or 50% of the highest aggregate account balance during the year. The 50% penalty was added to the BSA in 2004. The IRS examining agent has the discretion to assess a separate penalty for each year when there are several years of non-disclosure. In some instances, however, the examiner will limit the total penalty to 50% of the highest aggregate account balance for a single year, even when there are multiple years of violations.
Even though the statute permits the imposition of the 50% penalty for willful violations, some courts have limited the FBAR “willfulness” penalty to the inflation-adjusted $100,000 because the Department of Treasury did not update the relevant regulations to match the BSA statute when it was amended by Congress in 2004. Essentially the dispute in the cases revolves around the interplay between the statutory provisions of the BSA and the Treasury regulations implementing the law. I have written blog posts on some decisions limiting the FBAR “willfulness” penalty to the inflation-adjusted $100,000 (the Colliot case) here and (the Wadhan case) here.
In the summer of 2018 in Norman v. United States (Ct. Fed. Cl. Dkt 15-872T; 7/31/18), the US Court of Federal Claims rejected the premise of the Colliot holding and permitted the IRS’ higher penalty assessment based on 50% of the value of the taxpayer’s unreported foreign accounts. Other courts have followed the Norman decision as well. See Kimble v. United States, No. 17-421, 2018 WL 6816546, at *15 (Fed. Cl. Dec. 27, 2018; I blogged about Kimble here), United States v. Horowitz, No. PWG-16-1997, 2019 WL 265107, at *3 (D. Md. Jan. 18, 2019) and United States v. Garrity, 2019 U.S. Dist. LEXIS 32404 (D. Conn. 2019).
Taxpayers should be aware that over the years, the courts have been whittling away at the meaning of the term “willful”, making it easier and easier for the IRS to prove an FBAR violation was “willful”. You can read about the shift in the court attitude at my blog post here.
The penalty for non-willful FBAR violations is generally US$10,000 per violation. It may come as an unwelcome surprise to learn that the IRS has assessed this penalty for each unreported account for each year. Thus, if the taxpayer had 6 unreported accounts for the year at issue, the penalty could be US$60,000. The IRS is viewing the violation as the failure to report each account on the FBAR, rather than a failure to file the FBAR for the particular year.
In line with the Internal Revenue Manual, the examining agent is given discretion to assess lesser penalties. The agent can assess only one FBAR penalty per year, even when there are several undisclosed foreign accounts. The examiner also has the option to assert only one FBAR penalty when there are multiple years of violations, but the Operating Division FBAR Coordinator must be consulted in these cases. For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a separate penalty for each account and for each year. The examiner’s work papers must support such a penalty determination and document the group manager’s approval.
What have the courts said about penalty assessments in “nonwillful” violation cases?
In United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), the taxpayer had fourteen financial accounts in the United Kingdom, but failed to file an FBAR for 2010, the year in issue. Since the IRS concluded her violations were not “willful”, the agency mitigated the penalties and assessed a nonwillful penalty for 2010 on each of 13 accounts with a total FBAR penalty of US$47,279.
The taxpayer argued that the penalty was in excess of that permitted by the BSA, claiming that the maximum US$10,000 penalty is based on the failure to file the FBAR itelf rather than per account that should have appeared on the FBAR. The court rejected the taxpayer’s argument. In agreeing with the IRS, the court accepted the agency’s position that “the better interpretation of the relevant statutory and regulatory language is that each non-willful FBAR violation relates to a foreign financial account, and that the IRS may penalize each such violation with a penalty not to exceed US$10,000.”
The Boyd case is currently on appeal and is scheduled to be heard this September.
The first case to hold otherwise was decided very recently. In United States v. Bittner (E.D. Texas 6/29/2020), several years of unfiled FBARs were at issue, covering tax years 2007-2010 and involving numerous overseas accounts, with the IRS seeking nonwillful FBAR penalties for 177 accounts in total. The district court held that the nonwillful FBAR penalty was to be assessed per form and not per account. The happy taxpayer saw the number of violations reduced from 177 as asserted by the IRS (for a whopping nonwillful penalty of US$1,770,000) to a mere 4 (for a total penalty amount of US$40,000).
If you have FBAR issues, there may be a penalty-free way to get back on track. Don’t let the IRS’ aggressive FBAR position wipe out your overseas accounts. Stop all the unproductive worrying and contact me if you have FBAR matters that need resolution.
Posted: July 23 2020
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