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Can IRS FBAR Penalties Exceed the Regulatory Cap?

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Can IRS FBAR Penalties Exceed the Regulatory Cap?


The IRS has gotten into the habit of assessing and enforcing harsh FBAR penalties in the recent past. But statutory guidelines clash on how much is permissible to assess as a penalty in a given case. It is reasonable to be confused about what penalties are allowable under the law, as the issue had to go all the way up to the Second Circuit to be decided.

In short, the IRS can enforce FBAR penalties that exceed the regulatory cap. In Kahn, the Court found that the old maximum cap on FBAR penalties was no longer valid, as it had been superseded by a more recent amendment to the original statute. This controversial decision opens the door for extreme penalties for FBAR violations which taxpayers might not have been aware existed.

The best action you can take to avoid facing these extreme penalties is to contact the Tax Law Offices of David W. Klasing today. Our dual Licensed International Tax Attorneys and CPAs have tons of experience battling the IRS on behalf of our clients over domestic and international tax issues. If you are concerned about how developments in the area of FBAR penalties may affect your offshore assets, call us today at (800) 681-1295 or schedule online here.

Enforcement of FBAR Penalties

According to the Bank Secrecy Act, U.S. taxpayers who hold foreign financial accounts with a combined total of over $10,000 in U.S. equivalent dollars at any time during a calendar tax year face FBAR reporting requirements. These reporting requirements are contained within the Report of Foreign Bank and Financial Accounts, or the “FBAR” or FinCen 114

Offshore tax evasion schemes are plentiful and thus the government cares a great deal about your full and truthful declaration of your offshore income generating assets, businesses, real estate, and other investments via mandatory foreign information reporting requirements and especially paying tax on your taxable offshore income.

Failure to report the existence of foreign assets under the taxpayer’s control in an accurate and timely manner will open the door for aggressive FBAR penalties. But how much could a taxpayer face in FBAR penalties? Keep reading or reach out of one of our dual licensed International Tax Attorneys and CPAs to find out more.

1987 Treasury Regulation vs. 2004 Amendment

In 1987, the Treasury Department issued new guidelines on assessing FBAR penalties, which were then codified in statutory form. This language (the “1987 Regulation”) can be found in 31 U.S.C. § 31 C.F.R. § 1010.820(g) and was repeated verbatim in 31 U.S.C. § 5321(a)(5). The 1987 Regulation specifies that civil penalties for FBAR violations should not exceed the greater of the amount equal to the balance of the account at the time of the violation up to $100,000, or $25,000.

In other words, the 1987 Regulation capped the maximum allowable FBAR penalty at $100,000, regardless of the size of the account.

In 2004, Congress determined that they would amend the FBAR penalty statute to increase the available penalty. This amendment (the “2004 Amendment”) set the maximum penalty available for FBAR violations as the greater of $100,000 or 50% of the aggregate balance in the account(s) at the time of the violation. The 2004 Amendment can be found at 31 U.S.C. § 5321(a)(5)(C)(i).

While the statute was amended in 2004, the Treasury Department regulations were never updated to reflect the amendment. Therefore, until recently, there was a statute and an official executive regulation on the same exact subject that contradicted each other.

Second Circuit in Kahn: Treasury Guideline Does Not Supersede 2004 Amendment Raising Cap on FBAR Penalties

It was only a matter of time before a case came about that would test the two provisions against one another. In United States v. Kahn, the defendant (“Kahn”) was charged with willfully failing to file an FBAR for the 2008 year. A proper FBAR would have declared two accounts that Kahn held at Credit Suisse in Switzerland. The total value held in both accounts came to $8,529,456 as of the FBAR filing deadline.

Kahn was assessed a willful FBAR violation penalty of $4,264,728. This figure represented half of the balance held in the foreign accounts in question, plus interest and certain statutory additions. Obviously, the penalty assessed to Kahn greatly exceeded the cap set out by the 1987 Treasury Regulation.

Kahn did not contest the willfulness of his violation, but appealed the assessment of the penalty, as the 1987 Treasury Regulation limited the government’s ability to assess a penalty above $100,000.

The Second Circuit rejected this argument, reasoning that the 1987 Treasury Regulation’s penalty limitation tracked the original penalty provision, which was properly amended. Therefore, in the eyes of the Second Circuit, the 2004 Amendment properly superseded the 1987 Treasury Regulation.

The decision was certainly controversial. The Treasury Department had 17 years to rectify the contradicting language between the 2004 Amendment and their original regulation and failed to do so. Why should that failure fall on the shoulders of taxpayers? Still, many other courts have used the reasoning to affirm hefty penalties assessed on FBAR disclosure requirement violators.

How to Avoid Excessive FBAR Penalties from the IRS

The best way to keep your nose clean if you have foreign holdings of a substantial nature is to meet the disclosure requirements of an FBAR. FBAR disclosures may seem daunting, but the experienced dual licensed Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing have tons of experience in getting client’s back into compliance over FBAR reporting & foreign accounts.  No matter what the circumstances of your offshore asset holdings may be, you deserve the professional advice to ensure that you don’t wake up facing the excessive penalties now allowed under the tax code.

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We Can Help You Comply with FBAR Requirements

The Tax Law Offices of David W. Klasing has earned a reputation of a client-first firm that won’t back down to federal or state government pressure. Whatever issues you could have, our dual-licensed International Tax Attorneys and CPAs are all too often the difference between financial security and a seven-figure fine and or criminal tax and information reporting prosecution. Call us today at (800) 681-1295 or schedule online here.

See our 2011 OVDI Q and A Library

See our FBAR Compliance and Disclosure Q and A Library

See our Foreign Audit Q and A Library