Under the Bank Secrecy Act, taxpayers must report income derived from foreign bank accounts and other types of foreign financial accounts. When a taxpayer violates the foreign bank and financial account reporting (FBAR) laws, they could face several foreign information reporting failure penalties. Note, however, that the penalties imposed by the IRS may vary as examiners have discretion when recommending penalties. If you violated FBAR tax laws and you are concerned about the penalties you may face, you should consult with a dual-licensed California Tax Attorney and CPA at the Tax Law Offices of David W. Klasing. Our legal team is well-versed in handling many types of international tax matters, and we welcome the chance to offer you the legal representation needed for your FBAR case. The Tax Law Offices of David W. Klasing is here to answer the question of how much discretion the IRS has over FBAR penalties.
Discretion and Mitigation for IRS FBAR Penalties
Taxpayers are subject to various reporting requirements when they possess a foreign bank or financial account. When a person violates FBAR reporting requirements, the IRS examiner assigned to their case will determine how severe the penalty is. There are four types of civil penalties that may be imposed based upon the actions of the taxpayer:
- Penalties for negligently missing the FBAR filing deadline.
- Penalties for taxpayers who exhibit a pattern of negligent activity.
- Penalties assessed for non-willful violations of FBAR filing requirements.
- Penalties for willful violations of FBAR filing requirements.
The IRS examiner has discretion over the severity and types of penalties imposed on the taxpayer. The examiner could also choose to mitigate (remove or not assess) the FBAR penalty if the taxpayer meets the following four conditions:
- The taxpayer does not have a history of criminal tax violations or convictions under the Bank Secrecy Act for the past 10 years and has not committed a prior FBAR violation.
- Any money in the taxpayer’s foreign account was not secured from an illegal source or used to commit a crime.
- The taxpayer cooperated in the examination performed by the IRS, and the IRS did not have to submit a summons for the taxpayer to respond.
- The IRS did not impose a civil fraud penalty against the taxpayer for underpayment deriving from an intentional failure to report taxable offshore or domestic income related to a foreign account.
Guidelines for IRS Examiner Discretion for FBAR Penalties
An IRS examiner has a broad amount of discretion when determining whether to mitigate a penalty or impose the full amount of the penalty. Typically, the IRS examiner will consider the unique circumstances and facts of each person’s case when considering a penalty.
If a person is assessed an FBAR penalty, the examiner could look to the IRS mitigation guidelines to determine whether the penalty is appropriate. Note, however, that an IRS examiner’s discretion is not limitless. If an IRS examiner wants to increase or decrease an FBAR penalty, they must have the written approval of their manager, and they are required to thoroughly document their decisions.
There are also a few factors that the IRS examiner may consider when using their discretion:
- Whether a taxpayer would be more likely to comply with FBAR regulations if they were issued a warning letter
- Whether the IRS previously issued a warning letter or imposed an FBAR penalty on the taxpayer
- The nature of the violation and the amount of income that went unreported.
- The taxpayer’s level of cooperation with the IRS investigation
Penalties Imposed for FBAR Violations
As mentioned, there are different civil penalties depending on the circumstances of the FBAR violation. The following is a list of ways that an IRS examiner may impose different types of FBAR violations.
Penalties for FBAR Negligence Violation
If a taxpayer was determined to be negligent when they committed an FBAR violation, the IRS may issue a tax penalty of up to $500. Most taxpayers are required to pay the full $500 amount for a negligence violation. However, an IRS examiner has the discretion to decrease the amount of the $500 penalty. Note that an examiner does not have to follow mitigation guidelines for this type of violation.
Penalties for Pattern of Negligence FBAR Violations
When a taxpayer has shown a pattern of negligence when it comes to foreign account reporting, the taxpayer may be assessed a maximum penalty of $50,000. This penalty is in addition to the $500 penalty for simple negligence violations. It is important to note that the IRS only encourages penalties for pattern of negligence violations in extreme cases. For instance, if a taxpayer has a thorough knowledge of FBAR requirements and continues to violate the law, the IRS examiner may recommend this penalty.
There are also no mitigation guidelines for pattern of negligence violations.
Penalties Assessed for Non-Willful FBAR Violations
For non-willful FBAR violations, a taxpayer may be subject to a penalty of $10,000 per annual violation. Other penalties may be assessed for recordkeeping violations or late FBAR filings. When making a determination for a non-willful violation, an IRS examiner is encouraged to use the mitigation guidelines.
If an IRS examiner finds that there was a reasonable cause for the violation and the taxpayer agrees to file their past due FBAR returns, they may mitigate the penalties.
Penalties for Willful FBAR Violations
If the taxpayer committed a willful or intentional FBAR violation, they could be fined the larger of $100,000 or 50% of the balance in a foreign account when the violation occurred. Once the IRS establishes the willfulness of the violation, the examiner could decide whether a referral for criminal prosecution is also appropriate.
Schedule a Consultation with Our FBAR Penalty Lawyers to Discuss Your Case
If you are subject to (or merely at risk of) FBAR penalties for failing to report your foreign bank and financial accounts, contact our dual licensed California Tax lawyers and CPAs immediately. At the Tax Law Offices of David W. Klasing, our staff has decades of combined legal experience resolving FBAR tax issues for our clients. Our firm knows how these issues could affect a taxpayer financially and would like to help you seek the best possible outcome for your case. If you are interested in a confidential legal consultation with a member of our team, contact the Tax Law Offices of David W. Klasing at (800) 681-1295. More information for scheduling a consultation online could be found on our website.
Questions and Answers about Offshore Voluntary Disclosure Initiative (OVDI)
- Why hire David W. Klasing to represent me in an audit
- 2011 Offshore Voluntary Disclosure Initiative FAQ
- Key Features of Initiative
- Eligibility For This Initiative
- 2011 OVDI Process
- Calculating The Offshore Penalty
- Statute of Limitations
- FBAR Questions
- Taxpayer Representatives
- Case Resolution
- What not to do!
- What to do!
- FBAR Reporting and Expired Voluntary Disclosure Program
- How the Law Offices of David W. Klasing Can Help
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Questions and Answers About Foreign Tax Audits
- Does the Fifth Amendment apply to foreign accounts?
- How is evidence cultivated from foreign sources?
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- How might an FBAR audit be resolved?
- Is a penalty assessment ripe for judicial review?
- Overview of an administrative criminal investigation
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- Statute of Limitations raised during a FBAR audit?
- Precautions to be taken in the pre-audit phase
- Recent international tax and reporting prosecutions
- Foreign account, entity and investment prosecution
- Who collects restitution and penalties?
- International tax investigations are an IRS high priority
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Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.
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