Many individuals with undisclosed foreign accounts are justifiably concerned about their failure to comply with the annual obligation to file FBAR (Report of Foreign Bank and Financial Accounts). Each year individuals holding a financial interest in or signature authority over certain foreign financial accounts must file FinCEN Form 114. Covered accounts include foreign mutual funds, trusts, bank accounts, brokerage accounts, and many other foreign financial accounts. For individuals who have failed to comply with this obligation either willfully or inadvertently, harsh penalties can apply. The U.S. government has invested significant resources in offshore tax enforcement providing the IRS and Department of Justice with international tax data from more than 100 nations.
For individuals concerned about facing FBAR penalties due to potential ineligibility for OVDP or for other reasons, recent IRS guidance found in IRS Memorandum SBSE-04-0515-0025, Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties sets forth the possibility for reduced FBAR penalties. However, the penalties you face are discretionary so it is important to have an experienced tax attorney, such as the lawyers of the Tax Law Offices of David w. Klasing, who can advocate and negotiate with the IRS on your behalf.
Penalties for willful violations of FBAR are particularly severe. Willful FBAR penalties can be imposed at the greater of $100,000 or 50% of the aggregate of the highest account balance. Prior to this guidance, the IRS could apply the penalty for every year where the violation occurred. Thus, if an account was not reported for three years – 2011, 2012, and 2013 – a penalty was imposed for each year. As such, penalties could frequently exceed the value of the original account.
However, the new guidance states that there is, essentially, a cap on the damages that can be imposed. In most cases, penalties will be “limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.” Yearly penalties are assessed by a formula “based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined.” The yearly penalty may not exceed the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C).
Consider this example provided by the IRS. For a taxpayer with unreported high aggregate balances of:
Under the new guidance the penalty would be 50% of the highest aggregate balance ($200,000) equaling a penalty of $100,000. Prior to the release of this guidance it was possible for penalty to have equaled $175,000 assuming that the examiner had assessed a 50% penalty for each year.
The guidance does state, “Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance.” Thus, attorneys have room to negotiate a penalty down since the guidance affirms that the IRS must “clearly state the years for which it was determined that an FBAR violation was willful” and that IRS examiners “must fully develop and adequately document in the examination work papers their analysis regarding willfulness.” While there is the risk an examiner could recommend a more severe penalty, the penalty can never exceed “100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.”
There has also been significant discussion over the potential for the IRS to impose multiple FBAR penalties when several accounts went undisclosed. If a $10,000 penalty is applied for each unreported account, liabilities quickly add up. Under the guidance, such an approach will not become a reality for most taxpayers as examiners in most cases should recommend a single penalty for any year where required FBAR disclosures did not occur. Furthermore, the penalty for any single year cannot exceed $10,000. The examiner is also provided discretion to impose a single penalty of up to $10,000 despite multiple years with nonwillful FBAR violations. However, for certain cases, examiners “with the group manager’s approval after consultation with an Operating Division FBAR Coordinator” may work to impose a separate penalty for each unreported account and year. The careful guidance of an experienced tax attorney throughout the FBAR process can reduce the likelihood that an examiner finds such action necessary.
If you have undisclosed foreign accounts and have been contacted by the IRS, the experienced attorneys of the Tax Law Offices of David w. Klasing can work to mitigate the situation and consequences you face. To schedule a reduced-rate consultation at our Los Angeles, Irvine, or San Diego offices call 800-681-1295 today or contact us online.