Over the past decade, the U.S. government has vigorously pursued undisclosed foreign bank and financial accounts, effectively ending the days of “secret” offshore banking & investing. U.S. persons (citizens, resident aliens, and domestic entities) who have foreign accounts exceeding $10,000 at any point in a calendar year must file a Foreign Bank and Financial Accounts Report (FBAR), formally known as FinCEN Form 114, via the BSA E-Filing System. Failing to file or intentionally omitting accounts can lead to a 50% penalty on the account’s highest balance for each unreported year, sometimes stacking well beyond the actual value of the account.
FBAR Basics: Triggers for the 50% Penalty
A U.S. person—including citizens, resident aliens, corporations, partnerships, LLCs, trusts, or estates—must file an FBAR if the aggregate value of all foreign accounts surpasses $10,000 in a calendar year. Noncompliance falls under two primary categories:
Non-Willful Violations
- Penalties: Generally up to $10,000 per violation. Under recent court decisions (e.g., Bittner), the penalty for non-willful conduct is typically applied per unfiled FBAR rather than per account. 6-year statute of limitations so $60,000 at maximum.
- No More Formal Mitigation Guidelines: Examiners previously had structured mitigation measures to reduce non-willful fines; those guidelines were removed, expanding examiner discretion.
- One Penalty per Year: In most instances, the IRS will assess a single penalty per year for all unreported accounts. However, if certain aggravating factors exist—approved by management—examiners may impose separate penalties per account and year.
Willful Violations
- Penalties: Up to 50% of the highest account balance (or $100,000, whichever is greater) per year. This penalty can apply for each unfiled year, potentially exceeding the account’s entire balance multiple times over.
- Criminal Tax Liability: If the IRS deems you intentionally concealed offshore income, your case may be referred to the clandestine IRS criminal investigation division. The IRS-CID boasts a 92%+ conviction rate in criminal tax cases, which refers to the DOJ, making early, strategic legal representation critical if you suspect your foreign account audit might escalate into a criminal tax matter. Conviction can lead to hefty fines, restitution, and up to five years in prison.
A violation is deemed willful if the taxpayer “knew or recklessly disregarded” the FBAR filing requirement. Signs might include ignoring repeated bank requests under FATCA, using complex foreign structures to hide U.S.-taxable assets, or lying to tax professionals or federal agents. The IRS Criminal Investigation Division (CID) can then recommend felony prosecution, often leading to an indictment and a conviction rate exceeding 90%.
IRS Guidance Limiting 50% Penalties
While the 50% penalty is potentially devastating, IRS Memorandum SBSE-04-0515-0025 introduced notable limitations and possible reductions:
- Single 50% Cap: In most willful cases, penalties must not exceed 50% of the highest aggregate balance across all unreported accounts for the entire examination period—rather than 50% per year cumulatively.
- Year-by-Year Formula: The penalty for each year is derived by comparing that year’s highest aggregate balance to the overall highest aggregate during all examination years.
- Higher or Lower Than 50%: Examiners may propose more or less than 50%, provided they document their justifications. However, total penalties cannot exceed 100% of the highest aggregate balance.
- Dual-licensed Tax Attorney’s Role: A skilled dual-licensed tax attorney & CPA can negotiate for less than the maximum, especially if the IRS classification of “willfulness” is questionable or examiners overreach in their penalty determination.
Expanding Enforcement and FATCA Letters
For years, the IRS and Department of Justice have pressed foreign banks to reveal the identities of U.S. taxpayers with offshore accounts, capitalizing on FATCA’s global reach. Many banks send out “FATCA letters” to American clients, requesting confirmation of their tax status and subtly cautioning that the institution will not protect undisclosed assets. Taxpayers who disregard these warnings and continue concealing accounts risk classification as willful violators, triggering the 50% penalty and possibly a criminal tax referral if underreporting of income is evident.
It is impossible to overstate the importance of taking your FACTA enforcement letter seriously and discussing your next steps with an experienced FBAR tax attorney – the earlier, the better. Be advised that ignoring the letter will not prevent the IRS from investigating your account(s) but, on the contrary, will merely suggest willful noncompliance, making the situation worse. Failure to disclose foreign accounts can lead to severe tax penalties, particularly in cases of intentional noncompliance.
Fifteen “Known Facilitator” Banks
The IRS has publicly identified at least 15 foreign financial institutions that have historically offered secrecy to U.S. accountholders. Clients of these institutions who remain non-compliant are prime targets for 50% penalties, especially if warnings or prior communications were ignored. Where the government has “named and shamed” a bank, the risk of a willful determination soars.
It is easy for taxpayers to become lost in the sea of acronyms, tax forms, deadlines, and disclosure programs relating to FATCA and FBAR – yet even minor errors or missteps expose taxpayers to debilitating penalties. In some cases, taxpayers may even be at risk of criminal tax and foreign information reporting prosecution and prison time.
If you have undisclosed foreign bank accounts, the best time to consult with an experienced tax attorney is today – before the IRS initiates an FBAR audit or criminal tax investigation. With a swift and proactive approach, it may be possible to dramatically mitigate the FBAR penalties you are currently at risk of facing.
Options to Avoid or Reduce the 50% and other Foreign Information Reporting Penalties
Voluntary Disclosure Practice (VDP)
For taxpayers worried about willful omissions of taxable offshore income and willful omission of required foreign information reporting, coming forward before the IRS contacts you can avert the worst fines and offer a nearly guaranteed chance to eliminate criminal tax prosecutions.
Streamlined Filing Compliance Procedures
If your noncompliance was non-willful, the Streamlined Domestic or Foreign Offshore Programs can substantially reduce penalties—sometimes down to 5% or zero. However, any false certification about your willfulness can escalate matters drastically.
Reasonable Cause Requests
In non-willful cases, you can argue that you relied on erroneous advice, suffered from severe personal hardship, or faced other extenuating circumstances. Examiners may waive or reduce penalties if documented thoroughly.
Penalty Negotiation
Under the interim FBAR guidance, attorneys can contest overbroad or duplicative penalties and push for a single 50% penalty (or even lower) rather than stacking them annually.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed returns coupled with affirmative evasion of payment) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for voluntary disclosure.
As uniquely qualified and extensively experienced criminal tax defense tax attorneys, Kovel CPAs, and EAs, our firm provides a one-stop-shop for efficiently achieving optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
Contact the Tax Law Offices of David W. Klasing Today to Prevent the 50% IRS Penalty and Worse
At the Tax Law Offices of David W. Klasing, we are extremely experienced and successful with high-risk civil and criminal tax controversies, with a particular focus on undisclosed foreign accounts and FBAR compliance. Led by Attorney-CPA David W. Klasing, our firm brings together the legal and accounting capabilities essential for addressing the complexities of willful vs. non-willful classification, the latest FBAR penalty guidance, and potential criminal tax consequences. We thoroughly evaluate each client’s exposure, determining if conduct truly meets a “willful” standard and pursuing paths—such as voluntary disclosure or streamlined filing—that may significantly lower or even eliminate the 50% FBAR penalty. Our representation extends to negotiating penalties by leveraging new IRS guidance, actively contesting any harsh “per account” or multi-year stacking assessments, and mounting a vigorous defense should the matter escalate to a life-altering criminal tax investigation.
By seeking our counsel promptly—before the IRS contacts you—you stand a better chance of preserving your assets, maintaining your freedom, and avoiding the burdensome 50% penalty or worse. Waiting can result in crushing fines for willful violations or criminal tax prosecution if the IRS deems you intentionally concealed foreign funds. Call the Tax Law Offices of David W. Klasing at (800) 681-1295 or use our online contact form to schedule a reduced-rate initial consultation. With flexible options and the possibility for Attorney David W. Klasing to travel personally at no added cost, we deliver the comprehensive advocacy you need. Choose our firm—where in-depth tax knowledge unites with aggressive, strategic representation—and let us safeguard your interests against the most severe FBAR tax penalties.
