The Statute of Limitations for FBAR Explained, How Far Back?

Extending the FBAR Penalty Statutory Deadline Pros and Cons

What is the FBAR Statute of Limitations for Civil Penalties?

The FBAR refers to the Foreign Bank and Financial Account Reporting Form, ‘FinCEN Form 114.’ This form is required to be filed by certain U.S. Taxpayers who have an ownership interest or signature authority over foreign accounts, assets, and investments. When a U.S. person fails to file the FBAR timely (or accurately), they may become subject to fines and penalties. While FBAR penalties can be both civil and criminal, most of the time the fines are civil and not criminal. The issue then becomes whether the civil penalties are willful or non-willful. In determining whether the IRS will issue willful or non-willful penalties, sometimes the IRS is late to the party and requires additional time before making an FBAR penalty determination. Before the statute expires, the IRS may request the Taxpayer to sign an extension form to extend the statute of limitations for the IRS to assess penalties.

• • • Should the Taxpayer sign the statutory extension form?

Let’s review some of the pros and cons of extending the FBAR Statute of Limitations, along with a summary of a recent FBAR  statutory extension case.

*Golding & Golding previously published the FBAR Statute of Limitations, How Far Back article back in 2020 and has since updated and expanded the summary.

FBAR Statute

In general, the IRS has 6 years from the date that the FBAR violation occurs to assess penalties.  

31 U.S. Code § 5321 – Civil penalties

• • •  “(b) Time Limitations for Assessments and Commencement of Civil Actions.—

      • (1) Assessments — The Secretary of the Treasury may assess a civil penalty under subsection (a) at any time before the end of the 6-year period beginning on the date of the transaction with respect to which the penalty is assessed.“

Consent to Extend Time to Assess Civil FBAR Penalties

While it may seem counterintuitive to agree to allow the IRS more time to assess FBAR penalties, sometimes it can be an effective strategy. Here is some language from a standard IRS Consent to Extend Time to Assess Civil FBAR Penalties form:

• • • “WHEREAS, the parties to this agreement desire to extend the time during which the penalties provided by 31 U.S.C. 5321 may be assessed and collected

      • For violations with respect to the requirement, established under 31 U.S.C. 5314, for a United States person to report having a financial interest in or signature authority, or other authority, over a financial account during the calendar years…that was maintained with a financial institution located in a foreign country, the amount of any penalty provided by 31 U.S.C. 5321 may be assessed at any time on or before December 31, 2024.

      • This consent does not reduce, waive, or extend any period of limitation under 26 U.S.C. 6501 for assessing or collecting tax. This consent also does not supersede or amend any other agreement between the United States person and the Internal Revenue Service.”

The Pros of Agreeing to an FBAR Statutory Extension

First, let’s look at some common scenarios in which an FBAR statutory extension may benefit the Taxpayer.

Avoid a Premature Willful Penalty

If the IRS Agent only has a short window of time left on the statute to assess FBAR penalties, the Agent may request the Taxpayer to sign an extension form. One reason the Taxpayer may agree to an extension is that if the IRS agent is under tight time constraints, he may be quick to assess willful penalties immediately to meet the statutory deadline — without having had a chance to consider all the facts. Especially if the Taxpayer believes that he was non-willful, this is a situation in which the Taxpayer may consider agreeing to extend the statutory FBAR deadline.

Show Non-Willful or Reasonable Cause

By expanding the statutory FBAR deadline, the Taxpayer will have an opportunity to show that the non-compliance was due to non-willfulness or reasonable cause. This can allow the Taxpayer to level the playing field and make the case for non-willfulness before being put on the defensive.

Establish Mitigating Factors

By extending the statutory deadline, the Taxpayer has an opportunity to try to negotiate a lower penalty based on potential mitigating factors. Depending on the specific facts and circumstances, even if the Taxpayer did violate the FBAR statute and cannot show reasonable cause, they may have an opportunity to mitigate any potential willful or non-willful penalties they may receive.

Voluntary Disclosure Program (‘Cooperation’)

When a Taxpayer is willful and submits to the IRS Voluntary Disclosure Program they are required to ‘cooperate’ to remain in the program. This cooperation usually requires the Taxpayer to sign a statutory extension(s) — including an FBAR statutory extension — during the VDP process to avoid being terminated from the program.

Negotiate a Global Settlement with the IRS

Sometimes, the Taxpayer may have a mixed bag of potential fines and penalties involving FBAR, FATCA, Form 3520, etc. By agreeing to extend the statutory deadline, the Taxpayer may have a better opportunity to negotiate a global settlement of all violations. If the Taxpayer does not sign the statutory extension, they may be hit with significantly more fines and penalties for each violation and each form.

Cons to an FBAR Statutory Extension

While extending the FBAR statutory deadline may benefit the Taxpayer, there also are some detriments to extending the statute. Here are two key issues to consider:

More Time For the IRS to Discover Bad Facts

Agreeing to give the IRS more time to assess FBAR penalties also provides IRS agents more time to discover and uncover negative facts that may work against the Taxpayer. It may result in a situation in which the IRS was going to issue non-willful penalties based on the information they had and change them into willfulness violations, based on the additional information they discover.

The IRS May Have Missed the Deadline

Most IRS agents are overworked and juggling too many balls in the air at any given time. It is difficult for them to meet all the statutory deadline requirements on all their cases. If the Taxpayer does not agree to the statutory extension and the IRS agent does not make the case a priority, the IRS Agent may miss the deadline to assess FBAR penalties and only because the Taxpayer extended the FBAR statute does the IRS now have an opportunity to assess penalties.

Rund FBAR Statutory Extension (No. 1:23-cv-00549)

In the case of Rund, the defendant had many foreign accounts over several years which were not properly reported on the FBAR. At some point, the IRS agents caught wind of the fact that the defendant had allegedly violated the FBAR statute and assessed willful penalties against the taxpayer. Some of these penalties dated back to years in which the IRS would typically not have any basis for assessing penalties since it was beyond the six-year statute. But, since the taxpayer consented to extend the statutory deadline, the IRS was able to assess penalties for violations that occurred beyond the six-year statute of limitations. 

Assessing the Different FBAR Strategies Carefully

The important takeaway from the Rund case is that if the IRS believes the Taxpayer is willful and/or the Taxpayer does not believe that they can make a strong showing that they are non-willful, they may want to reconsider signing a statutory extension form. But, if the Taxpayer enters the voluntary disclosure program (Rund had submitted to OVDP) it is important to note that OVDP/VDP requires full disclosure and cooperation — and VDP/OVDP cooperation typically includes signing any statutory extension during the VDP compliance. Thus, before a Taxpayer commits to entering the IRS Voluntary Disclosure Program they should do so with the intent of completing the program to the end.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.