How FBAR Violations & Investigations Put Taxpayers at Risk: 2021

FBAR Violations & IRS Penalties

FBAR Violations: The FBAR is the Foreign Bank and Financial Account Reporting Form aka FinCEN Form 114. Taxpayers with foreign accounts may have and FBAR reporting requirement, if they meet the threshold for filing. If a U.S. person fails to report the FBAR timely or completely, it is considered an FBAR violations. Enforcement of FBAR violations are on the rise.

The IRS has taken an aggressive position when it comes to foreign accounts compliance.  The failure to properly report offshore accounts, assets and investments may result in fines and penalties. We will summarize FBAR Violations and What Happens when the IRS Investigates:

FBAR Violations & IRS Investigations

Statute of Limitations for FBAR Violations

The statute of limitations is 6-years, and the IRS has 2-years to assess. When a person does not timely and accurately file and report the FBAR, they may become subject to FBAR penalties.

An FBAR violation occurs when a person either does not file the FBAR, or files it late or incomplete.

There are different types of FBAR violations, but the two main categories are Civil FBAR penalties & Criminal FBAR penalties (less common). When FBAR violations are civil, they can be broken down further into willful FBAR violations and non-willful FBAR violations

In order to avoid or reduce FBAR penalties, the Internal Revenue Service has developed FBAR Amnesty programs — collectively referred to as offshore voluntary disclosure.

Foreign Account Investigations are on the Rise

FBAR violations are being heavily issued and enforced. The extent of the penalty is primarily determined by whether the person was willful or non-willful. The IRS devotes extensive times and resources to FBAR violation investigations.

An FBAR Violation(s) stems from a late, unfiled, delinquent or incomplete filed FBAR. The FBAR itself is a form required to be filed by U.S persons with foreign accounts. If a person does not report the accounts on the FBAR, they are considered non-compliant. The Internal Revenue Service has various practices and procedures they use to uncover FBAR violations across the globe.

We will summarize the basics.

One common way the IRS learns of an FBAR violation is because the person was report to the IRS or Department of Treasury by a Foreign Financial Institution in accordance with FATCA.

A second very common method the IRS uses to uncover an FBAR violation is through an FBAR audit or examination. 

FBAR violations may lead to non-willful or willful penalties. In addition, the penalties may be civil or criminal.

What is the FBAR Statutory Authority?

The FBAR is the FinCEN Form 114. Even though the form was created by FinCEN, the IRS has authority to enforce the form.

Who is Required to File?

There are various categories of individuals and person required to file the FBAR.

As provided by the IRS:

“A United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report:

1. a financial interest in or signature or other authority over at least one financial account located outside the United States if
2. the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

Generally, an account at a financial institution located outside the United States is a foreign financial account. Whether the account produced taxable income has no effect on whether the account is a “foreign financial account” for FBAR purposes.”

When Do You File?

As provided by the IRS:

The FBAR is an annual report, due April 15 following the calendar year reported. 

You’re allowed an automatic extension to October 15 if you fail to meet the FBAR annual due date of April 15. You don’t need to request an extension to file the FBAR.

If you are affected by a natural disaster, the government may further extend your FBAR due date. It’s important that you review relevant FBAR Relief Notices for complete information.

For certain employees or officers with signature or other authority over, but no financial interest in certain foreign financial accounts, the 2018 FBAR due date is deferred to April 15, 2020. See Notice 2018-1.

FBAR Violation Penalties

If you do not file the FBAR, you may be subject to fines and penalties.

The two main civil code sections involved section 5314 and 5321

U.S. Code § 5314 (Civil Penalties)

Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. 

The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:

(1) the identity and address of participants in a transaction or relationship.

(2) the legal capacity in which a participant is acting.

(3) the identity of real parties in interest.

(4) a description of the transaction.

(b)The Secretary may prescribe—

(1) a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;

(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;

(3) the magnitude of transactions subject to a requirement or a regulation under this section;

(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and

(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section. (c) A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law.

U.S. Code §5321 (Civil Penalties)

When a person fails to properly file the FBAR, they are subject to section 5321 penalties.

FOREIGN FINANCIAL AGENCY TRANSACTION VIOLATION

(A) Penalty authorized— The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty—(i)In general.— Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000

(ii) Reasonable cause exception— No penalty shall be imposed under subparagraph (A) with respect to any violation if—
such violation was due to reasonable cause, and the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i) the maximum penalty under subparagraph

(B)(i) shall be increased to the greater of—
$100,000, or 50 percent of the amount determined under subparagraph (D), and (ii) subparagraph

(B)(ii) shall not apply.

(D) Amount.—The amount determined under this subparagraph is— (i) in the case of a violation involving a transaction, the amount of the transaction, or (ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

Willful & Non-Willful FBAR Violations

The main factor in deciding between issuing a willful and non-willful FBAR penalty is whether the IRS believes the Taxpayer is willful or non-willful.

• Willful FBAR Penalty
• Non-Willful FBAR Penalty

Non-Willful FBAR Penalty

The non-willful FBAR penalty is typically the least severe penalties. An FBAR non-willful penalty is a “lower-level” penalty for not filing the FBAR. The non-willful penalties can be high, BUT, typically they are not as high as willful penalties.

Willful FBAR Penalty and (Reduced) Willfulness

The Willful FBAR Penalty is typically more severe. An FBAR Willful Penalty is penalty for acting willful, willfully blind, or with reckless disregard in not filing the FBAR. We have provided detailed explanations and analyses in our free International Tax Law library about these different terms, and what they mean.

Reasonable Cause & FBAR Violation Penalties

For some people, they know they were willful and therefore they enter into the traditional Offshore Voluntary Disclosure Program. Other people are confident that they are non-willful, and therefore enter into the Streamlined Program.

For individuals who do not qualify for SFOP or Delinquency Procedures (both provide for penalty waivers), they may be able to choose Reasonable Cause as an option.

With a reasonable cause, a person submits directly to Internal Revenue Service and FinCEN, and requests a penalty waiver by way of a Reasonable Cause Statement.

Additional Offshore Violation Penalties

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets in addition to FBAR violations:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

If you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

Penalties for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The failure to file each one of these information returns or for filing an incomplete return, is a penalty the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty  starts at $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 926

An unfiled form may lead to a penalty that is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

Golding & Golding: About Our International Tax Law Firm

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

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