In response to emerging calls for clarity on FBAR penalties, the IRS recently released a memorandum to all LB&I, SB/SE and TE/GE employees regarding guidelines for imposing FBAR penalties.
As a quick review, the penalty for willfully failing to file an FBAR is capped at the greater of $100,000 or 50% of the highest aggregate account balance, per violation, and the penalty for non-willfully failing to file an FBAR will not exceed $10,000 per violation. Taxpayers that fail to report multiple foreign financial accounts over multiple years face potentially enormous FBAR penalties. In the past, practitioners and taxpayers have complained that the government treats the maximum penalty as the default penalty without giving enough emphasis to a taxpayer’s mitigating circumstances, thereby violating the 8th amendment prohibition against excessive fines. For example, in the Zwerner case, a jury imposed fines equal to 1.5 times the highest account balance held by the taxpayer for the years at issue, although the government later settled with the taxpayer for a reduced amount. Additionally, in Moore v. United States, the court rejected the plaintiff’s argument that the $10,000 non-willful penalty violated the 8th amendment because the plaintiff did not have reasonable cause for failing to file FBARs. Although the Internal Revenue Manual provides mitigation guidelines for both the willful and non-willful penalties, practitioners and taxpayers have complained that the guidelines do not always offer taxpayers clear predictability.
The memorandum the IRS recently released clarifies the guidelines for imposing FBAR penalties. Specifically, the memorandum states that for most willful violation cases, the penalty amount for all years under audit shall not exceed 50% of the highest aggregate balance of all unreported foreign accounts under examination. In no event shall the penalty exceed 100% of the highest aggregate account balance of all unreported foreign accounts under audit.
The memorandum also clarifies that non-willful violations should generally be capped at $10,000 per year, regardless of how many foreign financial accounts a taxpayer fails to disclose in a given year. However, if the facts and circumstances warrant, a separate non-willful penalty for each unreported foreign financial account and for each year may be imposed. Examiners must obtain their group manager’s approval prior to imposing the enhanced penalty, and in no event shall the penalties for non-willful violations exceed 50% of the highest aggregate balance of all unreported foreign accounts for the years under exam.
The memorandum further specifies that for multiple owners of foreign financial accounts, examiners must make a separate determination for each account owner as to whether an FBAR violation occurred. The penalty is based on the co-owner’s percentage ownership of the highest balance of the foreign financial account. If the IRS cannot determine the co-owner’s percentage ownership, the Service will divide the highest aggregate balance equally among the owners or in another manner based on the facts and circumstances.
The memorandum is effective May 13, 2015 and “applies to all open cases where the FBAR penalty is considered.” The IRS will incorporate the guidance into IRM 4.26.16 and IRM 4.26.17 within one year of the guidance’s issuance.
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