If you haven’t filed your Report of Foreign Bank and Financial Accounts (FBARs) on a timely basis, you could be at risk of a higher civil penalty assessment. Inflation-adjusted FBAR penalties are now in effect.
New FBAR Civil Penalties Framework
The statutory civil penalties most people are familiar with, and as reflected in the January 2017 FBAR filing requirements, are:
- Non-willful conduct: a civil penalty not to exceed $10,000 per violation.
- Willful conduct: a civil penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.
Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015: This piece of legislation subjected both non-willful and willful violations of the FBAR requirement to adjustments for inflation. The changes were not retroactive. Currently, the inflation-adjusted civil penalties are amended to depend on the date of assessment:
- Penalties Assessed After August 1, 2016 but before January 16, 2017
- Non-willful conduct: $12,459 per violation.
- Willful conduct: to the greater of $124,588 or 50 percent of the balance in the account at the time of the violation.
- Penalties Assessed after January 15, 2017
- Non-willful conduct: $12,663 per violation.
- Willful conduct: to the greater of $126,626 or 50 percent of the balance in the account at the time of the violation.
Note: If the violation occurred on or before November 2, 2015, the statutory civil penalty amounts may still be assessed.
This is approximately a 25% increase in the penalty amount for an FBAR violation. Meanwhile, there has not been a corresponding inflation-adjustment to the FBAR filing threshold of $10,000 of the aggregate value of foreign financial accounts at any time during the calendar year.
Reducing FBAR Penalty Assessment Amounts
While civil penalties for FBAR violations may have increased as a result of the adjustments for inflation, taxpayers faced with an assessment may still have options to reduce or eliminate these penalties.
Reasonable Cause: First, the adjustments for inflation do not remove the reasonable cause exception for non-willful violations. If reasonable cause can be successfully established, no civil penalty will be assessed. Reasonable cause is determined on a facts and circumstances basis which usually evaluates the experience, knowledge and education of the taxpayer. Reasonable cause does not apply to willful violations.
Mitigation: An IRS examiner, with manager approval, has discretion over the amount of penalties to assess; there is a ceiling to the FBAR penalties, but there is no floor. For instance, a taxpayer may have violated the FBAR filing requirement, but the IRS examiner may decide to issue an FBAR warning letter, if the facts and circumstance permit. Or the examiner may determine that while assessing a penalty is the appropriate course of action, a lesser penalty should be applied. To be considered for mitigation, taxpayers must meet the certain criteria, such as:
- No history of criminal tax or Bank Secrecy Act convictions in the last ten years,
- No history of prior FBAR penalty assessments,
- No funds in the foreign accounts were from an illegal source or were used for criminal purposes,
- No determination of a fraud penalty for underpayment of income tax from failure to report income related to foreign accounts.
Establishing reasonable cause or requesting mitigation based on facts and circumstances is often more difficult than it sounds. If faced with an examination by the IRS, being organized and having contemporaneous documentation to establish reasonable cause or to assist the examiner in determining a basis for mitigation may reduce exposure to civil FBAR penalties. Of course, the best way to avoid penalties is to file accurate and complete FBARs on a timely basis.
The tax attorneys at M. Robinson and Company have experience with international tax preparation, audits and FBAR controversies; we may be able to assist you. Please feel free to contact us at 617-428-6900 with questions. The material in this publication does not constitute legal advice. It is intended for general information purposes only.
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