The Tax Times: IRS Issues New FBAR Penalty Guidance

The IRS released new guidance dated May 13, 2015 on how examiners should determine the amount of any penalty for the failure to file an FBAR (Report of Foreign Bank Account, FinCEN Form 114).

SBSE-04-0515-0025 MEMORANDUM FOR ALL LB&I, SB/SE, AND TE/GE EMPLOYEES

The above-mentioned link has been taken down by the IRS and the provisions of this guidance have been incorporated into the IRM 4.26.16.6.5.3 (11-06-2015), Penalty for Willful FBAR Violations which now provides that the willful penalty is generally limited to 50% of the balance in the account at the time of the violation.

While it does not appear to apply directly to cases in the Offshore Voluntary Disclosure Program (OVDP); it may impact clients' decisions as to whether or not to opt-out of OVDP, or whether or not to enter OVDP in the first place.

Under the guidance examiners are instructed to make a determination of willfulness for each year of the examination. If multiple years are involved, and the conduct is willful, the total penalty amount for all years under examination is generally limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts.

However, if the "facts and circumstances" justify it, an examiner may recommend a penalty of more or less than 50 percent, but in no circumstances will the penalty exceed 100% of the highest aggregate balance.

When asserting an FBAR penalty, the burden is on the IRS to show that an FBAR violation occurred and, for willful violations, that the violation was in fact willful. The FBAR penalty provision of Title 31 establishes only maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case.

The procedures in Attachment 1 were developed to ensure consistency and effectiveness in the administration of FBAR penalties. They will help ensure FBAR penalty determinations are adequately supported and penalties are asserted in a fair and consistent manner. Examiners must continue to use their best judgment when proposing FBAR penalties. They must take into account all the available facts and circumstances of a case. See IRM 4.26.16.4.7, FBAR Penalties – Examiner Discretion, concerning the use of examiner discretion when proposing FBAR penalties.
Attachment 2 is a Civil FBAR Penalty Case File Checklist. Its use will help ensure consistency in FBAR penalty case file information.

This interim guidance will be incorporated into IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR), and IRM 4.26.17, Report of Foreign Bank and Financial Accounts (FBAR) Procedures, no later than one year following its issuance.

Examiners will continue to coordinate with Fraud Technical Advisors (FTA) if they have reason to believe a criminal referral may be appropriate.

If the examiner determines that the conduct was non-willful then in most cases the penalty will be limited to $10,000 for each year regardless of the number of unreported financial accounts.

The guidance does provide that in some cases the "...facts and circumstances (considering the conduct of the person required to file, and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting nonwillful penalties for each year is not warranted." Examiners may in those cases assert a single penalty not to exceed $10,000 for one year only. The starting point for all nonwillful calculations, however will be the "mitigation guidelines" set forth in IRM 4.26.16.4.6 et. seq.

The guidance also indicates that depending on the facts and circumstances, multiple $10,000 penalties for each year may be appropriate. In no event may the total penalties be greater than 50% of the highest aggregate balance for all years under examination.

While all of this leaves a fair amount of discretion with the IRS examiner, it does suggest that there are "norms" for FBAR penalties. However, given that the actual amount of the penalties will be determined based upon "facts and circumstances"there remains a good deal of leeway for effective advocacy to keep the FBAR penalties as low as possible, and to keep them from reaching the maximum guideline amounts.

The guidance provides that it is the examiner who makes a recommendation as to amount, and type of FBAR penalty that is appropriate, and the group manager who makes the final determination, after consultation with an Operating Division FBAR Coordinator. The guidance makes clear that it is not the FBAR Coordinator who makes the decision. In addition, except in cases where the recommendation is to assert a willfulness penalty, IRS Counsel review is not required.

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