The Report of Foreign Bank and Financial Accounts (FBAR) is not a tax form. Its filing is not required by the Internal Revenue Code. It is required by Title 31 of the Code of Federal Regulations. Title 31 is the Bank Secrecy Act (BSA). Although FBAR reporting is within the jurisdiction of the Financial Crimes Enforcement Network – a Bureau of the US Department of the Treasury – (FinCEN), (it is E-filed on FinCEN Form 114), the investigation and enforcement of FBAR filing requirements has been relegated to IRS.
A Memorandum of Understanding (MOU) between FinCEN and IRS sets the provisions of the delegated IRS CIVIL enforcement authority for the FBAR. This MOU allows IRS to do the following:
- Investigate possible civil FBAR filing violations;
- Assess and collect civil FBAR penalties;
- Employ its summons power;
- Issue administrative rulings; and,
- Take any other action reasonably necessary for the enforcement of these and related provisions, including the pursuit of injunctions.
The statutory FBAR penalty provisions establish maximum penalty amounts, leaving IRS to determine an appropriate FBAR penalty amount below that threshold.
There are four civil penalties available for FBAR violations:
- Pattern of negligent activity
- Penalty for non-willful violation
- Penalty for willful violations
The following factors are considered by an IRS examiner when establishing FBAR penalties:
- Whether compliance objectives would be achieved through issuance of a warning letter.
- Whether the person who committed the violation previously received a warning letter or was previously assessed an FBAR penalty.
- The nature of the violation and the amounts involved.
- The cooperation of the taxpayer during the examination
Since FATCA’s enactment in 2010, US persons with undisclosed foreign financial accounts are at risk of detection by the IRS and could face financial penalties and possible criminal prosecution for lack of FBAR reporting. US accountholders or US beneficial owners of previously unreported financial assets abroad which have had their information automatically disclosed to IRS are in jeopardy. When FATCA mandated financial information is disclosed by a foreign financial institution and IRS learns of a failure to file required FBARS, IRS is authorized to enforce civil penalties. Moreover, IRS could initiate a criminal investigation against the US Person with legal authority or ownership of the unreported foreign financial account depending on evidence establishing willfulness.
IRS issued Memorandum SBSE-04-0515-0025, “Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties” to improve administration of the FBAR, other than determinations arising from participation in the Offshore Voluntary Disclosure Program (OVDP) or the Streamlined Filing Compliance Procedures. A certain penalty determined under IRS OVDP or the Streamlined Filing Compliance Procedures is referred to as a “miscellaneous penalty”. It is imposed in lieu of other challenges a Taxpayer avoids through coming into the OVDP or filing through the Streamlined Filing Compliance Procedures.
The “take away” from this Report can be summarized as follows:
- IRS requires its examiners to develop and adequately document their analysis of the civil FBAR non-willfulness penalty;
- IRS provides detailed instructions to its examiners for how to calculate the penalty amount for willful violations and non-willful violations of the rules, and limitations or caps on the penalty amounts in certain cases;
- IRS coordinates FBAR cases with technical specialists who have been designated to assist examiners with their cases, and coordinates cases with IRS Chief Counsel’s Office in willfulness cases;
- IRS publishes a civil FBAR penalty case file checklist, detailing which documents must be in the administrative case file.
Once a US person is under IRS examination or has been identified by the U.S. Government as non-compliant, there are few corrective remedies available for compliance failings.
Don’t be a victim of your own making. Consult with your tax advisor for a proper course of action. You don’t want to be a victim of a faulty “checklist”.