Getting Rid of FBAR Penalties
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The IRS has been delegated authority to assess FBAR civil penalties.
There are civil penalties for negligence, pattern of negligence, non-willful, and willful violations. And believe it or not some of the budget is made up for Internal Revenue Service comes from penalties and interest from the Fbar. Fbar is becoming very popular in IRS circles.
Over the last three filing seasons the IRS has collected over $5.5 billion in Fbar alone and it is not going away. The threat of criminal prosecution is scaring many people into the filing of their FBAR reports and amending their tax returns as they should.
It is important for taxpayers to understand that they should find IRS before IRS finds them.
Auditor Procedures
Whenever there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, or determine a penalty.
Reason for FBAR Penalties
Penalties should be asserted only to promote compliance with the FBAR reporting and record keeping requirements.
In exercising their discretion, examiners should consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the assertion of a penalty, will achieve the desired result of improving compliance in the future.
Civil Penalties for FBAR
FBAR civil penalties have varying upper limits, but no floor.
The tax examiner has great discretion in determining the amount of the penalty, if any. The tax examiner discretion is necessary because the total amount of penalties that can be applied under the statute can greatly exceed an amount that would be appropriate in view of the violation.
Tax Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted.
Because FBAR penalties do not have a set amount, IRS has developed penalty mitigation guidelines to assist examiners in the exercise of their discretion in applying these penalties. this is why it is in the best interest of taxpayers to use season and experienced tax professionals to handle to Fbar penalty negotiation defenses. Believe me when I tell you as a former IRS agent this experience will save you great volumes of money
The mitigation guidelines are only intended as an aid for the examiner in determining an appropriate penalty amount.
The tax examiner must still consider whether a warning letter or a penalty amount that is less than what would be called for under the mitigation guidelines would be more appropriate given the facts and circumstances of a particular case.
An Example of this
For example, if an individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts but the income from each account was properly reported and the taxpayer made no effort to conceal the existence of the account, it may be more appropriate to issue a warning letter rather than assert penalties under the mitigation guidelines.
FBAR penalties are determined per account, not per unfiled FBAR, for each person required to file. Penalties apply for each year of each violation.
As noted above, however, tax examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted.
Multiple FBAR Penalties
There may be multiple FBAR civil penalty assessments arising from one account.
FBAR civil penalties can apply to each person with a financial interest in, or signature or other authority over, the foreign financial account.
Thus there may be multiple penalty assessments if there is more than one account owner or if a person other than the account owner has signature or other authority over the foreign account.
Each person can be liable for the full amount of the penalty.
Some taxpayers who are dual citizens of the U.S. and a foreign country or who are merely U.S. citizens living and working abroad, may have failed to timely file their FBAR reports.
Good News about FBAR Penalties
The good news is that there is a reasonable case exception under the FBAR Statute that that may eliminate the FBAR penalty altogether..
The authority for the “reasonable cause” exception is found in the IRS Manual IRM 4.26.16.4.3.1 (07-01-2008). See IRS.gov for more on this. If you are going to do this by yourself you would do yourself well by researching are doing some due diligence on this issue.
This IRM approves of the reasonable cause guidance provided under 26 C.F.R. § 1.6664, Reasonable Cause and Good Faith Exception to the § 6662 penalties. IR-2012-65, June 26, 2012 offers a new procedure that will go into effect September 1, 2012, that speak to the reasonable cause exception to the FBAR penalty.
Whether a failure to file or failure to pay is due to “reasonable cause” is based on a consideration of the facts and circumstances.
Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence.
The IRS will consider all available information, including:
- The reasons given for not meeting your tax obligations;
- Your compliance history;
- The length of time between your failure to meet your tax obligations and your subsequent compliance; and
- Circumstances beyond your control.
FBAR reasonable cause may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances.
Among the facts and circumstances that will be considered are:
- Your education level;
- Whether you have previously been subject to the FBAR Reporting tax;
- Whether you have been penalized before, your history plays a very important role.
- Whether there were recent changes in the tax forms or law that you could not reasonably be expected to know; and
- The level of complexity of a tax or compliance issue.
- Reliance upon the advice of a professional tax advisor who was informed of the existence of the foreign financial account.
- Evidence that the foreign account was established for a legitimate purpose.
- Evidence that there was no effort to intentionally conceal the reporting of income or assets.
- Evidence that there was no tax deficiency related to the unreported account.
There may be other factors in addition to those listed that may weigh in favor of a determination that the failure to file was due to reasonable cause. Is the job of the tax professional that you have retained to help with these other factors.
Ignorance of the law, if reasonable along with a good faith effort to comply with the law if you could not reasonable be expected to know of the FBAR requirement.
No single factor will determine reasonable cause. It is a facts and circumstances test. As a former IRS agent I can tell you, look at the whole body of the case.
FBAR Penalties – IRS Tax Examiner Discretion
The examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty. If there was an FBAR violation but the examiner determines that a penalty is not appropriate, the examiner should issue the FBAR warning letter, Letter 3800.
When a penalty is appropriate, IRS has established penalty mitigation guidelines to aid the examiner in applying penalties in a uniform manner.The examiner may determine that a penalty under these guidelines is not appropriate or that a lesser penalty amount than the guidelines would otherwise provide is appropriate or that the penalty should be increased (up to the statutory maximum).
The examiner must make such a determination with the written approval of the examiner’s manager and document the decision in the work papers.
Factors to consider when applying examiner discretion may include, but are not limited to, the following:
Whether compliance objectives would be achieved by issuance of a warning letter;
Whether the person who committed the violation had been previously issued a warning letter or has been assessed the FBAR penalty;
The nature of the violation and the amounts involved; and,
The cooperation of the taxpayer during the examination.
Given the magnitude of the maximum penalties permitted for each violation, the assertion of multiple penalties and the assertion of separate penalties for multiple violations with respect to a single FBAR form, will be considered.
