The IRS has authority to assert FBAR civil penalties. Before delving any deeper into the FBAR abyss, an important point must be made in order to avoid any confusion or misunderstanding. The FBAR penalty only exists outside of the OVDP and streamlined framework. There is no such thing as an FBAR penalty within OVDP or the streamlined procedures. Instead, penalties under the OVDP or streamlined procedures are referred to as the “miscellaneous penalty.”
Contrary to popular belief, an FBAR violation doesn’t automatically mean that a penalty will be asserted. Examiners are expected to use their best judgment, taking into account the facts and circumstances of each case, in determining whether to assert an FBAR penalty. For example, the examiner may determine that the facts do not justify asserting a penalty. In that case, the examiner will issue an FBAR warning letter, Letter 3800.
According to IRM 4.26.16.4, the sole purpose of the FBAR penalty is to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether issuing a warning letter and securing delinquent FBARs, rather than asserting a penalty, will achieve the desired result of improving compliance in the future.
Other factors to be considered when applying examiner discretion include: (1) whether the person who committed the violation has been previously issued a warning letter or has been assessed the FBAR penalty; (2) the nature of the violation and the amounts involved; and (3) the cooperation of the taxpayer during the examination.
The following is an example of when it would be more appropriate to issue a warning letter rather than assert penalties. Jake has five small foreign accounts with a combined balance of $20,000. He did not report any of these accounts. However, the income from each account was properly reported and Jake made no effort to conceal their existence. Under these circumstances, it would be more appropriate to issue a warning letter.
To the extent that a penalty is warranted, the burden is on the IRS to show that an FBAR violation occurred. There are two types of FBAR penalties: non-willful and willful. Both types have varying upper limits, but no floor, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case. For example, the maximum nonwillful FBAR penalty is $ 10,000. And the maximum willful FBAR penalty is the greater of (a) $ 100,000 or (b) 50% of the total balance of the foreign account.
In a recent memorandum entitled, “Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties,” the IRS listed the procedures that apply to all FBAR cases. Examiners must:
i. Determine a recommended penalty based on the guidance in IRM 4.26.16 and (2), (3), and (4) below.
ii. Consult with an Operating Division FBAR Coordinator.
iii. Seek approval of the FBAR penalty from the group manager after consultation with an Operating Division FBAR Coordinator.
iv. Coordinate with Counsel if a penalty for a willful FBAR violation is being recommended.
v. Coordinate with a Fraud Technical Advisor if there is reason to believe a criminal referral may be warranted.
To summarize the FBAR penalty, there are two possibilities: on the one hand, the examiner may choose to issue you an FBAR warning letter (i.e., Letter 3800) in lieu of asserting a penalty. Or the examiner may believe that a penalty is warranted. If a penalty is warranted, most taxpayers are eligible for the penalty mitigation guidelines.
To the extent that the examiner attempts to assert a willful FBAR penalty, the burden of establishing willfulness is on the IRS.