New IRS Guidelines for Willful FBAR violations

Last week, the Internal Revenue Service released interim guidance (SBSE-04-0515-0025) on foreign bank account report (FBAR) penalties to improve the administration of the FBAR compliance program. The guidance contains amendments to the Internal Revenue Manual (IRM), effective immediately, and applies to all open cases in which the FBAR penalties are at issue. Examiners are required to implement these new procedures to help ensure consistent, effective and fair administration of the penalties. A Civil FBAR Penalty Case File Checklist is also included to further establish consistency in FBAR case file information.

We find that the guidance is much needed in light of the lack of uniformity in the IRS’ application of FBAR penalties.

The IRS has the burden of showing that a FBAR violation occurred and, for willful violations, that the violation was in fact willful. Because the FBAR penalty provision only provides maximum penalty amounts, the IRS is tasked with determining the appropriate FBAR penalty amount on a case-by-case basis, taking into consideration the particular underlying facts and circumstances.

In regard to willful violations over several years, the memorandum recommends a penalty equal to 50% of the highest account balances for all years with violations. Thus, in lieu a 50% penalty for each year, one 50% penalty is imposed for all years, and it is then allocated across the years based on the balances of each year. The memorandum provides this example:

Assume highest aggregate balances of $50,000, $100,000, and $200,000 for 2010, 2011, and 2012, respectively. The total penalty amount is $100,000 (50 percent of the $200,000 highest aggregate balance during the years under examination).  The total of the highest aggregate balances for all years combined is $350,000.  The penalty for 2010 is $14,286 ($50,000/$350,000 x $100,000). The penalty for 2011 is $28,571 ($100,000/$350,000 x $100,000). The penalty for 2012 is $57,143 ($200,000/$350,000 x $100,000).  The penalty amounts for each year are subject to the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C).

Examiners are still free to impose a higher or lower penalty, in appropriate circumstances. In no case will the penalty exceed 100% of the highest balance of the subject accounts in the years of nonreporting. Another notable change is that IRS Counsel review is no longer required except in cases in which willful penalties have been determined.

The IRS examiner has significant discretion however this provides some much-needed guidance to taxpayers and examiners alike for FBAR penalties. Since the actual amount of the penalties is still largely determined based upon “facts and circumstances” there remains a significant opportunity for persuasive legal advocacy to minimize FBAR penalties.

The 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 from the date of issuance.