Last week, the Internal Revenue Service released interim guidance (SBSE-04-0515-0025) on foreign bank account report…
Last week, the Internal Revenue Service released interim guidance (SBSE-04-0515-0025) on foreign bank account report (FBAR) (also known as FinCen 114) 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 non-willful penalties.
The memo states that a non-willful penalty will not be recommended if the IRS determines that the FBAR violations were due to reasonable cause and the person later files correct and complete FBARs.
In regard to non-willful violations when there are multiple accounts, the memorandum indicates in most cases only one $10,000 penalty should be imposed in each year, not $10,000 per account. The memorandum also notes, however, that lesser penalties (e.g., only imposing the penalty in one year) or greater penalties (i.e., per account penalties) may be imposed when appropriate.
Attachment 1 of the memo states that if conditions for mitigation guidelines are met then:
“examiners should make a preliminary penalty calculation based upon the mitigation guidelines in IRM 4.26.16.4.6.2, except that the penalty for each year will be limited to $10,000. This is the penalty amount, unless the facts and circumstances of a case warrant a different penalty amount.
If the facts and circumstances of a case warrant a lower penalty amount, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a single penalty, not to exceed $10,000, for one year only.” (italics added for emphasis)
This clarifies the old punitive rule that could have been interpreted and applied as $10,000 per account per year. This memo is clearly helpful to taxpayers, since it indicates that maximum penalties should be the exception not the default starting point.
While the IRS examiner has significant discretion this memo 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.
Also, the memorandum notes that when accounts have co-owners, each shall be attributed the appropriate percentage ownership of the account balances in computing penalties. Co-owners of an unreported foreign financial account don’t necessarily have to be held jointly liable. Separate determinations must be made with respect to each co-owner as to whether there was a violation.
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.