For the Internal Revenue Service, the difference between tens of thousands of dollars all comes down to three letters that make up one important prefix: non. As the IRS looks at untimely filed Reports of Foreign Bank and Financial Accounts (FBAR), the question that determines how much tardy reporters will be penalized boils down to one question: was the failure to timely file the FBAR a willful or non-willful action?
In order to assist IRS examiners in their quest to impose proper penalties, the IRS issued a set of interim guidelines on May 13, 2015. The interim guidelines took effect the same day of their issuance and will continue to operate until their scheduled inclusion into the Internal Revenue Manual on or before May 13, 2016. The guidelines have been warmly received by tax law practitioners for the help they offer in understanding how the IRS will implement their FBAR compliance program.
The guidelines direct IRS examiners to find cases of non-willfulness in situations where the failure to file was due to reasonable cause and when the account holder later filed a complete, thorough and correct FBAR. It is important to recognize that to be categorized as a non-willful violation, the account holder must fulfill both parts of the non-willful “test.” First, the account holder must adequately show that the failure to file was because of some reasonable cause. Second, the account holder must also file a late, yet complete and correct, FBAR. Both parts of this “test” must be met before an examiner may find the violation non-willful and impose the lesser of the penalties that the IRS is authorized to assess.
As may be expected, the penalty for a willful failure to report carries a much larger fine. If an account holder is found to have willfully failed to file a timely FBAR, he or she may be penalized per account at a rate of $100,000 or 50% of the account balance as of the last day for timely filing an FBAR, whichever is greater.
Prior to the implementation of the interim guidelines, it appeared that an examiner’s typical response to a failure to file would be the maximum penalty permitted annually per account and according to whether the failure was considered willful or non-willful. Since the introduction of the guidelines in May, however, examiners have been assessing penalties after a diligent review of circumstances on an account-by- account basis.
The independent review of each account encourages examiners to take a more comprehensive view of the factors behind an untimely-filed FBAR. Examiners review factors such as account balances, and whether the account holder’s conduct warrants assessing stiffer penalties. For example, in order to find that an account holder committed a willful violation, examiners will question whether there was “a voluntary, intentional violation of a known legal duty” and, of equal importance, whether the facts exist that would result in a reasonable inference that an account holder intended to willfully fail to file an FBAR. Other factors, such as the account holder’s history of penalties for FBAR violations and history of criminal tax convictions may also be considered when determining whether violations will be categorized as willful or non-willful.
Use of the new guidelines has resulted in shift in how examiners assess penalties. In most cases under the new guidelines, most willful violators will be fined 50% of the annual highest aggregate balance of all FBAR-eligible and unreported accounts during the years when the accounts were under examination. In such cases the fine cannot exceed 100% of the aggregate.
Non-willful violators with multiple unreported accounts are now typically assessed one annual penalty of $10,000 per year under examination. Depending on the circumstances, the $10,000 penalty may be issued per year for each year under examination, or may be limited to one fine of $10,000 for one year. Non-willful penalties are capped at 50% of the annual highest aggregate balance on all FBAR-eligible and unreported accounts during the years when the accounts were under examination.
To avoid an FBAR penalty, US citizens and residents with foreign bank accounts must timely file an FBAR if, at any point during the year preceding the filing deadline, the accounts held over $10,000.