Understanding the FBAR Penalties
Many people are now familiar with the IRS requirement to file an annual Report of Foreign Bank and Financial Accounts (aka “TDF 90-22.1” aka “Foreign Bank Account Report” aka “FBAR” aka “that annoying form with my account information that needs to be sent to the US government”). In the last few years, the FBAR has reached the same levels of infamy as the previously unmentioned “fiscal cliff” – both of which have grown from seldom mentioned concepts to a harsh reality that many U.S. citizens must now confront.
As people begin to comprehend their obligation to file an annual FBAR, they often have to address the nightmarish question of what to do with their outstanding FBARs. The instructions on TDF 90-22.1 explain:
A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause….no penalty will be imposed. A person who willfully fails to report…may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation…willful violations may also be subject to criminal penalties.
These statutory FBAR penalties have captured the attention of the press and have caused many sleepless nights to U.S. citizens who are potentially liable for such burdensome penalties. Consequentially, it is important to review the Internal Revenue Manual (www.irs.gov/irm/part4/irm_04-026-016.html) that directs examiners in determining the appropriate FBAR penalty. This gives a more realistic outline of potential penalties for late filing the FBAR.
For most FBAR cases, the IRS has determined that if a person meets four threshold conditions then the person may be subject to less than the maximum FBAR penalty (for violations occurring prior to October 23, 2004). IRM 18.104.22.168.6.1 (09-01-2008).
- The person has no history of past FBAR penalty assessments.
- No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.
- The person cooperated during the examination.
- The IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.
The Internal Revenue Manual continues to outline the penalty guidelines for the computation of non-willful FBAR violations. There are three penalty levels depending on the maximum value of the account during the period for which the FBAR should have been filed.
Level 1: If the aggregate balance of all accounts is less than $50,000, then the penalty for each violation is $500 (not to exceed a total of $5,000 in penalties).
Level 2: If the aggregate balance of all accounts is between $50,000 and $250,000, then the penalty for each violation is the lesser of $5,000 or 10% of the highest balance in each account during the year.
Level 3: If the aggregate balance of all accounts is more than $250,000, then the penalty for each violation is the statutory maximum of $10,000.