As stated in our recent post, the IRS released internal documents pursuant to a Freedom of Information Act ("FOIA") request. Many of the documents released relate to FinCEN Form 114 (the "FBAR," formerly Form TD F 90-22.1).
The penalty for willfully failing to file the FBAR is the greater of $100,000 or 50% of the account balance at time of violation. The penalty for a non-willful violation is up to $10,000. The documents released by the IRS list the factors that the IRS considers when determining whether an FBAR violation was willful:
Factors supporting a willful FBAR penalty:
- Opened the foreign bank account
- Owner of, or a financial interest in, the foreign account
- Tax non-compliance
- Did not seek advice, or relied upon the advice of a promoter, foreign banker, or other unqualified tax professional.
- Violations persist after notification of FBAR reporting requirements
- Foreign account not disclosed to return preparer
- No business reason for the foreign account
- No family or business connection to the foreign country
- An offshore entity owns the account
- Previously-filed FBARs do not include all foreign accounts
- Illegal income in the foreign account
- Participated in an abusive tax avoidance scheme
Factors not supporting a willful FBAR penalty:
- Inherited the foreign bank account
- Only signature authority over the foreign bank account
- Tax compliance
- Relied upon the advice of a tax return preparer, a CPA, an attorney, or another
qualified tax professional.
- Full compliance after notification of FBAR reporting requirements
- Foreign account disclosed to return preparer
- Business reason for the foreign account
- Family or business connection to the foreign country
- Person owns the account in his name
What is an FBAR "violation?"
The FBAR statute does not define what constitutes a separate FBAR "violation." See 31 U.S. Code § 5321(a)(5). As a result, the IRS could impose multiple FBAR penalties per year. The documents released by the IRS use the example of an individual who failed to file the FBAR for three years to report two foreign accounts. The IRS examiner has the discretion to assert either (i) 6 violations, one per account per year, (ii) 3 violations, one per FBAR, or (iii) one violation for the entire three year period. However, the document states that "assertion of multiple penalties and the assertion of separate penalties for multiple violations with respect to a single FBAR form should only be taken in the most egregious cases."