The IRS has authority to assert FBAR civil penalties. Contrary to popular belief, an FBAR violation doesn’t automatically mean that a penalty will be asserted. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted. For example, the examiner may determine that the facts do not justify asserting a penalty. In that case, the examiner will issue an FBAR warning letter, Letter 3800.
According to IRM 4.26.16.4, the sole purpose of the FBAR penalty is to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether issuing a warning letter and securing delinquent FBARs, rather than asserting a penalty, will achieve the desired result of improving compliance in the future.
Other factors to be considered when applying examiner discretion include: (1) whether the person who committed the violation has been previously issued a warning letter or has been assessed the FBAR penalty; (2) the nature of the violation and the amounts involved; and (3) the cooperation of the taxpayer during the examination.
To the extent that a penalty is warranted, there are two types: non-willful and willful. Both types have varying upper limits, but no floor. As you might imagine, willful FBAR penalties are greater than nonwillful penalties. For example, the maximum nonwillful FBAR penalty is $ 10,000. And the maximum willful FBAR penalty is the greater of (a) $ 100,000 or (b) 50% of the total balance of the foreign account.
In the same way that the decision to impose a FBAR penalty is discretionary, so too is the decision for what the actual amount of that penalty should be. Because FBAR penalties do not have a set amount, the IRS has developed penalty mitigation guidelines to assist examiners in exercising their discretion in applying these penalties. The mitigation guidelines apply to both nonwillful and willful penalty amounts.
The mitigation guidelines are only intended as an aid for the examiner in determining an appropriate penalty amount. Indeed, the examiner may determine that a lesser penalty amount than the guidelines would otherwise provide is appropriate. At the same time, the examiner might determine that the penalty should be increased.
Under the guidelines, the penalty amount is tied to a predetermined maximum aggregate balance for all accounts to which the violations relate. For example, under the nonwillful penalty guidelines, if the maximum aggregate balance for all accounts to which the violations relate did not exceed $ 50,000 at any time during the year, a Level I Nonwillful penalty applies. The corresponding penalty is $ 500 for each violation, not to exceed a total of $ 5,000 in penalties.
How does a person determine whether he qualifies for mitigation? There are four threshold conditions:
• The person must have no history of criminal tax or Bank Secrecy Act convictions for the preceding ten years and have no history of prior FBAR penalty assessments;
• No money passing through any of the foreign accounts associated with the person can be from an illegal source or used to further a criminal purpose;
• The person must have cooperated during the examination; and
• The IRS must not have determined a fraud penalty against the person for an underpayment of income tax for the year in question due to the failure to report income related to any amount in a foreign account.
Most taxpayers qualify for mitigation. If the examiner determines that the taxpayer’s failure to disclose his offshore accounts was not willful, then the nonwillful mitigation guidelines apply. But if the examiner determines that the taxpayer’s failure to disclose his offshore accounts was willful, then the willful mitigation guidelines apply.