Do Examiners Use Discretion to Reduce or Eliminate FBAR Fines

Are Examiners Authorized to Waive FBAR Fines?

Are IRS Examiners Authorized to Reduce or Waive FBAR Fines: When it comes to the FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114), one of the biggest hurdles is not the actual preparation of the form — but rather how the IRS penalizes filers who are noncompliant. FBAR fines can be broken down into civil and criminal penalties — and then the civil penalties can be further broken down into willfulness vs non-willfulness. The fines can vary extensively. They start at a penalty waiver in lieu of penalty, and can work its way all the way up to a 50% penalty on the maximum value of the unreported accounts per year — up to 100% (It used to be up to 300% which represents the six-year FBAR penalty statute (IRC 5321), but it is currently capped at 100%). Different courts across the country have issued different rulings as to how penalties should be issued, and what the maximum penalty should be — but it all starts with the IRS agent or examiner assigned to your case.

Let’s take a look at how FBAR mitigation of fines works (for civil FBAR Violations):

FBAR Fines

Fines for not being in compliance can be pretty bad, but there is still hope. Based on the agent who is assigned to your case and the facts and circumstances surrounding your case will help determine what the outcome of your FBAR fines will be.

As provided by the IRS:

• • • “You may be subject to civil monetary penalties and/or criminal penalties for FBAR reporting and/or recordkeeping violations.  Assertion of penalties depends on facts and circumstances. Civil penalty maximums must be adjusted annually for inflation.”

Penalty for Nonwillful FBAR Violations

Let’s take a look at the IRM (Internal Revenue Manual) says:

IRM 4.26.16.6.4 Penalty for Nonwillful FBAR Violations

• • • “For violations occurring after October 22, 2004, a penalty, not to exceed $10,000 per violation, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements. 31 USC 5321(a)(5)(B).

• • • The penalty should not be imposed if: The violation was due to reasonable cause, and The person files any delinquent FBARs and properly reports the previously unreported account. Examiners have discretion in determining the penalty amount and should use the mitigation guidelines in making their determinations. See the discussion of the mitigation guidelines below. See Exhibit 4.26.16-1. Examiners should take the facts and circumstances of each case into account when determining if a warning letter or penalties that are less than the mitigation guidelines are appropriate. The purpose of FBAR penalties is to promote compliance with the FBAR reporting and recordkeeping requirements.”

What does this Mean?

In general, while the failure to properly file the form may result in a $10,000 per violation penalty, the examiner should use their own judgment in accordance with IRM guidelines to reduce or eliminate penalties in a situation in which the taxpayer can show reasonable cause.

Penalty for Willful FBAR Violations

IRM 4.26.16.6.5 Penalty for Willful FBAR Violations

• • • “The penalty for willful FBAR violations may be imposed on any person who willfully violates or causes any violation of any provisions of 31 USC 5314 (the FBAR filing and recordkeeping requirements). 31 USC 5321(a)(5)(C).

    • The penalty applies to individuals as well as financial institutions and nonfinancial trades or businesses for all years. For violations occurring after October 22, 2004, the statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation. There may be both a reporting and a recordkeeping violation regarding each account.”

FBAR Penalties Indexed For Inflation

While the text of the code section is not continually update, the FBAR penalties are indexed for inflation and the current maximums are as follows:

• Non-Willful Violation of Transaction: $13,481
• Willful Violation of Transaction: $134,806, or 50% of the amount per 31 U.S.C.5321(a)(5)(D)

Mitigation of FBAR Fines

When it comes to the FBAR penalties, IRS examiners and their managers have some leeway with penalty mitigation — but not that much. In addition, most of the time it required consent and approval from a manager or supervisor — which can make it even more complicating, because most managers slash supervisors are less than inclined to have to remove a penalty or reduce the penalty “on their watch.”

Further complicating the issue is the simple fact that there is no bright line test for reasonable cause and non-willfulness — just factors — and different reasonable people can interpret the same facts differently.

Let’s see what the IRM has to say about it:

Mitigation: 4.26.16.6.6

The statutory penalty computation provides a ceiling on the FBAR penalty.

The actual amount of the penalty is left to the discretion of the examiner.

IRS has adopted mitigation guidelines to promote consistency by IRS employees in exercising this discretion for similarly situated persons.

Exhibit 4.26.16-1. 4.26.16.6.6.1 Mitigation Threshold Conditions

• • • “For most FBAR cases, if IRS has determined that if a person meets four threshold conditions, then that person may be subject to less than the maximum FBAR penalty depending on the amounts in the accounts.

    •  For violations occurring after October 22, 2004, the four threshold conditions are:

      • • The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as 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 (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews (the taxpayer back-filed correct reports).

        • 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.”

What does this Mean

This part of the Internal Revenue manual provides a four-prong test to determine whether or not a taxpayer may qualify to have the FBAR penalty mitigated. In other words, if the taxpayer can meet the four-prong test as indicated above then they may be able to have their penalties mitigated by the IRS examiner –but as seen below mitigation is still at the discretion of the examiner.

4.26.16.6.7 FBAR Penalties – Examiner Discretion

• • • The examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty. When a penalty is appropriate, IRS penalty mitigation guidelines aid the examiner in applying penalties in a uniform manner. The examiner may determine that a penalty under these guidelines is not appropriate or that a lesser penalty amount than the guidelines would otherwise provide is appropriate or that the penalty should be increased (up to the statutory maximum).

• • • The examiner must make such a determination with the written approval of the examiner’s manager and document the decision in the workpapers. Factors to consider when applying examiner discretion may include, but are not limited to, the following:
      • • Whether compliance objectives would be achieved by issuance of a warning letter.
        • Whether the person who committed the violation had been previously issued a warning letter or assessed an FBAR penalty.
        • The nature of the violation and the amounts involved.
        • The cooperation of the taxpayer during the examination.

• • • Given the magnitude of the maximum penalties permitted for each violation, the assertion of multiple penalties and the assertion of separate penalties for multiple violations with respect to a single FBAR, should be carefully considered and calculated to ensure the amount of the penalty is commensurate to the harm caused by the FBAR violation.

What does this Mean

It is important to remember that just because the examiner has the discretion to reduce or eliminate FBAR penalties – does not mean they will. The analysis is subjective in nature and therefore while you may find your position to be convincing — the IRS examiner may not agree.

Likewise, even if the agent does agree, it also requires manager/supervisor approval

4.26.16.6.8 Managerial Involvement and Approval of FBAR Penalties

• • • • Managers must perform a meaningful review of the examiner’s penalty determination prior to assessment. The manager must verify that the penalties were fairly imposed and accurately computed; that the examiner did not improperly assert the penalties in the first instance; and that the conclusions regarding “reasonable cause” (or the lack thereof) were proper)…

• • • • • [T]here is a penalty ceiling but no minimum amount. This discretion has been delegated to the FBAR examiner. The examiner may determine that the facts and circumstances of a particular case do not justify a penalty.
        • If there was an FBAR violation but no penalty is appropriate, the examiner must issue the FBAR warning letter, Letter 3800. When a penalty is appropriate, IRS established penalty mitigation guidelines to ensure the penalties determined by the examiner’s discretion are uniform.
        • The examiner may determine that: A penalty under these guidelines is not appropriate, or A lesser amount than the guidelines otherwise provide is appropriate.
        • The examiner must make this determination with the written approval of that examiner’s manager. The examiner’s workpapers must document the circumstances that make mitigation of the penalty under these guidelines appropriate.
        • When determining the proper penalty amount, the examiner should keep in mind that manager approval is required to assert more than one $10,000 non-willful penalty per year, and in no event can the aggregate non-willful penalties asserted exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue.

• • • • Similarly, manager approval is required to assert willful penalties that, in the aggregate, exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue, and in no event can the aggregate willful penalties exceed 100% of the highest aggregate balance of all accounts to which the violations relate during the years at issue.

To qualify for mitigation, the person must meet four criteria:

• • • • The person has no history of criminal tax or BSA convictions for the preceding 10 years and has no history of prior 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.

      • IRS did not determine 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.

It should be noted that either willful or non-willful FBAR fines may be mitigated.

Careful and Thorough Strategy Analysis and Execution

In conclusion, sometimes IRS personnel may consider using their discretion to reduce or eliminate an FBAR penalty. Whether or not the examiner wants to modify eliminate the penalty is dependent on whether or not the taxpayer can convince the examiner that they have met the requirements, and puts forward a persuasive and effective argument in their favor.

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