What is the Proper Willful FBAR Penalty Calculation Method

The Proper Willful FBAR Penalty Calculation Method

Unlike non-willful FBAR penalties — which are not calculated based on the value of the missed accounts but rather on the number of years that the form was not filed — willfulness FBAR penalty calculations are based on the value of the unreported accounts. From a baseline perspective, the IRS determines what the highest value was of the unreported accounts throughout the year and that is the starting point to determine what the willful FBAR penalties may be, since mitigating factors may reduce the final assessed penalty amount. It is important to note, that there is a minimum penalty that the IRS reserves the right to issue which is $100,000 per year, noting that this value adjusts for inflation and is currently closer to 140,000. Let’s take a look at how the Internal Revenue Manual summarizes the proper willful FBAR penalty calculation.

What is the Willfulness FBAR Penalty?

The willfulness penalty is 50% of the highest year’s unreported value on whichever day within the tax year is the highest value. There has been litigation nationwide regarding what date can be used (‘date of violation.’). This can get complicated, because FBARs are technically due on 4/15, but are on automatic extension through 10/15.

As provided by the IRS:

• • • “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2014, Public Law 114-41, required the Secretary to modify the applicable regulations to change the due date for FBARs due for calendar year 2016 and subsequent years to April 15th. FinCEN announced the due date change on its website and granted filers failing to meet the FBAR annual due date of April 15th an automatic extension to October 15th each year. FinCEN also announced that when the FBAR due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.”

What is the Maximum Value?

As provided by the IRM:

• • • The term “highest aggregate balance” as used in this IRM, is calculated as follows:

      • Determine the high balance in each foreign account (to which the violations relate) during each year under examination,

      • For each year, calculate the “combined high balance” by adding together the high balance of each account as determined in subparagraph (a), and then subtracting any transfers among the accounts during that year as necessary to avoid counting the same funds more than once in determining the “highest aggregate balance” . For example, if Account A’s high balance occurs July 15, transfers into Account A after July 15 are not subtracted; however, transfers into Account B from Account A after July 15 and before the date of Account B’s high balance are subtracted, and

      • The highest combined balance calculated under subparagraph (b) among all of the years at issue is the “highest aggregate balance”

Is There Willful FBAR Mitigation?

Before calculating the penalty, the IRS would determine whether or not there are any mitigating factors sufficient to reduce the overall penalties or possibly avoid penalties altogether. In general, when it comes to willfulness the IRS is less inclined to waive FBAR penalties although penalties may be mitigated.

As provided by the IRM:

• • • In ascertaining the penalty amount for willful violations, first determine whether the mitigation criteria in Exhibit 4.26.16-2are met.

What if there are Mitigating Factors

If there are mitigating factors, then the IRS will first make the calculation and then work backward to determine whether or not mitigating factors should apply to the penalties over the different years within the compliance.

As provided by the IRM:

• • • If the mitigation criteria are met, make a preliminary penalty calculation using the mitigation guidelines in Exhibit 4.26.16-2, except limit the total mitigated penalties (among all open years) to no more than 50 percent of the highest aggregate balance of all unreported foreign financial accounts (to which the violations relate) during the years under examination. Allocate the total mitigated penalty amount for each year among all violations in that year for which a penalty is recommended. This is the penalty amount, unless, in the examiner’s discretion as noted in IRM 4.26.16.5.2.1, the facts and circumstances of a case warrant a different penalty amount. 

No Mitigation but Facts and Circumstances

In general, willfulness FBAR penalties are harsh so even if the taxpayer does not have mitigating factors, based on the facts and circumstances of the taxpayer scenario, the IRS does not believe the extreme penalties are warranted, there is still wiggle room for the IRS to reduce the overall penalty for the violations.

As provided by the IRM:

• • • If the mitigation criteria are not met or are met but the facts and circumstances of a case warrant a different penalty amount than calculated in paragraph (2), examiners will consider, as appropriate.

      • Asserting penalties, totaling (among all open years) no more than 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination, regardless of the number of willful violations. Allocate the total penalty amount among all open years (with willful violations) based on the ratio of the combined high balance for each year to the total of the combined high balances for all years. Since FBAR penalties are determined under the statute on a per-violation basis, the total penalty allocated to each year will be further allocated among all violations being penalized in that year, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each violation. The “highest aggregate balance” and the “combined high balance” are calculated as described in IRM 4.26.16.1.6.

      • If asserting penalties computed under subparagraph (a) is not appropriate, asserting penalties for each willful violation in each open year with a penalty amount for each violation up to the statutory maximum penalty amount for that violation.

      • In determining an appropriate penalty amount, consider the facts and circumstances of the case and apply discretion as appropriate. See IRM 4.26.16.5.2.1 for more information about examiner discretion.

Maximum Penalty is 100%

As provided by the IRM:

In no event will the total penalty amount (among all open years) exceed 100 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate during the years under examination. The “highest aggregate balance” is calculated as described in IRM 4.26.16.1.6.

• • • Once penalty amounts are determined, examiners will compare the determined penalty amounts with the statutory maximum penalties to ensure that no penalty exceeds the statutory maximum. In determining the statutory maximum penalty amount under 31 USC 5321(a)(5)(c)(i)(II), use the balance for each account as of the violation date, defined in IRM 4.26.16.5.2.

      • If, after reasonable efforts by the examiner to obtain it, the violation date balance is not available, the examiner may estimate it using available information, including the balance in the account on another date.

      • The examiner should document in the case file: 1) the efforts made to obtain the violation date balance, 2) the fact that the violation date balance is being estimated, and 3) the reason an estimate is used.

      • The examiner should also document what information was used to estimate the violation date balance. For example, if the examiner used the account balance on another date to estimate the violation date balance, the examiner should document 1) the date of that account balance; 2) where that account balance was obtained, for example the balance was included on an account statement; 3) any changes made to that account balance to arrive at the estimated violation date balance, such as changes made to reflect known transfers into or out of the account between the date of the account balance and the violation date; 4) and any other information the examiner considers relevant to the estimated balance.

      • If the account balance on another date is used to estimate the violation date balance, the examiner should use the closest balance date available, unless the examiner determines that the closest available balance is not the most accurate balance to use. If the examiner uses the account balance on another date to estimate the violation date balance but does not use the closest available balance, the reason the closest available balance was not used should be documented.

      • For purposes of determining the violation date balance for accounts where a currency other than U.S. dollars is used, follow additional guidance in paragraph (4) of IRM 4.26.16.2.2.2.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.