FBAR is an acronym for the Report of Foreign Bank and Financial Accounts. Under the Bank Secrecy Act, U.S. persons are required to file FinCEN Form 114 (FBAR) if they have a financial interest in, or signature or other authority over, foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year. This includes:
Reporting Requirement: According to 31 CFR 1010.350(a), U.S. persons must annually report their foreign account details to the Commissioner of Internal Revenue using the prescribed form under 31 USC 5314.
Record-Keeping Requirement: Per 31 CFR 1010.420, individuals must maintain and retain relevant records for five years to comply with FBAR regulations.
REPORTING REQUIREMENT
Definition of a U.S. Person for FBAR Purposes:
A U.S. person includes:
Any citizen or resident of the United States;
Entities such as corporations, partnerships, trusts, and limited liability companies that are created, organized, or formed under U.S. laws, including those of any state, the District of Columbia, U.S. Territories and Insular Possessions, or recognized by the Indian Tribes; and
Estates formed under U.S. laws.
Note on Disregarded Entities:
The tax classification of an entity does not influence the requirement to file an FBAR. This is because FBARs fall under the jurisdiction of Title 31 (the Bank Secrecy Act), not Title 26 (Internal Revenue Code).
Determining U.S. Residency:
To establish whether an individual is a U.S. resident for FBAR purposes, one should refer to the residency tests outlined in Section 7701(b)(1)(A)(i)-(iii) of Title 26 of the USC. For these tests, the term “United States” encompasses all states, the District of Columbia, all territories and possessions (including American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the U.S. Virgin Islands), and Indian lands as defined in the Indian Gaming Regulatory Act.
What Counts as a Financial Account?
A financial account can be any of the following:
Savings, checking, and time deposit bank accounts.
Brokerage and securities accounts, including derivatives and other financial instruments.
Commodity futures or options accounts.
Insurance policies or annuities with cash value, such as whole life insurance.
Mutual funds or similar pooled funds that the public can invest in, which have regular value assessments and redemption options.
Any account held at a foreign financial institution or through a person who provides financial services.
Foreign Financial Account:
An account is considered foreign if it is located outside the United States, which includes all U.S. states, the District of Columbia, territories (Northern Mariana Islands, American Samoa, Guam, Puerto Rico, U.S. Virgin Islands), Trust Territory of the Pacific Islands, and Indian lands recognized by the Indian Gaming Regulatory Act.
Determining the Maximum Account Value:
The maximum account value is the highest value of all currency and assets in the account during the year. You can use your quarterly account statements to estimate this value if they accurately reflect the account’s peak value. To convert foreign currency to U.S. dollars, use the exchange rate from the last day of the year, preferably the Treasury Reporting Rates of Exchange.
When You Have a Financial Interest:
You have a financial interest in an account if:
You own or have legal title to it, whether it’s for your benefit or someone else’
Someone holds the account on your behalf, like an agent or nominee.
You own more than 50% of a corporation, partnership, or other entity that holds legal title.
You have a majority interest in a trust, or you receive over half of the trust’s current income.
Signature or Other Authority:
You have signature authority if you can control the movement of money or assets in the account by communicating with the financial institution holding it.
Reporting Jointly Held Accounts
If two individuals jointly maintain a foreign financial account or if multiple individuals each own a partial interest in an account, each U.S. person has a financial interest in that account. Therefore, each person must report the entire value of the account on an FBAR (Report of Foreign Bank and Financial Accounts).
There is a limited exception for spouses. The spouse of an individual who files an FBAR doesn’t need to file a separate FBAR if the following conditions are met:
All financial accounts that the non-filing spouse must report are jointly owned with the filing spouse.
The filing spouse reports the jointly owned accounts on a timely filed FBAR electronically signed (PIN) in item 44.
Both spouses have completed and signed Form 114a, Record of Authorization to Electronically File FBARs, which should be maintained with the filer’s records.
Otherwise, both spouses must file separate FBARs, and each spouse must report the entire value of the jointly owned accounts.
Modified Reporting Requirements
Reporting requirements are modified under certain circumstances:
Reporting 25 or More Foreign Financial Accounts: A U.S. person with a financial interest in 25 or more foreign financial accounts should check the ‘Yes’ box in Part I, Item 14a, and record the number of accounts. The U.S. person should not complete Part II or Part III but keep records of the information. If a group of entities covered by a consolidated report has a financial interest in 25 or more foreign financial accounts, the reporting parent corporation need only complete Part V (for consolidated reporting), Items 34-42, to identify the account owners; it doesn’t need to complete the account information.
Signature or Other Authority Over 25 or More Foreign Financial Accounts: A U.S. person who has signature or other authority over 25 or more foreign financial accounts should check the ‘Yes’ box in Part I, Item 14b, and record the number of accounts. Complete Part IV, Items 34-43, for each person for which the filer has signature authority.
By U.S. Persons Employed and Residing Outside the U.S.: A U.S. person who resides outside the U.S., is an officer or employee of an employer located outside the U.S., and has signature authority over a foreign financial account owned or maintained by the individual’s employer only needs to complete Part I, Part IV, Items 34-43, and the signature section of the FBAR.
Filing Exceptions
The following individuals and types of accounts are exempt from the FBAR filing requirement:
Consolidated FBAR: A U.S. person named in a consolidated FBAR filed by a greater than 50% owner doesn’t need to file a separate FBAR.
Individual Retirement Account (IRA) Owners and Beneficiaries: Owners or beneficiaries of IRAs located in the U.S. don’t need to report foreign financial accounts held by or on behalf of the IRA.
Participants in and Beneficiaries of Tax-Qualified Retirement Plans: Participants in or beneficiaries of retirement plans described in Sections 401(a), 403(a), or 403(b) of Title 26 of the United States Code (Internal Revenue Code) don’t need to report foreign financial accounts held by or on behalf of the retirement plan.
Trust Beneficiaries: Beneficiaries of a trust with a financial interest (defined as “Financial Interest” above) don’t need to report the trust’s foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust is a U.S. person and files an FBAR disclosing the trust’s foreign financial accounts.
Officers or Employees with Signature or Other Authority: Individuals with signature or other authority over foreign financial accounts but no financial interest don’t need to report the account in certain situations, including when they are officers or employees of specific types of financial institutions or entities.
Additionally, certain types of foreign financial accounts, such as those jointly owned by spouses, correspondent or nostro accounts used solely for bank-to-bank settlements, foreign financial accounts of governmental entities, and international financial institutions when the U.S. government is a member, are also exempt from the FBAR filing requirement.
RECORD-KEEPING REQUIREMEN
Keep records of accounts that need to be reported on the FBAR for generally five years from the due date of the report, which is April 15 of the year following the calendar year being reported. The records should include:
Name in which each account is maintained.
Number or other designation identifying the account.
Name and address of the foreign financial institution or other person with whom the account is maintained.
Type of account.
Maximum value of each account during the reporting period.
Keeping a copy of the filed FBAR can help satisfy the recordkeeping requirements. An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account doesn’t need to personally keep records on these foreign financial accounts.
PENALTIES
Individuals who fail to timely file a complete and correct FBAR may be subject to civil monetary penalties, criminal penalties, or both. If a U.S. person learns they should have filed an FBAR for an earlier year, they should electronically file the late FBAR using the BSA E-Filing System and provide an explanation for the late filing. If the IRS determines that the FBAR violation was due to reasonable cause, no penalty will be imposed.
The specific penalties for non-compliance with FBAR reporting and recordkeeping requirements are subject to annual adjustments for inflation. These penalties can vary, and their upper limits are summarized below.
Delinquent FBAR Filing Procedures:
BSA Negligence Penalties:
Applicability: Two types of negligence penalties under 31 USC 5321(a)(6) apply to financial institutions or non-financial trades or businesses for any negligent violations of the Bank Secrecy Act (BSA), including those related to Foreign Bank and Financial Accounts Reports (FBAR). These penalties are not applicable to individuals.
Types of Penalties:
Negligence Penalty: For general negligent violations under 31 USC 5321(a)(6)(A).
Pattern of Negligent Activity Penalty: For businesses demonstrating a pattern of negligent BSA violations under 31 USC 5321(a)(6)(B).
Examiner Role: Only BSA examiners are authorized to assert these negligence penalties. The FBAR warning letter (Letter 3800) addresses most FBAR violations unless a negligence penalty is considered necessary, in which case examiners should seek guidance from a BSA FBAR program analyst.
Negligence Defined (31 USC 5321(a)(6)):
Lack of actual knowledge of FBAR requirements does not preclude a finding of negligence. Non-compliance due to ignorance of these requirements is considered negligent.
Evaluation involves using general negligence principles and comparing actions to industry standards, with 26 CFR 1.6664-4 providing guidance on determining reasonable cause and good faith exceptions.
Penalty Details:
Simple Negligence Penalty (31 USC 5321(a)(6)(A)): Applies only to businesses for each negligent violation of the BSA, including FBAR reporting and recordkeeping requirements, with a statutory maximum of $500 (adjusted for inflation) per violation.
Pattern of Negligence Penalty (31 USC 5321(a)(6)(B)): Imposed on businesses that engage in a pattern of negligent BSA violations, including FBAR rules, with a maximum penalty of $50,000 (adjusted for inflation) in addition to any simple negligence penalties.
Adjustments and Discretion:
Penalties assessed after August 1, 2016, for violations occurring after November 2, 2015, are subject to annual inflationary adjustments under the FCPIA Act, with adjusted maximum penalty amounts detailed in 31 CFR 1010.821. While examiners have discretion in determining the penalty amounts, the general approach is to apply the statutory maximum, with no mitigation guidelines for lowering penalties.
For FBAR violations occurring after October 22, 2004, a non-willful violation penalty can be applied under the authority of 31 USC 5321(a)(5)(A) for Penalty Authorization and 31 USC 5321(a)(5)(B) for the Amount of Penalty. This penalty is applicable to both individuals and entities, such as financial institutions and non-financial trades or businesses.
However, the penalty should not be imposed if the violation was due to reasonable cause and the filer has submitted accurate delinquent or amended FBARs to correct the prior violations.
To file a delinquent FBAR:
Use Electronic Report: File using the current version of the electronic report, but refer to the instructions for the specific year you’re reporting to verify if FBAR reporting requirements apply.
Explain the Delay: On the first page of FinCEN Form 114, specify why the FBAR wasn’t filed on time. Choose a reason from the drop-down menu or select “Other” to provide a detailed explanation in the text box.
Recordkeeping: Retain a copy of the filed FBAR for your records.
Penalty Considerations: No penalty will be applied if it’s determined that the delay in filing was not willful, there was reasonable cause for the delay, and the foreign accounts were accurately reported on the belatedly filed FBAR.
Section 4.26.16.3.12.
Penalty for Non-willful FBAR Violations
For non-willful FBAR violations occurring after October 22, 2004, penalties may be imposed under the authority of 31 USC 5321(a)(5)(A) for the authorization of penalties and 31 USC 5321(a)(5)(B)(i) for the determination of penalty amounts. These penalties apply to both individuals and entities, including financial institutions and non-financial trades or businesses, and are subject to the following considerations:
Reasonable Cause Exception: Penalties should not be imposed if the violation was due to reasonable cause and accurate delinquent or amended FBARs are filed, addressing prior violations. Judicial precedents, such as United States v. Ott, Jarnagin v. United States, and Moore v. United States, have indicated that the principles of reasonable cause within Title 26 can inform what constitutes reasonable cause for FBAR penalties.
Penalty Amount: The maximum penalty for each non-willful violation is $10,000, as specified in 31 USC 5321(a)(5)(B)(i), adjusted for inflation according to the Federal Civil Penalties Inflation Adjustment Act (FCPIA Act). The adjusted penalty amounts are listed in 31 CFR 1010.821.
Examiner Discretion: IRS examiners have discretion in determining penalty amounts, guided by mitigation guidelines and the overarching goal of promoting compliance with FBAR reporting and recordkeeping requirements.
Penalty Calculation for Non-Willful Violations:
If mitigation criteria are met, penalties for each year are preliminarily calculated using the guidelines in Exhibit 4.26.16-2, subject to the statutory maximum for a single non-willful violation. Examiners may adjust the penalty amount based on the facts and circumstances of the case.
If mitigation criteria are not met or if the case’s facts and circumstances warrant a different penalty amount, examiners may:
Limit penalties to the statutory maximum for a single violation, regardless of the number of violations.
Allocate the total penalty amount among all years and violations under consideration.
Assert penalties for each violation up to the statutory maximum.
Group Manager Approval: Each penalty determination must be supported by examiner’s workpapers and approved by the group manager.
Multiple Owners: For accounts with multiple owners, separate determinations are made for each co-owner regarding the violation and its willfulness.
Penalty Limits: Except in egregious cases, the penalty for an account should not exceed 50% of the account’s maximum value during the penalty year. The total penalties for non-willful violations across all open years should not exceed 50% of the highest aggregate balance of all accounts under examination.
Penalty for Willful FBAR Violations
Statutory Basis for Penalties
Legal Authority for Penalties: Penalties for willful FBAR violations are established under 31 USC 5321(a)(5)(A) for the authorization of penalties and further detailed in 31 USC 5321(a)(5)(C) for willful violations. These penalties are applicable for violations of FBAR filing, reporting, and recordkeeping requirements mandated by 31 USC 5314.
Penalty Amount Determination: According to 31 USC 5321(a)(5)(C)(i)(I), the penalty for a willful violation can be the greater of $100,000, adjusted for inflation as outlined in 31 CFR 1010.821, or 50% of the account balance at the time of the violation. The base penalty of $100,000 is subject to annual inflation adjustments, as detailed in 31 CFR 1010.821, to maintain the penalty’s deterrent value over time.
Defining Willfulness
Scope of Willfulness: Willfulness encompasses knowingly violating the FBAR requirements, recklessly disregarding these obligations, or acting with willful blindness towards the duty to report and record keep. These interpretations allow a range of conduct, from deliberate omission to ignorant negligence, to be classified under willful violations.
Evidence of Willfulness: Demonstrating willfulness typically involves indirect evidence of intent to conceal financial information or evade reporting. Key behaviors indicating willfulness include neglecting to report foreign accounts, efforts to hide account existence, or disregarding clear reporting instructions.
Evidence Requirements for Willfulness
Inference from Actions: Willfulness can often be inferred from actions that indicate an intent to conceal or the failure to follow known reporting requirements. This might include inconsistent reporting of foreign accounts on tax returns or deliberate avoidance of learning about FBAR obligations.
Supporting Documentation: Evidence might include financial statements, communications with tax professionals, previous FBAR filings, and any maneuvers aimed at hiding the existence of foreign accounts, such as utilizing foreign-issued debit or credit cards for domestic expenses.
Calculation of Penalties for Willful Violations
Mitigation and Discretionary Adjustments: While mitigation criteria can reduce penalty amounts, total mitigated penalties are capped at 50% of the highest aggregate balance of undisclosed foreign financial accounts, as per examiner discretion outlined in IRM 4.26.16.5.2.1.
Limit on Total Penalty Amount: The cumulative penalty for willful violations across all years under examination is restricted to 100% of the highest aggregate balance of the foreign financial accounts involved, ensuring a proportionate penalty to the violation’s severity.
Evaluation of Co-Owners: In cases involving multiple account owners, each individual’s compliance and willfulness are assessed separately, leading to personalized penalties based on each co-owner’s involvement and actions.
The FBAR penalty mitigation guidelines
The FBAR penalty mitigation guidelines provided are detailed and categorized based on the severity of violations—distinguishing between non-willful and willful violations—and the maximum aggregate balance of foreign financial accounts involved. Here’s a concise overview that includes the criteria for mitigation and outlines the penalty structure as per the guidelines:
Criteria for Penalty Mitigation
To be eligible for penalty mitigation, a filer must meet all the following conditions:
No History of Criminal or Civil Penalties: The filer should not have any criminal tax or BSA convictions in the preceding 10 years and no history of prior FBAR penalty assessments.
Legitimate Funds: No money in the foreign accounts was from illegal sources or used for criminal purposes.
Cooperation with the IRS: The filer cooperated during the examination, including responding to requests for information and back-filing correct reports without the IRS resorting to summons.
No Civil Fraud Penalty: The IRS has not determined a civil fraud penalty against the filer for underpayment related to foreign account income for the year in question.
Non-Willful Violation Penalty Mitigation Levels
Level I-NW: For maximum aggregate balances not exceeding $50,000, the penalty is $500 per violation, with a total cap of $5,000 per year.
Level II-NW: For balances over $50,000 but not exceeding $250,000, the penalty increases to $5,000 per violation.
Level III-NW: For balances exceeding $250,000, penalties rise to the statutory maximum per non-willful violation.
Willful Violation Penalty Mitigation Levels
Level I-Willful: For maximum aggregate balances not exceeding $50,000, the penalty is the greater of $1,000 or 5% of the maximum balance.
Level II-Willful: For balances over $50,000 but not exceeding $250,000, the penalty is the greater of $5,000 or 10% of the maximum account balance.
Level III-Willful: For balances over $250,000 but not exceeding $1,000,000, penalties are the greater of 10% of the maximum balance or 50% of the balance on the violation date.
Level IV-Willful: For balances exceeding $1,000,000, the penalty is the greater of 50% of the account balance on the violation date or the statutory maximum for willful violations.
Money Transmitter Specific Guidance
For money transmitters, FBAR filing requirements hinge on the nature of their relationship with foreign financial accounts. If a money transmitter has signature or other authority, or a direct financial interest in a foreign account exceeding $10,000 at any time during the year, an FBAR filing is required. However, if the money transmitter does not have authority over the agent’s bank account in the foreign country, they are typically not required to file an FBAR for that account.
COMPLETING THE REPORTING OBLIGATION
Individuals must report their foreign accounts by:
Electronically Submitting the FBAR: The FBAR must be filed electronically in a timely manner to comply with reporting obligations.
Responding to Related Inquiries on Federal Tax Returns: Individuals must answer FBAR-related questions found on various forms, including:
Form 1040, Schedule B, questions 7a and 7b;
Form 1041, in the “Other Information” section, question 3;
Form 1065, Schedule B, question 8;
Form 1120, Schedule N, questions 6a and 6b.
Submission Deadline
The FBAR is an annual report due by April 15th of the year following the reported calendar year. This adjustment was made following the enactment of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Before this legislation, the deadline was June 30th, with no option for an extension.
Starting with the calendar year 2016 reports, the deadline includes a provision for an automatic six-month extension to October 15th, requiring no application from the filer for this extension.
FBAR Submission Instructions
Separate from Tax Return: The FBAR is not to be filed with the federal tax return but must be submitted electronically through the BSA E-Filing System since July 1, 2013.
Electronic Filing: The BSA E-Filing System is the mandatory method for FBAR submission, offering a secure and efficient way to file, complete with submission confirmations for filers.
Disclaimer: Please note that the information provided here is intended to serve as a basic overview only. The practice of tax law is complex and cannot be effectively navigated as a do-it-yourself project. It is important to understand that no attorney can fully address all your concerns or questions without a personalized consultation to discuss the unique aspects of your situation.
We strongly encourage you to schedule a call with us to receive tailored assistance and guidance through the process
admin
Cynthia Wu is the Founder and Managing Partner of a law firm, with a strong legal background encompassing complex business litigation, probate, and guardianship cases. She holds a Juris Doctor degree from the University of Arizona and an LLM in Taxation from the University of Florida. Cynthia's experience spans estate planning, probate, and business litigation, and she is admitted to practice law in California, the District of Columbia, Texas, and Florida, as well as before the U.S. Tax Court and the Chinese National Bar.
FBAR
Editor: Cynthia Wu
FBAR is an acronym for the Report of Foreign Bank and Financial Accounts. Under the Bank Secrecy Act, U.S. persons are required to file FinCEN Form 114 (FBAR) if they have a financial interest in, or signature or other authority over, foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year. This includes:
Reporting Requirement: According to 31 CFR 1010.350(a), U.S. persons must annually report their foreign account details to the Commissioner of Internal Revenue using the prescribed form under 31 USC 5314.
Record-Keeping Requirement: Per 31 CFR 1010.420, individuals must maintain and retain relevant records for five years to comply with FBAR regulations.
Definition of a U.S. Person for FBAR Purposes:
A U.S. person includes:
Note on Disregarded Entities:
The tax classification of an entity does not influence the requirement to file an FBAR. This is because FBARs fall under the jurisdiction of Title 31 (the Bank Secrecy Act), not Title 26 (Internal Revenue Code).
Determining U.S. Residency:
To establish whether an individual is a U.S. resident for FBAR purposes, one should refer to the residency tests outlined in Section 7701(b)(1)(A)(i)-(iii) of Title 26 of the USC. For these tests, the term “United States” encompasses all states, the District of Columbia, all territories and possessions (including American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the U.S. Virgin Islands), and Indian lands as defined in the Indian Gaming Regulatory Act.
What Counts as a Financial Account?
A financial account can be any of the following:
Foreign Financial Account:
An account is considered foreign if it is located outside the United States, which includes all U.S. states, the District of Columbia, territories (Northern Mariana Islands, American Samoa, Guam, Puerto Rico, U.S. Virgin Islands), Trust Territory of the Pacific Islands, and Indian lands recognized by the Indian Gaming Regulatory Act.
Determining the Maximum Account Value:
The maximum account value is the highest value of all currency and assets in the account during the year. You can use your quarterly account statements to estimate this value if they accurately reflect the account’s peak value. To convert foreign currency to U.S. dollars, use the exchange rate from the last day of the year, preferably the Treasury Reporting Rates of Exchange.
When You Have a Financial Interest:
You have a financial interest in an account if:
Signature or Other Authority:
You have signature authority if you can control the movement of money or assets in the account by communicating with the financial institution holding it.
Reporting Jointly Held Accounts
If two individuals jointly maintain a foreign financial account or if multiple individuals each own a partial interest in an account, each U.S. person has a financial interest in that account. Therefore, each person must report the entire value of the account on an FBAR (Report of Foreign Bank and Financial Accounts).
There is a limited exception for spouses. The spouse of an individual who files an FBAR doesn’t need to file a separate FBAR if the following conditions are met:
Modified Reporting Requirements
Reporting requirements are modified under certain circumstances:
Reporting 25 or More Foreign Financial Accounts: A U.S. person with a financial interest in 25 or more foreign financial accounts should check the ‘Yes’ box in Part I, Item 14a, and record the number of accounts. The U.S. person should not complete Part II or Part III but keep records of the information. If a group of entities covered by a consolidated report has a financial interest in 25 or more foreign financial accounts, the reporting parent corporation need only complete Part V (for consolidated reporting), Items 34-42, to identify the account owners; it doesn’t need to complete the account information.
Signature or Other Authority Over 25 or More Foreign Financial Accounts: A U.S. person who has signature or other authority over 25 or more foreign financial accounts should check the ‘Yes’ box in Part I, Item 14b, and record the number of accounts. Complete Part IV, Items 34-43, for each person for which the filer has signature authority.
By U.S. Persons Employed and Residing Outside the U.S.: A U.S. person who resides outside the U.S., is an officer or employee of an employer located outside the U.S., and has signature authority over a foreign financial account owned or maintained by the individual’s employer only needs to complete Part I, Part IV, Items 34-43, and the signature section of the FBAR.
Filing Exceptions
The following individuals and types of accounts are exempt from the FBAR filing requirement:
Keep records of accounts that need to be reported on the FBAR for generally five years from the due date of the report, which is April 15 of the year following the calendar year being reported. The records should include:
Individuals who fail to timely file a complete and correct FBAR may be subject to civil monetary penalties, criminal penalties, or both. If a U.S. person learns they should have filed an FBAR for an earlier year, they should electronically file the late FBAR using the BSA E-Filing System and provide an explanation for the late filing. If the IRS determines that the FBAR violation was due to reasonable cause, no penalty will be imposed.
The specific penalties for non-compliance with FBAR reporting and recordkeeping requirements are subject to annual adjustments for inflation. These penalties can vary, and their upper limits are summarized below.
Delinquent FBAR Filing Procedures:
BSA Negligence Penalties:
Applicability: Two types of negligence penalties under 31 USC 5321(a)(6) apply to financial institutions or non-financial trades or businesses for any negligent violations of the Bank Secrecy Act (BSA), including those related to Foreign Bank and Financial Accounts Reports (FBAR). These penalties are not applicable to individuals.
Types of Penalties:
Negligence Penalty: For general negligent violations under 31 USC 5321(a)(6)(A).
Pattern of Negligent Activity Penalty: For businesses demonstrating a pattern of negligent BSA violations under 31 USC 5321(a)(6)(B).
Examiner Role: Only BSA examiners are authorized to assert these negligence penalties. The FBAR warning letter (Letter 3800) addresses most FBAR violations unless a negligence penalty is considered necessary, in which case examiners should seek guidance from a BSA FBAR program analyst.
Negligence Defined (31 USC 5321(a)(6)):
Lack of actual knowledge of FBAR requirements does not preclude a finding of negligence. Non-compliance due to ignorance of these requirements is considered negligent.
Evaluation involves using general negligence principles and comparing actions to industry standards, with 26 CFR 1.6664-4 providing guidance on determining reasonable cause and good faith exceptions.
Penalty Details:
Simple Negligence Penalty (31 USC 5321(a)(6)(A)): Applies only to businesses for each negligent violation of the BSA, including FBAR reporting and recordkeeping requirements, with a statutory maximum of $500 (adjusted for inflation) per violation.
Pattern of Negligence Penalty (31 USC 5321(a)(6)(B)): Imposed on businesses that engage in a pattern of negligent BSA violations, including FBAR rules, with a maximum penalty of $50,000 (adjusted for inflation) in addition to any simple negligence penalties.
Adjustments and Discretion:
Penalties assessed after August 1, 2016, for violations occurring after November 2, 2015, are subject to annual inflationary adjustments under the FCPIA Act, with adjusted maximum penalty amounts detailed in 31 CFR 1010.821. While examiners have discretion in determining the penalty amounts, the general approach is to apply the statutory maximum, with no mitigation guidelines for lowering penalties.
For FBAR violations occurring after October 22, 2004, a non-willful violation penalty can be applied under the authority of 31 USC 5321(a)(5)(A) for Penalty Authorization and 31 USC 5321(a)(5)(B) for the Amount of Penalty. This penalty is applicable to both individuals and entities, such as financial institutions and non-financial trades or businesses.
However, the penalty should not be imposed if the violation was due to reasonable cause and the filer has submitted accurate delinquent or amended FBARs to correct the prior violations.
To file a delinquent FBAR:
Use Electronic Report: File using the current version of the electronic report, but refer to the instructions for the specific year you’re reporting to verify if FBAR reporting requirements apply.
Explain the Delay: On the first page of FinCEN Form 114, specify why the FBAR wasn’t filed on time. Choose a reason from the drop-down menu or select “Other” to provide a detailed explanation in the text box.
Recordkeeping: Retain a copy of the filed FBAR for your records.
Penalty Considerations: No penalty will be applied if it’s determined that the delay in filing was not willful, there was reasonable cause for the delay, and the foreign accounts were accurately reported on the belatedly filed FBAR.
Section 4.26.16.3.12.
Penalty for Non-willful FBAR Violations
For non-willful FBAR violations occurring after October 22, 2004, penalties may be imposed under the authority of 31 USC 5321(a)(5)(A) for the authorization of penalties and 31 USC 5321(a)(5)(B)(i) for the determination of penalty amounts. These penalties apply to both individuals and entities, including financial institutions and non-financial trades or businesses, and are subject to the following considerations:
Reasonable Cause Exception: Penalties should not be imposed if the violation was due to reasonable cause and accurate delinquent or amended FBARs are filed, addressing prior violations. Judicial precedents, such as United States v. Ott, Jarnagin v. United States, and Moore v. United States, have indicated that the principles of reasonable cause within Title 26 can inform what constitutes reasonable cause for FBAR penalties.
Penalty Amount: The maximum penalty for each non-willful violation is $10,000, as specified in 31 USC 5321(a)(5)(B)(i), adjusted for inflation according to the Federal Civil Penalties Inflation Adjustment Act (FCPIA Act). The adjusted penalty amounts are listed in 31 CFR 1010.821.
Examiner Discretion: IRS examiners have discretion in determining penalty amounts, guided by mitigation guidelines and the overarching goal of promoting compliance with FBAR reporting and recordkeeping requirements.
Penalty Calculation for Non-Willful Violations:
If mitigation criteria are met, penalties for each year are preliminarily calculated using the guidelines in Exhibit 4.26.16-2, subject to the statutory maximum for a single non-willful violation. Examiners may adjust the penalty amount based on the facts and circumstances of the case.
If mitigation criteria are not met or if the case’s facts and circumstances warrant a different penalty amount, examiners may:
Limit penalties to the statutory maximum for a single violation, regardless of the number of violations.
Allocate the total penalty amount among all years and violations under consideration.
Assert penalties for each violation up to the statutory maximum.
Group Manager Approval: Each penalty determination must be supported by examiner’s workpapers and approved by the group manager.
Multiple Owners: For accounts with multiple owners, separate determinations are made for each co-owner regarding the violation and its willfulness.
Penalty Limits: Except in egregious cases, the penalty for an account should not exceed 50% of the account’s maximum value during the penalty year. The total penalties for non-willful violations across all open years should not exceed 50% of the highest aggregate balance of all accounts under examination.
Penalty for Willful FBAR Violations
Statutory Basis for Penalties
Legal Authority for Penalties: Penalties for willful FBAR violations are established under 31 USC 5321(a)(5)(A) for the authorization of penalties and further detailed in 31 USC 5321(a)(5)(C) for willful violations. These penalties are applicable for violations of FBAR filing, reporting, and recordkeeping requirements mandated by 31 USC 5314.
Penalty Amount Determination: According to 31 USC 5321(a)(5)(C)(i)(I), the penalty for a willful violation can be the greater of $100,000, adjusted for inflation as outlined in 31 CFR 1010.821, or 50% of the account balance at the time of the violation. The base penalty of $100,000 is subject to annual inflation adjustments, as detailed in 31 CFR 1010.821, to maintain the penalty’s deterrent value over time.
Defining Willfulness
Scope of Willfulness: Willfulness encompasses knowingly violating the FBAR requirements, recklessly disregarding these obligations, or acting with willful blindness towards the duty to report and record keep. These interpretations allow a range of conduct, from deliberate omission to ignorant negligence, to be classified under willful violations.
Evidence of Willfulness: Demonstrating willfulness typically involves indirect evidence of intent to conceal financial information or evade reporting. Key behaviors indicating willfulness include neglecting to report foreign accounts, efforts to hide account existence, or disregarding clear reporting instructions.
Evidence Requirements for Willfulness
Inference from Actions: Willfulness can often be inferred from actions that indicate an intent to conceal or the failure to follow known reporting requirements. This might include inconsistent reporting of foreign accounts on tax returns or deliberate avoidance of learning about FBAR obligations.
Supporting Documentation: Evidence might include financial statements, communications with tax professionals, previous FBAR filings, and any maneuvers aimed at hiding the existence of foreign accounts, such as utilizing foreign-issued debit or credit cards for domestic expenses.
Calculation of Penalties for Willful Violations
Mitigation and Discretionary Adjustments: While mitigation criteria can reduce penalty amounts, total mitigated penalties are capped at 50% of the highest aggregate balance of undisclosed foreign financial accounts, as per examiner discretion outlined in IRM 4.26.16.5.2.1.
Limit on Total Penalty Amount: The cumulative penalty for willful violations across all years under examination is restricted to 100% of the highest aggregate balance of the foreign financial accounts involved, ensuring a proportionate penalty to the violation’s severity.
Evaluation of Co-Owners: In cases involving multiple account owners, each individual’s compliance and willfulness are assessed separately, leading to personalized penalties based on each co-owner’s involvement and actions.
The FBAR penalty mitigation guidelines
The FBAR penalty mitigation guidelines provided are detailed and categorized based on the severity of violations—distinguishing between non-willful and willful violations—and the maximum aggregate balance of foreign financial accounts involved. Here’s a concise overview that includes the criteria for mitigation and outlines the penalty structure as per the guidelines:
Criteria for Penalty Mitigation
To be eligible for penalty mitigation, a filer must meet all the following conditions:
No History of Criminal or Civil Penalties: The filer should not have any criminal tax or BSA convictions in the preceding 10 years and no history of prior FBAR penalty assessments.
Legitimate Funds: No money in the foreign accounts was from illegal sources or used for criminal purposes.
Cooperation with the IRS: The filer cooperated during the examination, including responding to requests for information and back-filing correct reports without the IRS resorting to summons.
No Civil Fraud Penalty: The IRS has not determined a civil fraud penalty against the filer for underpayment related to foreign account income for the year in question.
Non-Willful Violation Penalty Mitigation Levels
Level I-NW: For maximum aggregate balances not exceeding $50,000, the penalty is $500 per violation, with a total cap of $5,000 per year.
Level II-NW: For balances over $50,000 but not exceeding $250,000, the penalty increases to $5,000 per violation.
Level III-NW: For balances exceeding $250,000, penalties rise to the statutory maximum per non-willful violation.
Willful Violation Penalty Mitigation Levels
Level I-Willful: For maximum aggregate balances not exceeding $50,000, the penalty is the greater of $1,000 or 5% of the maximum balance.
Level II-Willful: For balances over $50,000 but not exceeding $250,000, the penalty is the greater of $5,000 or 10% of the maximum account balance.
Level III-Willful: For balances over $250,000 but not exceeding $1,000,000, penalties are the greater of 10% of the maximum balance or 50% of the balance on the violation date.
Level IV-Willful: For balances exceeding $1,000,000, the penalty is the greater of 50% of the account balance on the violation date or the statutory maximum for willful violations.
Money Transmitter Specific Guidance
For money transmitters, FBAR filing requirements hinge on the nature of their relationship with foreign financial accounts. If a money transmitter has signature or other authority, or a direct financial interest in a foreign account exceeding $10,000 at any time during the year, an FBAR filing is required. However, if the money transmitter does not have authority over the agent’s bank account in the foreign country, they are typically not required to file an FBAR for that account.
Individuals must report their foreign accounts by:
Electronically Submitting the FBAR: The FBAR must be filed electronically in a timely manner to comply with reporting obligations.
Responding to Related Inquiries on Federal Tax Returns: Individuals must answer FBAR-related questions found on various forms, including:
Submission Deadline
The FBAR is an annual report due by April 15th of the year following the reported calendar year. This adjustment was made following the enactment of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. Before this legislation, the deadline was June 30th, with no option for an extension.
Starting with the calendar year 2016 reports, the deadline includes a provision for an automatic six-month extension to October 15th, requiring no application from the filer for this extension.
FBAR Submission Instructions
Separate from Tax Return: The FBAR is not to be filed with the federal tax return but must be submitted electronically through the BSA E-Filing System since July 1, 2013.
Electronic Filing: The BSA E-Filing System is the mandatory method for FBAR submission, offering a secure and efficient way to file, complete with submission confirmations for filers.
Disclaimer: Please note that the information provided here is intended to serve as a basic overview only. The practice of tax law is complex and cannot be effectively navigated as a do-it-yourself project. It is important to understand that no attorney can fully address all your concerns or questions without a personalized consultation to discuss the unique aspects of your situation.
We strongly encourage you to schedule a call with us to receive tailored assistance and guidance through the process