The Report of Foreign Bank and Financial Accounts (FBAR) is a critical compliance requirement for U.S. persons with foreign financial accounts. Failure to file an FBAR or filing inaccurately can result in severe penalties, ranging from civil fines to criminal charges. This guide explains the penalties for FBAR violations, how they are determined, and how to avoid them, based on the Internal Revenue Code (IRC), regulations (31 CFR 1010.350 et seq.), and relevant rulings.

1. Non-Willful Violations

• Definition: A non-willful violation occurs when a taxpayer fails to file an FBAR or files inaccurately, but the failure was not due to intentional disregard of the law.
• Penalty: The penalty for a non-willful violation is up to $10,000 per violation(per form, not per account, per year).
• Determination:
  • The penalty is assessed under 31 U.S.C. § 5321(a)(5)(A).
  • The IRS considers factors such as the taxpayer’s knowledge of the FBAR requirement, efforts to comply, and whether the failure was due to reasonable cause.
  • The penalty may be waived if the taxpayer demonstrates reasonable cause(per 31 U.S.C. § 5321(a)(5)(B)(ii)).
  • The S. v. Boyd (2020)ruling clarified that the $10,000 penalty applies per form, not per account, for non-willful violations. This ruling is binding in the Ninth Circuit and has influenced IRS practices nationwide.

2. Willful Violations

• Definition: A willful violation occurs when a taxpayer knowingly or recklessly fails to file an FBAR or files inaccurately.
• Penalty: The penalty for a willful violation is the greater of $100,000 or 50% of the account balanceat the time of the violation, per account, per year (per 31 U.S.C. § 5321(a)(5)(C)).
• Determination:
  • Willfulness is determined based on the taxpayer’s intent, including actual knowledgeof the FBAR requirement or reckless disregard for the obligation.
  • The IRS may use circumstantial evidence, such as the taxpayer’s education, business experience, and efforts to conceal the accounts, to establish willfulness.
  • There is no reasonable cause exceptionfor willful violations.

3. Criminal Penalties

• Definition: In cases of egregious willful violations, the taxpayer may face criminal charges. Criminal penalties are typically pursued in cases involving tax evasion, money laundering, or other serious financial crimes.
• Penalty: Criminal penalties include:
  • Fines: Up to 250,000∗∗forindividualsor∗∗250,000∗∗forindividualsor∗∗500,000for organizations (per 31 U.S.C. § 5322(a)).
  • Imprisonment: Up to 5 yearsfor willful failure to file an FBAR or filing a false FBAR.
• Determination:
  • Criminal penalties are assessed under 31 U.S.C. § 5322.
  • The Department of Justice (DOJ)prosecutes criminal FBAR cases, and the burden of proof is beyond a reasonable doubt.

4. Mitigating Factors and Defenses

The IRS considers several factors when determining penalties, including:

• Reasonable Cause: If the taxpayer can demonstrate that the failure to file was due to reasonable cause and not willful neglect, the penalty may be waived (per 31 U.S.C. § 5321(a)(5)(B)(ii)).
• Voluntary Disclosure: Taxpayers who voluntarily disclose their foreign accounts before being contacted by the IRS may qualify for reduced penalties under the IRS Voluntary Disclosure Program(per IRS Internal Revenue Manual (IRM) 9.5.11.9).
• First-Time Offenders: The IRS may exercise discretion and impose lower penalties on first-time offenders, especially in cases of non-willful violations.

5. How Penalties Are Calculated

• Non-Willful Penalties:
  • The penalty is calculated per form, not per account, per year, up to $10,000 per violation.
  • For example, if a taxpayer fails to report 3 accounts for 2 years, the maximum penalty could be **20,000∗∗(2years×20,000∗∗(2years×10,000).
• Willful Penalties:
  • The penalty is calculated as 50% of the highest account balanceduring the year of the violation.
  • For example, if the highest balance in an account was 200,000,thepenaltywouldbe∗∗200,000,thepenaltywouldbe∗∗100,000** (50% of $200,000).
  • If multiple accounts are involved, the penalty is applied separately to each account.

6. Recent IRS Guidance and Rulings

• S. v. Boyd (2020):
  • The Ninth Circuit Court ruled that the 10,000non−willfulpenaltyapplies∗∗perform∗∗,notperaccount.ThismeansthattaxpayerswhofailtoreportmultipleaccountsonasingleFBARmayfaceamaximumpenaltyof10,000non−willfulpenaltyapplies∗∗perform∗∗,notperaccount.ThismeansthattaxpayerswhofailtoreportmultipleaccountsonasingleFBARmayfaceamaximumpenaltyof10,000, rather than $10,000 per account.
• IRS Guidance on Willful Penalties:
  • The IRS has clarified that willful penalties are not cappedand can exceed 50% of the account balance in cases of multiple years of non-compliance (per IRS Chief Counsel Advice 200603026).

7. Practical Examples

1. Non-Willful Violation:
   • A taxpayer fails to report 3 foreign accounts for 2 years due to lack of awareness of the FBAR requirement.
   • Penalty: Up to **10,000peryear∗∗(totalof10,000peryear∗∗(totalof20,000), assuming the IRS does not waive the penalty.
2. Willful Violation:
   • A taxpayer knowingly fails to report a foreign account with a maximum balance of $500,000 for 2 years.
   • Penalty: **500,000∗∗(50500,000∗∗(50500,000 × 2 years).
3. Criminal Violation:
   • A taxpayer intentionally hides $1 million in a foreign account to evade taxes.
   • Penalty: **500,000fine∗∗(50500,000fine∗∗(501 million) and up to 5 years in prison.

8. How to Avoid Penalties

• File FBARs Timely: Ensure that all foreign accounts are reported annually by the deadline (April 15, with an extension to October 15).
• Seek Professional Help: Consult a tax attorney or CPA to ensure compliance with FBAR requirements.
• Use Voluntary Disclosure Programs: If you have unreported foreign accounts, consider using the IRS Voluntary Disclosure Programto reduce penalties.

Conclusion

FBAR penalties can be severe, ranging from civil fines to criminal charges, depending on the nature of the violation. Understanding the differences between non-willful, willful, and criminal violations is critical to mitigating risks. If you have unreported foreign accounts or are unsure about your FBAR obligations, contact our law firm for expert guidance. We can help you navigate the complexities of FBAR compliance and protect your financial interests.

For further reading, refer to IRS Publication 5569 (FBAR Reference Guide) and FinCEN’s FBAR website.

Disclaimer: This guide is for informational purposes only and does not constitute legal or tax advice. For specific guidance, consult a qualified attorney or tax professional.