FBAR Penalties for Late Filing, Failure to File & More
The IRS Can Impose Severe Penalties on Taxpayers Who Fail to File FBAR
The penalties for not filing FinCEN 114 (Report of Foreign Bank and Financial Accounts FBAR) are some of the IRS's highest civil penalties. In extreme cases, these penalties can be millions of dollars.
Don't be scared — you don't automatically face FBAR penalties if you forget to file. In a lot of cases, you can catch up on your filing requirement voluntarily without incurring penalties.
However, the penalties can be extreme if the IRS decides that you have been willfully incompliant with this reporting obligation. To protect yourself, you need to deal with unfiled FBAR forms carefully. Here's an overview of FBAR penalties.
How Much Are FBAR Penalties?
As of 2022, the maximum penalty for a non-willful FBAR violation is $14,489. Willful FBAR violations can incur penalties of the higher of $144,886 or 50% of the balance in your foreign account. These numbers are indexed to inflation, and they increase every year.
For example, say you have $50,000 in your foreign bank accounts, and the IRS determines that you have committed a willful FBAR violation. Your penalty can be $144,886. If you have $3 million in your foreign accounts, the FBAR willful violation penalty can be up to $1.5 million.
FBAR Penalties for Businesses Violations of the Bank Secrecy Act
The IRS can also assess negligent violation penalties to financial institutions and non-financial trades or businesses that do not follow FBAR reporting and recordkeeping requirements. This is a civil penalty of $1,253 (as of 2022) that applies to all violations of the Bank Secrecy Act.
Businesses and financial institutions with a pattern of negligence may face civil penalties of up to $97,529 (as of 2022). These FBAR penalties do not apply to individuals.
Legal Codes for FBAR Civil Penalties
As indicated above, there are four civil penalties related to FBAR violations. Here are the penalties and the U.S. Code that outlines the specific laws surrounding each of these penalties.
- Negligent activity 31 USC 5321(a)(6)(A).
- Pattern of negligent activity 31 USC 5321(a)(6)(B).
- Penalty for non-willful violation 31 USC 5321(a)(5)(A) and (B).
- Penalty for willful violations 31 USC 5321(a)(5)(C).
Willful Vs. Non-Willful FBAR Penalties
All FBAR penalties can be significant. A willful penalty can be ten times higher (or even more) than a non-willful penalty. However, in some cases, non-willful penalties can end up being higher than willful penalties because they can be assessed per account rather than based on the account balance.
What's the difference between willful and non-willful? In short, non-willful penalties typically apply when you didn't know about the filing requirements. Willful penalties apply when you knowingly chose not to file your FBAR.
But this isn't the only interpretation of the concept of willfulness. Willfulness can also include reckless disregard and willful blindness.
FBAR Willful Reckless Disregard
Here is an example of willful recklessness with the FBAR. Say that you complete your return, and you tick a box on Schedule B saying that you do not have any foreign assets, and another box saying that you don't have to file an FBAR.
When the IRS contacts you about the unfiled FBAR, you claim that you didn't know about the reporting requirement and didn't notice which boxes you ticked on your Schedule B. This may be considered reckless behavior. When you sign your tax return under penalty of perjury, you are declaring that the information submitted is correct.
Ticking boxes without reading questions or reporting incorrect information is reckless. By extension, the IRS can assess willful penalties in these situations.
FBAR Willful Blindness
Willful blindness occurs in cases where you didn't know about the FBAR filing requirement, and you went out of your way to maintain your ignorance. In other words, you should have known about the FBAR reporting requirement, but you didn't.
Again, you don't necessarily need intent for the IRS to assess a willful FBAR penalty. The government can assess your willfulness based on recklessness and blindness.
Civil Willfullness Vs. Criminal Willfulness
The above penalties are all civil penalties. If the IRS assesses a civil penalty, you just pay the penalty. You don't worry about criminal charges or jail time.
However, in rare cases, the government can assess willful criminal penalties on taxpayers who don't file FBAR. Generally, taxpayers only face criminal FBAR penalties when they are also being accused of other financial crimes such as money laundering and tax evasion.
Criminal FBAR Penalties
Under U.S. Code 31 U.S.C. §5322, you can face criminal FBAR penalties of up to $500,000 and a prison term of up to 10 years. These penalties can apply if you willfully failed to file FBAR or filed a false FBAR. Again, however, criminal penalties generally only apply in cases where other crimes are involved.
What Is the Maximum FBAR Penalty?
There is no cap on FBAR penalties, and this rule has been held up through several Federal circuit court rulings. To get a sense of how high FBAR penalties can be, look at the case of United States v. Kahn.
In 2009, Mr. Kahn willfully failed to report the funds in his foreign bank accounts. He had just over $8.5 million in two Swiss bank accounts. Because it was a willful failure to file the FBAR, the government assessed a penalty of $4.26 million which was equal to 50% of his aggregate account balances.
The lawyers for his estate argued that a 1987 Treasury Department Regulation limited the penalty for willful FBAR reporting violations to $100,000. The government claimed that a 2004 statuary amendment superseded the regulation. The courts sided with the government in this case, just as they had in several similar Federal District Court cases.
Are FBAR Penalties Per Form or Per Account
There is some discrepancy about whether non-willful FBAR penalties apply per form or per account. In early 2021, the U.S. Court of Appeals for the Ninth Circuit ruled that the non-willful FBAR penalties should be applied per FBAR form, not per account in the case of the United States v. Boyd.
The defendant had 13 unreported accounts, and she came forward voluntarily. Initially, the IRS attempted to assess a non-willful FBAR violation penalty on each of the 13 accounts. Her lawyers, however, claimed that she should only have to pay a single non-willful penalty for her single unfiled FBAR. In this case, the courts agreed.
But just a few months later, in November 2021, the U.S. Court of Appeals for the Fifth Circuit ruled the opposite way in the United States v. Bittner. In this case, the courts determined that the non-willful penalty should be applied per account rather than per form. At the time of writing, this case is in front of the Supreme Court, and it is still undecided.
If you have ten foreign accounts and you forget to file an FBAR, the maximum non-willful penalty could be $144,890 if calculated per account. If the penalty applies per form, the penalty would only be $14,489.
Neither penalty is ideal, but the smaller one is preferable. Because so much is at stake with FBAR penalties, you should work with a tax professional with experience with this specific tax concern.
Why Are FBAR Penalties So Severe?
Arguably, FBAR penalties have little to nothing to do with tax. Even if you report and pay tax on the income from your foreign accounts, you may still face a penalty if you don't file your FBAR.
The government uses FBAR penalties to scare taxpayers into compliance and reduce the risk of money laundering and other financial crimes. That is why the Financial Crimes Enforcement Network handles these returns instead of directly by the IRS.
How Does the IRS Calculate FBAR Penalties?
Once the IRS realizes that you have unfiled FBAR, the agency will assign an examiner to your case. The examiner will attempt to get more details about your foreign accounts and learn why you didn't file the FBAR.
You need to navigate this process carefully. The FBAR penalties quoted above are maximums — the examiner can also decide to assess no penalties or smaller penalties on your account.
The examiner is also the person who makes the initial determination of whether your behavior was willful or non-willful. One examiner may consider the situation aggravated negligence but still non-willful. Another examiner may claim that the same set of facts constitutes reckless disregard and thus warrants a non-willful FBAR penalty.
Luckily, this decision isn't final. The FBAR Counsel must approve all non-willful FBAR penalties. And you have the right to appeal the assessment and even take the issue to litigation if needed.
How to Reduce the Risk of FBAR Penalties?
The best way to avoid FBAR penalties is to file your FinCEN 114 accurately and on time. If you realize that you missed filing an FBAR, be proactive. It is always better to contact the IRS before the agency contacts you.
If the IRS contacts you about unfiled FBAR, reply promptly and provide the requested information. Even in this case, you may still be able to avoid penalties if the IRS believes that you had a reasonable cause for missing the filing requirement.
The FBAR rules can be complicated, and penalties for lack of compliance can be extremely severe. You may want to contact a tax professional to help with this issue.
History of FBAR Penalties
In 1970, Congress passed the Bank Secrecy Act (BSA), which contained a requirement for individuals to report their foreign bank accounts. In 1972, the Secretary of the Treasury created the FBAR form so that individuals could report their foreign bank accounts when they filed their income tax returns.
These rules were designed to reduce the risk of money laundering and other financial crimes. As these issues became a more significant problem, Congress passed the Money Laundering Control Act of 1986, and this act included the first penalty for willful failure to file FBAR.
At that point, the FBAR penalty was the greater of $25,000 or the amount in the bank accounts. But the penalty was capped at $100,000.
After 9/11, Congress decided to increase the willful FBAR penalty again. In 2004, the government passed a statute that increased the penalty for willful failure to file FBAR to the greater of $100,000 or 50% of the aggregate balances in the foreign bank accounts. The $100,000 is indexed for inflation, so it typically increases every year.
FBAR Penalties Waivers
There are situations where you can file late FBAR without incurring penalties. In other cases, an examiner may look at your case's circumstances and decide to issue you a warning without any penalties. If you've been assessed FBAR penalties, you can apply to have them waived, appeal the case, or pursue the issue through litigation.
FBAR Penalty Mitigation Guidelines
The IRS generally mitigates the penalties in cases that don't involve tax fraud or criminal charges. Mitigation affects both willful and non-willful violations.
If the maximum aggregate balance of all foreign accounts related to the FBAR violation is less than $50,000 at any time during the calendar year, the penalty is just $500 per non-willful violation per filer per year, and non-willful penalties cannot exceed $5,000 for the year. For willful violations, the mitigated penalty is the greater of $1,000 per year or 5% of the maximum balance of the accounts.
For aggregate account balances over $50,000 and up to $250,000, the penalty is $5,000 per non-willful violation. The mitigated penalty for willful violations is the greater of $5,000 or 10% of the maximum aggregate account balance.
If your account balances exceed $250,000, the mitigated non-willful penalty is the statutory maximum per violation. For willful violations related to accounts with an aggregate balance of over $250,000 but less than $1 million, the penalty is the greater of 10% of the maximum balance of each account during the year or 50% of the account balance on the violation date.
For willful violations on accounts with aggregate balances over $1 million, the penalty is the greater of 50% of the account balance on the violation date or the maximum statutory penalty.
Get Help With FBAR Penalties
If you're dealing with FBAR penalties, contact a tax professional today. Using the TaxCure directory, you can search for tax lawyers, CPAs, and enrolled agents who have experience helping taxpayers with this specific issue.