An area of difficulty that has arisen with regard to FBAR cases is the ambiguity of penalties potentially faced by an individual in violation of disclosure requirements.
The statute tells us that there are two categories of penalties that may be imposed:
Willfulness is defined as “a voluntary, intentional violation of a known legal duty.” Aside from criminal sanctions, a willful penalty is the greater of $100,000 or 50 percent of all non-disclosed accounts, per year; and for every year for which the statute of limitations is open. This means that the statute allows the IRS to fine a taxpayer up to 300 percent of the amount of an account in violation of disclosure obligations.
In most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unpaid foreign financial accounts during the years under examination. Examiners may recommend an amount which is higher or lower than 50 percent. The total penalty should not exceed 100 percent of the highest aggregate balance.
Of course, these large fines have had their critics who have raised the issue of whether these excessive fines taken to their full extent under the statute, may violate a taxpayer’s rights under the Eighth Amendment.
Perhaps as a recognition of this complaint, the IRS has generally adopted a policy of limiting actual implementation of these 50 percent penalties to once or twice over the collection period; which is still burdensome enough to drain your account entirely.
While cases of intentional concealment or fraud are generally distinguishable as willful violations, often there are cases where the distinction between a willful and non-willful violation can be difficult to assess without professional guidance. Depending on the circumstances surrounding the taxpayer’s failure to file, the courts may find that a taxpayer is “willfully-blind” to their filing obligations.
This means that the taxpayer made a conscious effort to avoid learning about their FBAR reporting obligations. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient in itself, to establish that the FBAR violation was attributable to willful blindness.
As an example, if the taxpayer failed to inform his tax preparer about any foreign accounts he owns, a court may find that the taxpayer willfully avoided learning about their disclosure obligations.
On the other hand, if a taxpayer did inform their tax preparer, the court may look a bit deeper into the facts of the circumstances that led to the taxpayer’s failure to file. The court looks to determine whether or not the taxpayer had reasonable cause; does the taxpayer have a good reason that would allow the court to excuse the violation?
For example, if the taxpayer told his tax return preparer about the foreign accounts and the preparer misinformed the taxpayer – was it reasonable for the taxpayer to rely on the tax preparer’s advice?
This can be a very fact-specific inquiry. If the return preparer was unpaid or known to be inexperienced, or if you had filed an FBAR in a previous year, these facts will not likely weigh in your favor. Failure to review your tax returns is considered by the IRS to be “reckless” (willful).
Here are some of the possible outcomes — with variably degrees of severity:
The court’s rulings in FBAR cases have indicated that the reasonable cause defense that is usually available in other contexts is severely limited in FBAR cases. However, if you are able to give a valid and acceptable reason as to why you violated the FBAR filing requirement, you will qualify for a non-willful penalty.
When we see non-compliant clients in our office, the first thing we do is present them with a spreadsheet listing the possible penalties under different scenarios (which can include multiple years worth of filings) and we also point out the potential criminal risk. That definitely gets their attention, so we can proceed with gathering information and preparing the best defense strategy. But before we proceed, we make sure that the client 100 percent understands the law and IRS filing guidelines. This also a good time to remind them about the statute of limitations regarding FBAR filings.
Next, we ask client questions about their compliance status, what they know/are aware of regarding FBAR filing and gather information, such as the organizer that they filed or gave to their tax preparer. We verify everything by reviewing all back-up documentation including prior tax returns, relevant bank statements, and emails. If necessary, we will interview the tax preparer. Then, if necessary we will file a FOIA (Freedom of Information Act) request if we believe we have a good shot at an appeal.
 United States v Sturman 951 F 2 d 1466 6 th Cir 1991
 IRM 4 26 16 6 5 1 5 11 06 2015
A non-willful penalty carries a fine of $10,000 per year if you are in violation. The non-willful penalty has been limited to a $10,000 penalty per open year, regardless of the number of accounts. Unfortunately, the government has taken the position that the fine can be applied to each non-disclosed account.
As mentioned previously, the IRS has generally operated under a circumscribed policy limiting the application of the penalty to its full extent. However, depending on the facts and how egregious the violations are, the IRS may push the penalties further than they normally do. The IRS has had cases go in their favor in this area, but these FBAR penalty cases are still being litigated.
For now, this means that if you have three foreign bank accounts that fall under FBAR reporting obligations, you could potentially be fined $30,000 (3 accounts x $10,000 fine) for every year that you did not fulfill your filing requirements. This stacking of penalties under the non-willful penalty has imposed a pretty severe punishment on taxpayers who unintentionally failed to file.
There are some non-willful programs available to clients to get back into good graces with the IRS:
To be eligible, the taxpayer must certify under penalties of perjury that their conduct for the failure to report all income, pay all tax and file all information returns, including FBARs, was due to non-willful conduct. However, these options are not without their downsides. First off, these programs could close at any time. Secondly, by putting a taxpayer into a streamlined procedure and the IRS receives/discovers evidence of willfulness, fraud, or criminal conduct, it could result in the IRS opening up examination/investigation and FBAR penalties, civil fraud penalties, information return penalties, or referral to criminal investigation.
If the taxpayer gets audited, then all bets are off. To hopefully circumvent an audit, it is important that the taxpayer files a certification that discloses all the facts. It is important to get out in front of an audit but if there is any doubt in the mind of your client (or you) that they were acting willfully, then they should participate in the new OVDP (Offshore Voluntary Disclosure Program).
The IRS is serious about FBAR compliance. The possibility of being penalized to this extent provides enough incentive to file an FBAR, even in cases where you are not entirely convinced that your circumstances require doing so. It is better to make the filing beforehand, and square away the rest later.
The Internal Revenue Service has an arsenal of potential criminal charges:
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