It seems there has been no shortage of changes to the Report of the Financial Bank and Financial Accounts (FBARs) enforcement programs since renewed interest was launched several years ago. In keeping with this approach, the IRS has announced new changes to the FBAR enforcement program specifically relating to process and penalties. Under old regulations, there were significant penalties for taxpayers who were deemed to be willfully non-compliant, as well as those with multiple unreported foreign financial accounts. However, these latest changes allow taxpayers not only limited penalty relief but also provide the option to seek an extension. To help clients, prospects and others understand how the change will impact their situation, JLK Rosenberger has provided a brief summary of the changes below.
New Penalty Structure
The new guidance provides taxpayers with a much more favorable penalty assessment process. Not only was there a change in the maximum percentage used to determine penalties, but documentation requirements for IRS examiners became much stricter. Now examiners are required to provide a checklist of items in all civil FBAR penalty case files and provide a summary report to the taxpayer. Also new is the requirement to support the penalty determination and document the decision process used to determine whether a willful or non-willful violation occurred in the period in question.
For taxpayers who have not filed for multiple years, the capped penalty is a welcome relief. Past guidance only provided direction on what the maximum fines could be. Otherwise, it was up to the IRS and its discretion to determine a fair and reasonable penalty based on the specifics of each case. There was significant concern and outcry that penalties being imposed were done so in violation of constitutional prohibition of excessive fines. So it’s likely the penalty changes were implemented to address these concerns.
Willful Failure to Report –Penalty Changes
Under previous rules, taxpayers could owe a penalty of 50% of your total balance or $100,000, whichever is greater, for every year you failed to file an FBAR form – capped at six years. These staggering fines motivated taxpayers not to come into compliance because of the significant penalties they could face.
Under new regulations, the IRS has limited the penalties a taxpayer may face. First, examiners will determine a single total penalty for all years combined. In most cases, this will be limited to 50% of the highest aggregate balance of all unreported foreign financial accounts for all years under examination. Then the penalty for each year will be determined by allocating the total penalty amount to each year the FBAR violation was deemed willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balance for all years combined.
Examiners may recommend a penalty that is higher or lower than 50%, but it cannot exceed 100% of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
Non-willful Failure to Report – Penalty Changes
Under previous rules, if a taxpayer’s failure to file a FBAR was deemed non-willful, the IRS could impose a penalty of up to $10,000 for each account for a period of up to six years. Depending on the number of foreign accounts, the total penalties could be staggering, deterring compliance due to significant cost. The new guidance provides tremendous relief, limiting the penalty amount which can be assessed.
In most cases now involving multiple non-willful reporting failures, the penalty will be determined based on the aggregate balance of all unreported foreign financial accounts and limited to $10,000 for each year a taxpayer failed to report, regardless of the number of unreported accounts.
According to the new rules, the total amount of the penalties for non-willful violations may not exceed 50% of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.
While this news is encouraging for those taxpayers who have yet to file their FBAR, it’s important to work with an advisor who can properly assess your situation. There are several programs available which may offer greater penalty relief, so it’s important to find the right one for you. If you have questions, JLK Rosenberger wants to help! For additional information, contact us at 818-334-8623, or click here for email. We look forward to speaking with you soon!