In a recently issued guidance memorandum, the IRS seeks to provide guidance to its personnel to ensure consistency and effectiveness in the administration of FBAR penalties. It is intended that this guidance be incorporated into IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR), and IRM 4.26.17, Report of Foreign Bank and Financial Accounts (FBAR) Procedures, no later than one year following its issuance.
In regard to willful violations over several years, the memorandum appears to recommend a penalty equal to 50% of the highest account balances for all years with violations. Thus, in lieu a 50% penalty for each year, one 50% penalty is imposed for all years, and it is then allocated across the years based on the balances of each year. The memorandum uses this example:
Assume highest aggregate balances of $50,000, $100,000, and $200,000 for 2010, 2011, and 2012, respectively. The total penalty amount is $100,000 (50 percent of the $200,000 highest aggregate balance during the years under examination). The total of the highest aggregate balances for all years combined is $350,000. The penalty for 2010 is $14,286 ($50,000/$350,000 x $100,000). The penalty for 2011 is $28,571 ($100,000/$350,000 x $100,000). The penalty for 2012 is $57,143 ($200,000/$350,000 x $100,000). The penalty amounts for each year are subject to the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C).
In regard to nonwillful violations when there are multiple accounts, the memorandum indicates in most cases only one $10,000 penalty should be imposed in each year – not $10,000 per account. The memorandum also notes, however, that lesser penalties (e.g., only imposing the penalty in one year) or greater penalties (i.e., per account penalties) may be imposed when appropriate.
Also, the memorandum notes that when accounts have co-owners, each shall be attributed the appropriate percentage ownership of the account balances in computing penalties.
Overall, this memorandum is helpful to taxpayers, since it indicates that maximum penalties should be the exception not the norm. However, to the extent that examiners use these guidelines to impose the suggested penalties in circumstances where a lesser penalty is warranted, the memorandum could be injurious to those taxpayers.
Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties, May 13, 2015, Control Number: SBSE-04-0515-0025