IRS FBAR Penalty Guidelines Suggest Lower Risk of Multiple “Per Account” and “Per Year” Penalties

Penalties for willful violations of FBAR filing requirements can be as high as 50% of the balance of the subject accounts EACH YEAR. Penalties for nonwillful violations can be as high as $10,000 PER UNREPORTED ACCOUNT per year.

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).

Examiners are still free to impose a higher or lower penalty, in appropriate circumstances. In no case will the penalty exceed 100% of the highest balance of the subject accounts in the years of nonreporting.

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

Can the IRS Abate Interest and Penalties That Have Already Been Paid?

A taxpayer filed a late tax return, and paid with it interest and penalties based on the tax due. The taxpayer then filed a time-barred refund claim, providing that the tax amount due was overstated on the original return.

It was too late for the taxpayers to receive a refund of the overpaid taxes. However, the statute of limitations for refund of the interest and penalties paid had not yet expired. Could the IRS abate the penalties and interest due to the lower amount of tax that should have applied?

Code Sec. 6404(a) provides: “IRS is authorized to abate the unpaid portion of the assessment of any tax or any liability in respect thereof, which—(1) is excessive in amount, or (2) is assessed after the expiration of the period of limitation properly applicable thereto, or (3) is erroneously or illegally assessed (emphasis added).” Thus, from this provision, it would appear that the IRS has no authority to abate paid interest and penalties.

Nonetheless, in a Chief Counsel Advice, the IRS indicated that Code Sec. 6404 abatement “is permissive and that the IRS is not prohibited from abating the paid portion of assessments.”

CCA 201520010

Applicable Federal Rates–June 2015