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Penalties for FBAR violations, willful and nonwillful

Regular readers will recall that in our previous post, we discussed a recent IRS memo in which the agency outlined penalties and processes for those U.S. taxpayers who don't file a FBAR (Report of Foreign Bank and Financial Accounts).

This time, we're going to dive into some of the numbers the IRS mentioned in the memo; dollar amounts and percentages that can be assessed against those who willfully fail to file a FBAR and those who did so nonwillfully. Those who did it nonwillfully could well be people who inherited funds held in overseas financial institutions or who simply were unaware that the reports had to be filed annually for overseas accounts holding $10,000 or more.

In the penalties section of the memo, the IRS says that "in most cases" of willful FBAR violations, "the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination."

That is no slap on the wrist. Please keep in mind that examiners can recommend amounts even higher (or lower) than the recommended 50 percent penalty. The absolute maximum penalty is 100 percent "of the highest aggregate balance of all unreported foreign financial accounts during the years under examination." Even though this is a stiff penalty it is significantly less than the statute allows which is 50% of the account value every year.

That's for willful violations; for nonwillful violations, the IRS is more lenient. The examiner will recommend a penalty for each unreported year; the maximum penalty for any single year is $10,000.

While the new IRS guidelines are an improvement there are important factors to consider. First, the decision as to whether the conduct was willful or nonwillful is made by the IRS. Second, a willful violation can be referred for criminal investigation and prosecution. Third, The Offshore Voluntary Disclosure Program should be considered for it provides immunity from criminal prosecution and a lower civil penalty.

the Law Offices of Horwitz & Citro, P.A. can help you pursue the best outcome for your unique situation. Please see our FATCA, FBAR And IRS Amnesty page for more information about our Orlando, Florida, law firm.