An FBAR Violation Leads to IRS Investigations & Examinations

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IRS Enforcement of FBAR Violations

FBAR Violations: International FBAR Violations and Investigations by the IRS are on the rise. The FBAR is the FinCEN Form 114, and it is used for Foreign Bank and Financial Account Reporting. Offshore Penalties can range drastically, although they may be reduced or avoided with offshore disclosure and FBAR amnesty programs. With the increased issuance and enforcement of FBAR Penalties have made taxpayers (understandably) uneasy. In recent years, the Internal Revenue Service has taken an aggressive position on matters involving foreign accounts compliance. The two main categories of FBAR Penalties are willful and non-willful penalties.

FBAR Investigations are on the Rise

The increase in the number of FBAR violations and offshore penalties stemming from IRS investigations has also led to an increase in FBAR cases.  Even though FBAR reporting has been required since the early 1970s, with the recent introduction of FATCA (Foreign Account Tax Compliance Act), there has been a renewed interest in offshore account reporting.  As a result, when a person is non-willful, they may consider submitting to either the Streamlined Foreign or Streamlined Domestic program.

FBAR violations may lead to significant penalties involving willfulness and non-willfulness. While willful penalties are usually the worst (absent criminality) even non-willful penalties can reach as high as $10,000 per account, per occurrence. That is why If you believe you may have committed an FBAR violation, then you may consider FBAR Amnesty aka voluntary disclosure before the IRS conduction investigation of your non-compliance and it becomes too late.

*The $10,000 fine adjusts with inflation.

Which Accounts are Subject to FBAR Violations?

The IRS has many methods for investigating FBAR violations. Generally, it starts out as follows: a U.S. person has an FBAR reporting requirement. The person may have one foreign account or several accounts. For reference, the FBAR Form (FinCEN Form 114) is used for more than just bank accounts; it includes financial accounts.

Some common examples of financial accounts include:

      • Stock accounts

      • Investment accounts

      • Mutual fund accounts

      • ETF Accounts

      • Foreign pension or retirement

      • Foreign life insurance

IRS Investigations

The Internal Revenue Service has many tools and techniques they can use to investigate U.S. person foreign account holders. 

Here are some of the more common methods the IRS uses to investigate FBAR Violations:

      1. The foreign financial institution reports the individual in accordance with FATCA.

      2. The account holder is under audit for other reasons, but it becomes apparent that there is foreign money that was unreported.

      3. A third party is audited and gives up the information about the account holder

      4. The CPA that the person used is audited, and the IRS investigates the information this CPA has about his or her own clients.

      5. A whistleblower gives up information about the account holder.

Examples 

There are many different types of FBAR violations. They range from benign to criminal. For most clients, it is a matter of not knowing the forms were required to filed — and then only learning about the filing requirement once they are already delinquent.

Here are two common examples of FBAR Violations:

FBAR is Never Filed

This is an unfortunate situation for the non-filer and can lead to multi-year FBAR violations and offshore account penalties. In the typical scenario, the U.S. person has foreign accounts but no knowledge that there was any reporting requirement. The taxpayers’ foreign financial institution (FFI) is aware that the Account holder is a U.S. person. And, in accordance with recent FATCA reporting requirements, the FFI reports the account holder to the IRS as part of the exchange of information.

Thereafter, the Account holder receives IRS notice that he or she (or corporation or estate) did not properly report on the FBAR. They may receive notice of the FBAR violation, and either receive a warning letter in lieu of fine, or a fine.

Late-Filed FBAR (Outside of FBAR Amnesty)

In another common scenario, the US person does not become aware of the FBAR filing requirement until several years after the FBAR filing was required for a person. The foreign account holder learns about the reporting requirement, but does not follow the required Amnesty procedures.

Rather, the account holder just goes back and files FBARs for prior years, and/or begins filing forward. In offshore disclosure terms, this is referred to as a quiet disclosure or silence disclosure and can lead to FBAR Violations. A silent disclosure is ill-advised since, it contains an element of willfulness, which may lead to more extensive fines and penalties — and quite possibly a criminal investigation.

There are many different types of FBAR violations. Depending on the facts and circumstances, the penalties can go from non-existent to severe. The three main categories include

      • willful

      • non-willful, and

      • criminal penalties.

Non-willful FBAR violation penalties can be further broken down into four main categories. In addition, there are mitigating factors that the Internal Revenue Service examiners agents can use to reduce the penalties.

How is Non-Willfulness Defined?

The IRS has not yet developed a straightforward, bright-line test to determine non-willfulness with respect to FBAR violations. Determining whether one or more FBAR violations have occurred requires a totality of the circumstances analysis based on each person’s facts and circumstances.

To complicate the analysis further, the IRS has lower thresholds of willfulness, which we will discuss below.

Our specialist team has spoken with thousands of individuals with potential FBAR violations, and here are some of the introductory questions used in the analysis.

      • What is the total value of the unreported accounts?

      • What is the total value of the unreported income?

      • Did you use a CPA or EA to prepare your taxes?

      • Did they ask you about your foreign accounts and assets?

      • How long have you had U.S. person status?

      • How long have you been required to file tax U.S. returns?

      • Do you generally file your tax returns timely?

      • When did you learn about FBAR?

      • Did you answer truthfully?

      • Did you complete a schedule B?

There are hundreds of questions to choose from depending on how the initial fax parse out, these are some of the more introductory questions.

Penalties for FBAR

The two main categories of penalties for FBAR violations is civil and criminal. Civil is then broken down further into willful and non-willful.

Civil FBAR Violation (31 U.S.C. § 5321 et seq.)

An FBAR violation will be either a Civil FBAR fine and/or Criminal FBAR fine. They can then be broken down further, but the threshold question, is whether the IRS will get you for Civil (money) or Criminal (money, and worse). The civil FBAR fine is limited to monetary penalties. A civil FBAR fine is a fine that is focused on monetary fines or warning letters (waivers) — without any risk of criminal investigation or prosecution.

U.S. Code citation Civil Monetary Fine Description Current Maximum
31 U.S.C. 5321(a)(5)(B)(i) Foreign Financial Agency Transaction – Non-Willful Violation of Transaction $12,921
31 U.S.C. 5321(a)(5)(C) Foreign Financial Agency Transaction – Willful Violation of Transaction Greater of $129,210, or 50% of the amount per 31 U.S.C.5321(a)(5)(D)
31 U.S.C. 5321(a)(6)(A) Negligent Violation by Financial Institution or Non-Financial Trade or Business $1,118
31 U.S.C. 5321(a)(6)(B) Pattern of Negligent Activity by Financial Institution or Non-Financial Trade or Business $86,976
Four (4) Levels of Non-Willful FBAR Violation Penalties

The IRS agent has leeway to limit the non-willful FBAR fine. The facts and circumstances of each cases will determine what end of the spectrum the IRS agent will lean towards.

There are four (4) types of non-willful FBAR fines:

*The $10,000 annual fine adjusts for Inflation, and is currently ~$13,000.

Criminal FBAR fine (31 C.F.R. §103.59)

A criminal FBAR fine may include monetary penalties and incarceration. This is when the IRS refers the matter to the Department of Justice (DOJ) or other 3 letter government faction for criminal investigation and possible prosecution. These are not very common, but unfortunately they are on the rise.

U.S. Code citation Criminal Violation & Description Criminal Fine
31 C.F.R. §103.59(b) Willful – Failure to File FBAR or retain records of account Up to $250,000 or 5 years or both
31 C.F.R. §103.59(c) Willful – Failure to File FBAR or retain records of account while violating certain other laws Up to $500,000 or 10 years or both
31 C.F.R. §103.59(c)  Knowingly and Willfully Filing False FBAR $10,000 or 5 years or both
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d). See Statutes See Statutes

FBAR Willfulness Fine Does Not Require Intent or Knowledge

The concept of willfulness in the civil FBAR arena is different than it is in everyday phraseology and/or criminal tax matters. There are two important considerations when determining whether a person is non-willful, or if the person meets the lower threshold for willfulness.

      1. Reckless disregard (lacks actual intent)

      2. Willful blindness (lacks actual knowledge)

Enhanced FBAR Fine for Quiet Disclosure

Oftentimes, when a person has to go back and file prior-year FBAR, their biggest concern (understandably so far the potential penalties which can be staggering). One of the biggest risks, which can lead to both civil and criminal FBAR violations is a quiet disclosure.

Here’s why: if a person files a quiet disclosure, then they are acknowledging that they were supposed to file but knowingly and intentionally filing outside of the amnesty procedures. If they were to get investigated by the IRS, it could lead to a criminal investigation. This does not seem worth it, especially when the individual was clearly non-willful and they even qualify for a fine waiver under the streamlined foreign offshore procedures –or at least qualified to make a reasonable cost submission and seek a fine waiver.

We Specialize in Streamlined & Offshore Voluntary Disclosure

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm for assistance with getting compliant.