New 2025 IRS Civil Fines & Penalties Tax Guide and Explanation

New 2025 IRS Civil Fines & Penalties Tax Guide and Explanation

When it comes to dealing with the Internal Revenue Service and tax violations, one of the biggest hurdles for taxpayers to contend with is the threat of fines and penalties. There are many different types of fines the IRS can assess depending on the specific taxpayer’s facts and circumstances. In general, while domestic penalties can be severe, international information reporting penalties can be even more so. Matters such as unreported foreign accounts and assets, undisclosed gifts, and unreported investments can result in six- and seven-figure penalties, depending on the value of the accounts. Let’s dive into the different types of penalties that a taxpayer may be assessed with, starting with the international reporting penalties.

FBAR (FinCEN Form 114)

FBAR refers to foreign bank and financial account reporting, which is prepared and reported on a FinCEN Form 114. This is not an IRS form, but the Internal Revenue Service is tasked with the enforcement of non-compliance. Penalties can be broken down into criminal penalties and civil penalties, and then the civil penalties can be further divided into civil willful penalties and civil non-willful penalties.

Civil Non-Willful FBAR Penalties

The taxpayer may become subject to penalties of $10,000 per year based on a failure to file or filing a non-compliant FBAR for the year(s) at issue.  The $10,000 adjusts for inflation, so the penalty is closer to $17,000 at this time.

Civil Willful FBAR Penalties

The taxpayer may become subject to penalties equal to 50% maximum value of the unreported accounts, with a minimal penalty of $100,000 (the $100,000 adjusts for inflation).

Criminal FBAR Penalties

Unlike civil penalties, criminal penalties may subject the taxpayer to both incarceration and monetary fines.

Form 8938 (FATCA)

Form 8938 refers to FATCA — which is the Foreign Account Tax Compliance Act. Individuals and other taxpayers who fail to file Form 8938 may become subject to a $10,000 penalty per year, along with a continuing failure-to-file penalty of $50,000 per year. Additionally, the IRS takes the position that if the Form 8938 was not included in the prior year, then the tax return statute of limitations does not close — even if the time to file has otherwise passed (this is the same with other international reporting forms as well).

Form 3520 Gift or Inheritance

Most of the time, taxpayers may become subject to a Form 3520 penalty because they failed to timely report the receipt of a foreign gift or inheritance. The penalty may reach upwards of 25% value of the unreported foreign gift or inheritance. For example, if a taxpayer receives $1,000,000 inheritance from a foreign estate and they fail to file the Form 3520 more than five months late, they could become subject to a $250,000 penalty for failing to timely file Form 3520, even though there is no unreported income component.

Form 3520 Trust

For taxpayers who have a relationship with a foreign trust, the penalties related to foreign trust non-disclosure are different than failing to report the foreign gift. The penalties vary based on either the value of property transferred to the trust, the gross value of distributions received from the foreign trust, and/or a percentage of trust attributed to the US person under the grantor trust rules. There are also potential continuing failure to file penalties as well.

Form 3520-A (Foreign Trust)

Form 3520-A is for taxpayers with ownership of a foreign trust. The penalty for failing to file the form is the greater of $10,000 or 5% of the gross value of the trust assets attributed to the US person. Similar to Form 3520, there are also continuing failure to file penalties. The IRS reserves the right to pursue criminal penalties for filing a false return in conjunction with the Form 3520-A, but criminal penalties are rare.

Form 8621 (PFIC)

Form 8621 is used to report PFIC (Passive Foreign Investment Companies).  Unlike some of the other international reporting forms, there is no direct monetary penalty for failing to file this form, but if the taxpayer fails to file the form and report distributions and excess distributions correctly, it could result in significant taxes and interest.

Form 8865 (Foreign Partnership)

Form 8865 is used to report foreign partnerships. The various penalties depend on which category the taxpayer qualifies as, but in general, the penalty is $10,000, although there may be additional penalties for continuing failure to file.

Form 5471 (Foreign Entity)

Form 5471 is used to report foreign corporations and entities. Similar to many of the other entity reporting forms, taxpayers who failed to file the form timely or substantially correct may be subject to a $10,000 penalty, along with the continuing failure to file penalty.

Form 926

Form 926 is a lesser-known form but equally important because failing to file it may result in significant fines and penalties. In general, the form is required by taxpayers who are making transfers of property to a foreign corporation, noting that there are various exceptions, exclusions limitations. In general, unless the non-filing was willful or intentional, penalties are capped at $100,000, although there may be additional section 6662 penalties in conjunction with Form 926.

Failure-to-File Penalty

When taxpayers fail to file their tax returns timely, they may become subject to a failure-to-file penalty. There is a 5% penalty based on the amount of tax due for each month the return is filed late, up to a maximum of 25%. It is important to note that if the taxpayer already paid taxes and/or has available credits, this can impact whether there is any failure to file penalty.

Failure-to-Pay Penalty

When taxpayers do not pay their annual taxes, they may become subject to a failure-to-file penalty. This penalty is based on the amount of taxes that are due and how long the taxes remain unpaid. The total penalty cannot exceed 25% of the unpaid taxes, and it accumulates at .5% per month.

Civil Fraud

Civil tax fraud is one of the most dangerous types of IRS penalties, because unlike other violations, there is no statute of limitations for civil fraud  — so technically, the IRS can go back many years to try to penalize the person for civil tax fraud. Civil tax fraud penalties can reach upwards of 75% of the underpayment due to fraud.

Other IRS Penalties

While these are several of the most common penalties, it is important to know that many other types of IRS penalties exist.

Interest

In addition to penalties, the IRS can seek interest for the time that the penalty remains assessed and unpaid.

Reasonable Cause

In nearly all situations, unless the taxpayer was willful in their failure to file, if they are able to prove reasonable cause, then they are able to avoid penalties altogether. Reasonable cause is based on each taxpayer’s facts and circumstances and is referred to as the totality of the circumstances test to determine whether there are facts sufficient to authorize a reasonable cause waiver or abatement.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.