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IRS gives agents wide discretion in penalizing foreign accounts

The IRS has established a new penalty structure for taxpayers with unreported foreign financial accounts, giving agents broad discretion.

For taxpayers with offshore bank accounts and other foreign financial assets, the consequences of failing to properly report those assets has often been notoriously steep, particularly in the aftermath of the 2008 financial crisis. Recently, however, the IRS issued new guidance that caps those penalties and allows for somewhat less stringent penalties to be imposed in many cases according to the circumstances.

In an internal memorandum issued to its agents, the IRS provided guidance on how to assess penalties against taxpayers who fail to file an FBAR, which is also known as a Report of Foreign Bank and Financial Accounts, or FinCEN Form 114. All taxpayers who had foreign assets with a cumulative value of $10,000 or greater at any point during the preceding year are required to file an FBAR to report those assets to the IRS.

Agency memo outlines new penalty structure

The new FBAR penalty structure described in the IRS memo involves three different tiers of penalties and allows Internal Revenue agents to impose penalties within that structure according to their own discretion and assessment of the circumstances involved. In most cases, under the new structure, FBAR violations that are found to be non-willful will be penalized with a fine of $10,000 for each year that was not reported, regardless of the number of accounts involved.

However, the IRS guidance also gives agents the discretion to impose gentler or harsher penalties on a case-by-case basis as they see fit. Depending on the circumstances, including the taxpayer's conduct and the value of the unreported accounts, a taxpayer who failed to report offshore financial accounts could be required to pay a penalty of $10,000 per year for every account that was not reported. On the other hand, in certain situations warranting leniency, a taxpayer with unreported foreign accounts may be required to pay only a single fine of $10,000 to cover all years and all accounts.

Thus, under the new guidance, the penalties for failing to report foreign assets have the potential to vary dramatically according to the specific circumstances involved.

For willful violations, the penalties are reduced but still steep

The three-tiered penalty structure described above applies only to FBAR violations that are found to be non-willful. However, the IRS memo also contained new guidance for penalizing willful FBAR violations, softening those penalties somewhat and allowing agents to exercise their own discretion.

Under the new guidance, the standard civil penalty for a willful FBAR violation is capped at 50 percent of the highest value of the unreported accounts, though in certain cases the fines imposed may be higher or lower. Prior to the new guidance, the penalties for willful non-filers could potentially exceed the value of the unreported accounts.

Taxpayers with concerns about tax liability and reporting requirements for offshore bank accounts and other foreign financial assets are encouraged to seek advice from a knowledgeable tax lawyer for help protecting themselves from possible civil or criminal liability. Contact Levins Tax Law, LLC, to arrange a personalized consultation.