Many are now familiar with the famous Report of Foreign Bank and Financial Accounts (FBAR), a relatively small form that carries with it the threat of huge penalties in the case of a willful failure to file. As FATCA is upon us and each day brings new Non-Prosecution Agreements executed between the Department of Justice and Swiss banks in connection with the DOJ Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks, the IRS has signalled it is ready to act on the flood of new information. Just last month, new internal IRS 'Procedures to Ensure Consistency and Effectiveness in the Administration of Civil FBAR Penalties' were released that should have the practical effect of speeding resolution of FBAR related audits and reducing the number of legal challenges to the asserted penalties.
The interim guidance does the following:
- Reminds agents both that the burden is on the IRS to show than an FBAR violation occurred and, if asserting a willful penalty, to show that the violation was wilful.
- Reminds agents that the FBAR penalty provisions provide for maximum penalties and that the Revenue Agents have discretion to determine that lesser penalties should apply.
- For willful violations:
a. Limits 'in most cases' the total penalty amount for all years under examination to 50 percent of the highest aggregate balance of all unreported foreign financial accounts, although an examiner may recommend a higher or lower penalty.
b. Limits the highest possible penalty to 100% of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.
c. IRS Counsel review is required, but limited to advising on whether an FBAR violation occurred, whether the violation was willful, and whether the proposed penalty is within statutory limits.
- For nonwillful violations:
- Limits 'in most cases' the total amount of multiple nonwillful FBAR penalties asserted to $10,000 per year regardless of the number of unreported foreign financial accounts.
- In cases where the examiner would deviate (either to assert penalties for only one year, or to assert the penalty on a per-account basis in each year) management approval is required.
- Limits the total amount of penalties for nonwillful violations to 50% of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.
- IRS Counsel review is no longer required before asserting nonwillful violations
- Co-owned accounts will have each ownerships separate violations reviewed and penalties asserted based on the co-owner's percentage ownership.
We view these guidelines as the first (commendable) attempt at an equitable approach to limiting the application of the FBAR penalties. The IRS, of course, does not want to completely remove one of its most effective and expensive penalty threats, but this new guidance does alter the calculations taxpayers and counsel should go through in choosing options for tax regularization.