Can Fbar penalties be assesed on a per Account basis? In the recent United States v. Boyd, the court answered that question when it found that non-willful FBAR penalties can be assessed on a per account basis.
FBAR Non-Willful Penalty Statute
31 U.S.C. 5314(a) and its corresponding regulation under 31 C.F.R. § 1010.350 requires all U.S. persons (i.e., citizens, green card holders, and tax residents) to report foreign financial accounts on form FinCEN 114 (“FBAR”) annually if the aggregate value of their foreign financial accounts exceeds $10,000.
31 U.S. Code § 5321(a)(5)(B)(i) authorizes the Treasury Secretary to assess a civil Penalty on any person who violates section 5314 (FBAR filing requirement), and that penalty for non-willful violations may not exceed $10,000. The Treasury Secretary delegated the authority to assess and collect FBAR penalties under 31 C.F.R. § 1010.810(g).
Penalty Mitigation guidelines
The IRS administratively follows FBAR mitigation guidelines to deviate from the maximum penalty amount.
- After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate.
- For multiple years with nonwillful violations, examiners may determine that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a single penalty, not to exceed $10,000, for one year only.
- For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager’s approval after consultation with an Operating Division FBAR Coordinator, may assert a separate penalty for each account and for each year. The examiner’s workpapers must support such a penalty determination and document the group manager’s approval.
- In no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.
The IRM is not the law. The IRM only provides guidance for the IRS to administer tax laws. It was made publicly available through the Freedom of Information Act.
Neither the taxpayer nor the IRS is bound by the Internal Revenue Manual. However, when dealing with the IRS at the administrative level, the IRM can be very useful to ensure that examiners, appeals officers, and revenue officers are properly handling the case.
U.S. v. Boyd – Taxpayer’s Position
Boyd is a U.S. Citizen. During 2010, Boyd had a financial interest in accounts in the United Kingdom. The U.K. accounts had collective balances in excess of $10,000. In 2010, Boyd received interest and dividends from the U.K. accounts. Boyd, however, did not report the interest and dividends on her 2010 federal income tax return, nor did she otherwise disclose the existence of her U.K. accounts on the return.
In 2012, Boyd submitted an application to participate in the Internal Revenue Service’s (“IRS”) Offshore Voluntary Disclosure Program (“OVDP”), an IRS initiative for taxpayers who wished to voluntarily report previously undisclosed offshore financial accounts.
Boyd was accepted into the OVDP and submitted, in October of 2012, a delinquent FBAR for the 2010 calendar year. Around the same time, Boyd amended her 2010 federal income tax return to reflect the interest and dividends she received from the U.K. accounts.
In March of 2014, Boyd requested to opt out of the OVDP. Opting out of the OVDP meant that the IRS would examine Boyd’s income tax returns for the years for which no FBAR was submitted. In addition, the IRS would determine whether to assert FBAR penalties against Boyd. The IRS eventually concluded that Boyd had committed thirteen FBAR violations but that she had not violated her reporting requirements willfully.
In assessing the thirteen separate FBAR penalties against Boyd, the IRS treated each account that was not listed on a timely filed FBAR as a separate non-willful violation.
The amount of each FBAR penalty was computed based on the highest balance contained in the relevant account during 2010. For accounts containing $50,000 or more, the IRS asserted a $5,000 penalty. For accounts containing less than $50,000, the IRS asserted a penalty equal to 10% of the high balance in the account. On June 10, 2016, the IRS sent Boyd a letter demanding payment of the FBAR penalties.
On January 31, 2018, the Government commenced this action seeking to reduce the penalty assessment to judgment, as well as late-payment penalties and interest assessed against Boyd.
Taxpayer contends that, if there is a non-willful failure to file an FBAR, the penalty cannot exceed $10,000, regardless of the number of bank accounts required to have been listed on the FBAR.
Taxpayer argues further that, had Congress intended to impose a penalty based on each bank account required to be shown on the FBAR, Congress could have easily included such explicit language.
U.S. v. Boyd – Government’s Position
The Government argues that the better interpretation of the relevant statutory and regulatory language is that each non-willful FBAR violation relates to a foreign financial account, and that the IRS may penalize each such violation with a penalty not to exceed $10,000.
In support of its argument, the Government points to the reasonable cause exception found in 31 U.S.C. § 5321(a)(B)(ii), which provides: “No penalty shall be imposed . . . with respect to any violation if . . . (I) such violation was due to reasonable cause, and (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”
The Government contends that Congress made clear that each violation relates to each “account,” since Congress used the singular form of the word.
Court’s Determination
The Court views section 5321 as somewhat unclear as to whether the $10,000 negligence penalty applies per year or per account.
However, in light of the prominence of “transactions” and “accounts” in the language of section 5321, the Court determines that the statute contemplates that the relationship with each foreign financial account constitutes the non-willful FBAR violation.
The Court ultimately determines that that more than one FBAR violation may be assessed per year. Taxpayer motion of summary judgment was denied and the Government’s motion for the same was granted.
Conclusion
In most FBAR cases that have been litigated so far, the FBAR penalties were assessed in opt-out audits or audits resulting from information received through the Swiss Bank Program. While it has been rare for the IRS to audit taxpayers based on information received through FATCA reporting, it is on the increase and all non-compliance should be taken seriously. It’s likely that at some point the streamlined procedures will end, as did the OVDP program last year.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with their foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
Why hire us?
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.
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