We blogged about FBAR filing requirements in the past: what purpose they serve, and why the IRS is in charge of them. When a taxpayer violates the FBAR filing requirements, here’s how it works its way through the labyrinth of the Internal Revenue Service.
Step 1: Failure to File
You have a foreign bank account and fail to file a FBAR even though you are required to do so by law. (We’ll get into the why later.)
Step 2: An Examiner Gets Involved
An IRS examiner performs an examination on your account—a tax examination, Form 8300 (Report of Cash Payments Over $10000 Received in a Trade or Business), Bank Secrecy Act or other special examination (such as Offshore Voluntary Disclosure Initative or Last Chance Compliance). In the course of evaluating your records, the examiner suspects you should have filed an FBAR. He or she begins a special FBAR file for you to determine whether this is the case.
As we’ve mentioned before, even though the FBAR is not a tax form, the IRS has authority over its administration, and anytime the IRS is examining you they can start a FBAR file if they feel like it’s needed.
Step 3: The Investigation and the IRS’s Two Hats
The IRS wears two hats when it comes to FBAR assessments —Title 26, or tax, authority, and Title 31, or Bank Secrecy Act, authority. Can they use information from both functions against you?
There are some complicated requirements involving Title 26 vs. Title 31 powers and whether the IRS can use information gathered from your tax return and other tax information in their FBAR violation investigation. There are some hoops for the Service to jump through, but it is definitely possible in most cases for tax return information to be used as part of the investigation.
The FBAR penalties related to a single foreign account can be applied to multiple people. Anyone with authority over the bank account in question may have civil penalties assessed due to FBAR filing requirement violations.
Step 4: At the Examiner’s Discretion
If you’re in violation, you’re at the mercy of your examiner, who has an incredible amount of discretion in the matter. Penalties are available for negligence, pattern of negligence, willful, and non-willful violations. No matter what you were thinking or why you thought it when you failed to file, you may be liable. The examiner can decide whether to send a warning letter or assess a penalty. They get to decide what alternative they think will be promote compliance, based on the facts of your case. Administrative appeals are available.
Step 5: The Dollar Amount of the Penalty
The amount of money you’re on the hook for in the case of penalties is almost totally in the hands of the examiner. There are upper limits on the penalty you can be assessed, but otherwise, the examiner reviewing your file can decide what amount they feel is appropriate for your violation.
Step 6: Demand for Payment
So your examiner has decided on a number and sends you a demand for payment. For the next two years after the penalty is assessed, the Secretary, that is, the IRS, can also commence a civil action against you to recover the amount that they have decided you owe.
Step 7: Criminal Investigation?
Depending on your state of mind—i.e. whether the violation was “willful,” among other facts—the examiner and IRS Counsel may refer the case to Criminal Investigation. Some intentional FBAR violations are crimes—and criminal penalties are in addition to whatever civil penalties you may already have been assessed.
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