When people hear that FBAR penalties could potentially be up to 50% of your account balance, they rightfully get upset. The world of FBAR penalties is a large, complicated one. We've created this FBAR Penalty guide to help you muddle through.
FBAR Penalty Mitigation
The IRS has created mitigation guidelines to help examiners determine the appropriate FBAR penalties. According to the IRS, a taxpayer that meets the following threshold requirements qualifies for the FBAR penalty mitigation. All four must be present:
No illegal source income
Co-operation with the IRS
No previous FBAR penalties
No fraud penalty for underpayment of tax
Willful vs. Non-willful penalties
The willful penalty can be up to 50% of account value the date the FBAR is due. For instance, if you were assessed a willful FBAR penalty on your 2014 FBAR, the penalty would be based on the account balance as of June 30th. While it sounds scary, from our experience we can say it's rare that the penalty is 50%.
According to the mitigation guidelines, there are different tiers of penalties. If your account is under $50,000, if the account is between $50,000 and $250,000, between $250,000 and one million, or over one million you will be assessed different penalties. The higher the account balance, the higher the penalty. The cap is 50%, but with the mitigation guidelines you may actually be below that. Other factors can also affect the actual penalty amount such as the types and number of accounts you have; it's a fact sensitive determination.
How can the IRS prove that you're willful?
The Internal Revenue Manual itself says that this is going to based on circumstantial evidence information. They do have some guidelines, but again, they will most likely have to do a case by case investigation. Some things they will look at:
If you have completed an opt-out letter, they will be referencing that
You will be interviewed, either in person or over the phone
Did you check of Part 3 of Schedule B that asks "Do you have any foreign accounts?", and "Do you have an FBAR requirement?"
Your state of mind is a hard thing to prove. Keep this in mind as you prepare for the interview. You don't want to say things like "I knew about the FBAR, I just couldn't be bothered to fill it out".
You are allowed to have attorney representation at the interview, and we highly recommend doing so. Every single word you say at that interview is important. Even in you're non-willful, we'd still recommend it. Being innocent and having your words twisted around by the IRS to incriminate you for something you didn't do is an actual possibility. Hiring an attorney does not make you look guilty, it makes you look smart.
The non-willful penalty is $10,000 per occurrence.
FBAR filing vs. record-keeping penalties
Because it's not bad enough to have penalties for not filing or incorrectly filing FBARs. Let's add some more penalties to the mix. You are also required to hang on to your records for 6 years after the due date of the FBAR. If, for instance, you are being audited and the IRS requests copies of your records, you best have them ready. The penalties for failing to maintain these foreign account records are the same as those for failing to file.
Do criminal charges exist?
Yes, they do exist. But it's rare to actually be criminally charged for failing to file an FBAR. A jury would probably have a hard time criminally convicting someone simply because they didn't fill out a form. Right now, worldwide income is a huge deal at the IRS; no one there wants to be the first to lose an FBAR court case. If you're under the gun for tax evasion or some other issue, they may tack it on to the charges.
Understanding FBAR appeals
The IRS office of appeals is, believe it or not, one of our favorite places in the IRS. We find these people generally have good discretion -- their main job is to look at the facts and ask "Will this fight hold up in court? Can we enforce this judgement?" This is often based on the information you provided to them in the interview we mentioned above. Yet another reason to be extremely careful in what you're saying to them.
If you need assistance with any misfiled or unfiled FBARs, contact us. We can help. Call us at 888-727-8796 or email email@example.com.