Contesting tax and reporting return penalties: The FBAR, Part II: Mitigation & Defenses

This is a continuation of Part I on this topic.

The IRS has wide discretion when it comes to the imposition of FBAR penalties. In our last post, we reviewed the basic FBAR rules and penalties, and noted how IRS examiners have the discretion to waive the penalty. In this post, we will discuss the ability of an IRS examiner to reduce the amount of the penalty and two defenses that may be raised if an FBAR penalty is assessed.

Examiner has discretion to determine the amount of the penalty

The amount of an FBAR penalty -willful or nonwillful – is also at the discretion of the IRS examiners. Examiners’ mitigation guidelines allow them to impose a lesser penalty in certain circumstances, such as where there was a negligent violation (“simple negligence”).

Note, however, that there are certain conditions that must be satisfied before a taxpayer qualifies for mitigation of a penalty:

  • The taxpayer may have no previous criminal tax convictions or Bank Secrecy Act convictions over the previous 10 years;
  • The taxpayer may have no history of FBAR penalties;
  • No fraud penalties can have been assessed by the IRS against the taxpayer for failing to report income in a foreign account;
  • The money in the taxpayer’s foreign accounts may not be associated with any criminal activity; and
  • The taxpayer must have been cooperative during the IRS examination.

Defenses to the FBAR penalty

There are a number of defenses that may be raised against the imposition of the civil FBAR penalty, including:

  • Reasonable cause. If the taxpayer disclosed their overseas bank account to their tax practitioner and then reasonably relied on that practitioner’s written advice not to file an FBAR, the entire penalty may be removed. 
  • Expiration of the Statute of Limitations. Per 31 U.S. C. 5321(b), the Statute of Limitations on a civil financial action begins to run on the date of the transaction with respect to which the penalty is assessed, and expires six years thereafter. For FBAR issues, this means that the IRS cannot assess a penalty beginning six years after the FBAR was due, that is, June 30th of the year following the calendar year for which the account should have been reported. Note that it is generally not advisable to “wait and see” if the IRS will discover the accounts, and it is a bad idea to start closing overseas accounts without remedying the error because this could be viewed as willful evasion which could subject the taxpayer to even greater penalties. 
  • Keep in mind that the IRS the burden of proving that the taxpayer willfully failed to file an FBAR. If the IRS cannot meet this burden, only nonwillful penalties can be imposed.   Our tax law firm has been successful in negotiating and/or eliminating the tax penalties associated with FBAR.  In additional, we are currently litigating FBAR penalties in a case of first impression in the District Court of Washington.   We even were one of the first to be published on the subject of the nonwillful penalties as applied to FBAR (see “A Closer Look at the Non-Willful FBAR Penalty,” California Tax Lawyer, 2012) 

Thus, we are extremely well versed in the subject of FBAR penalties and can provide you with comprehensive advice.   

Other penalties may also apply

FBAR penalties are generally accompanied by other tax penalties, such as accuracy-related penalties on underpayments of tax under IRC 6662, fraud penalties under IRC 6651(f) or 6663, and penalties for failure to report interest on foreign accounts and other assets (Form 8938). These penalties are also extremely high.  

Experienced legal tax representation is crucial with FBAR cases 

International conventions and tax treaties are making it very easy for the U.S. to identify taxpayers’ offshore bank accounts and other overseas financial interests – it therefore crucial that you become FBAR-compliant with the assistance of an experienced and aggressive tax law firm. Contact the tax law firm of Moskowitz, LLP for more information.