We are circling back to our discussion of the Internal Revenue Service's recent memorandum clarifying (or attempting to clarify) how penalties are decided for foreign bank account reporting violations. In our June 17 post, we also warned that the June 30 deadline for filing FBAR reports was near. It is now even closer, and taxpayers with an interest or signature authority on any account held by a foreign financial institution may want to take a minute to contact a tax attorney about their filing status and potential penalties.
The memorandum outlined an examiner's approach to determining what level of penalty is warranted for each violation. The first question is whether the violation was willful or "nonwillful." If the examiner labels a violation willful, he or she must first document the decision and the evidence of conscious wrongdoing.
Willful violations, of course, warrant more serious penalties. After complaints from the field that some penalties were well in excess of the unreported account balances, the IRS placed a cap of sorts. For the most part, no penalty will exceed 50 percent of the sum of the highest balances for each unreported account. In extreme cases, examiners may recommend more sizeable penalties, but those will never exceed 100 percent of "the highest aggregate balance of all unreported foreign financial accounts during the years under examination." Apparently, the IRS is reluctant to take more than everything a taxpayer has.
There are caps for accidental, nonwillful reporting errors, too. Examiners will use the same formula, but the penalty will not exceed $10,000 for each unreported account per year. Again, the circumstances surrounding the error will inform the examiner's recommendation.
The most important takeaway for all of this is that the IRS is not planning to let anyone get by without reporting. Even if your failure to file was nonwillful, even if you realized the mistake and filed all of the forms on July 1, there will be some kind of penalty.
Source: Accounting Today, "IRS Issues New Guidance on FBAR Penalties," Michael Cohn, June 3, 2015