As if they were not high enough, the US Congress has obligated the IRS to adjust FBAR civil penalties for inflation on an annual basis. In this article, I will provide a broad overview of the current FBAR penalty system and describe the current 2021 FBAR civil penalties.
2021 FBAR Civil Penalties: Overview of the FBAR Penalty System
FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”), has always had a very complex, multi-layered system of penalties, which has grown even more complicated over the years. These penalties can be grouped into four categories: criminal, willful, non-willful and negligent.
Of course, the most dreaded penalties are FBAR criminal penalties. Not only is there a criminal fine of up to $500,000, but, in some case, a person can be sentenced to 10 years in prison for FBAR violation (and these two criminal penalties can be imposed simultaneously). Since the focus of this article is on FBAR civil penalties, I will not devote more time to the discussion of FBAR criminal penalties here.
The next category of penalties are FBAR civil penalties imposed for the willful failure to file an FBAR. These penalties are imposed per each violation – i.e. on each account per year, potentially going back six years (the FBAR statute of limitations is six years).
The third category of penalties are FBAR penalties imposed for a non-willful failure to file an FBAR or a filing of an incorrect FBAR. These penalties can be imposed on US persons who do not even know that FBAR exists.
Finally, with respect to business entities, a penalty can be imposed for a negligent failure to file an FBAR or a filing of an incorrect FBAR.
It is important to note that FBAR has its own reasonable cause exception that may be used to fight the assessment of any of the aforementioned civil penalties. Moreover, each of these penalty categories has numerous levels of penalty mitigation that a tax attorney may utilize to lower his client’s FBAR civil penalties.
2021 FBAR Civil Penalties: Penalties Prior to November 2 2015
Prior to November 2, 2015, FBAR penalties were not adjusted for inflation and stayed flat at the levels mandated by Congress. Let’s go over each category of penalties prior to inflation adjustment.
As of November 1, 2015, Willful FBAR penalties were up to $100,000 or 50% of the highest balance of an account, whichever is greater, per violation. Again, a violation meant a failure to correctly report an account in any year. Non-willful FBAR penalties were up to $10,000 per violation per year; it is far less clear what “violation” meant in this context. At that time, the IRS took a clear position that non-willful FBAR penalties are imposed on a per account basis similarly to willful penalties, but the validity of this position has been heavily compromised by recent court decisions. Finally, FBAR penalties for negligence were up to $500 per violation; if, however, there was a pattern of negligence, the negligence penalties could increase ten times up to $50,000 per violation.
2021 FBAR Civil Penalties: Inflation Adjustment
The situation changed dramatically in 2015. As a result of the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (“2015 Inflation Adjustment Act”), Congress mandated federal agents to: (1) adjust the amounts of civil monetary penalties with an initial “catch-up” adjustment; and (2) make subsequent annual adjustments for inflation. The inflation adjustment applied only to civil penalties.
The “catch-up” adjustment meant a huge increase in penalties, because federal agencies were required to update all of these penalties from the time of their enactment (or the last year the Congress adjusted the penalties) through November of 2015. This meant that, in 2015, the penalties jumped to account for all accumulated multi-year inflation. The catch-up adjustment was limited to two and a half times of the original penalty.
Fortunately, the Congress adjusted FBAR penalties in 2004 and the “catch-up” adjustment did not have to go back to the 1970s. It still meant a very large (about 25%) increase in FBAR civil penalties, but it was not as dramatic as some other federal penalties.
2021 FBAR Civil Penalties: Bifurcation of FBAR Penalty System
The biggest problem with the inflation adjustment, however, was the fact that it further complicated the already dense multi-layered FBAR system of civil penalties – FBAR penalties became dependent on the timing of a violation and IRS penalty assessment. In essence, the 2015 Inflation Adjustment Act split the FBAR penalty into two distinct parts.
The first part applies to FBAR violations that occurred on or before November 2, 2015. The old pre-2015 FBAR penalties described above applies to these violations irrespective of when the IRS actually assesses the penalties for these violations. The last FBAR violations definitely eligible for the old statutory penalties are those that were made concerning 2014 FBAR which was due on June 30, 2015. The statute of limitations for the 2014 FBAR ran out on June 30, 2021.
The second part applies to all FBAR violations that occurred after November 2, 2015. For all of these violations, the exact amount of penalties will depend on the timing of the IRS penalty assessment, not when the FBAR violation actually occurred. In other words, if an FBAR violation occurred on October 15, 2017 and the IRS assessed FBAR penalties June 17, 2021, the IRS would use the inflation-adjusted FBAR penalties as of the year 2021, not October 15, 2017.
2021 FBAR Civil Penalties: Penalties Assessed On or After January 28, 2021
Now that we understand the history of FBAR penalties, we can specifically discuss the 2021 FBAR civil penalties. The first thing to understand is that we are talking about penalties assessed by the IRS on or after January 28, 2021; prior to that date, the 2020 FBAR civil penalties were still effective.
The 2021 Willful FBAR penalty imposed under 31 U.S.C. §5321(a)(5)(C)(i)(I) is $136,399 per violation. So far, for willful FBAR penalties, “violation” is applied on a “per account for each year” basis described above. Last year (i.e. penalties assessed after February 19, 2020 and before January 28, 2021), the willful penalty was $134,806.
The 2021 Non-Willful FBAR penalty imposed under 31 U.S.C. §5321(a)(5)(B) is $13,640 per violation; last year, the non-willful penalty was $13,481. The term “violation” in the context of non-willful FBAR penalties at this point has not been settled. Starting last year and culminating with the recent 11th Circuit court decision, the courts have been applying the term “violation” on a per-form (rather than per-account) basis. It other words, a taxpayer can argue that a non-willful violation of $13,481 should be applied per each delinquent FBAR rather than each account reported on an FBAR. This is of course a highly beneficial approach (for taxpayers) to FBAR penalty imposition, but it is still a struggle to get the IRS to accept this position.
The 2021 Negligence FBAR penalty imposed under 31 U.S.C. §5321(a)(6)(A) is $1,166; if there is a pattern of negligence under 31 U.S.C. §5321(a)(6)(B), then the penalty goes up to $90,743. Last year, the respective amounts were $1,146 and $89,170.
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