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2023 Streamlined Domestic Offshore Procedures: Pros and Cons

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US taxpayers with undisclosed foreign assets and foreign income need to consider their 2023 offshore voluntary disclosure options. As was the case in the year 2022, I expect that Streamlined Domestic Offshore Procedures will continue to be the flagship voluntary disclosure option in 2023 for US taxpayers who reside in the United States. This is why noncompliant US taxpayers should understand well the main advantages and disadvantages of participating in the 2023 Streamlined Domestic Offshore Procedures.

2023 Streamlined Domestic Offshore Procedures: Background Information and Purpose

The IRS created the Streamlined Domestic Offshore Procedures (usually abbreviated as “SDOP”) on June 18, 2014, though the Certification forms became available only a few months later. Since its introduction, Streamlined Domestic Offshore Procedures quickly eclipsed the then-existing IRS Offshore Voluntary Disclosure Program (“OVDP”) and became the most popular offshore voluntary disclosure option for US taxpayers who reside in the United States. As we discuss the advantages of the 2023 SDOP, you will quickly understand the reason for this meteoric rise in popularity of the SDOP.

The main purpose of the Streamlined Domestic Offshore Procedures is to encourage non-willful US taxpayers to voluntarily resolve their prior noncompliance with US international tax reporting requirements in exchange for a reduced penalty, simplified disclosure procedure and a shorter disclosure period. In other words, SDOP is a voluntary disclosure option to resolve pretty much any non-willful US international tax noncompliance: foreign income, FBAR, Form 8938, Form 5471, Form 8621, Form 926, et cetera.

2023 Streamlined Domestic Offshore Procedures: Main Advantages

In exchange for a voluntary disclosure of their prior tax noncompliance through SDOP, US taxpayers escape income tax penalties and pay only a one-time Miscellaneous Offshore Penalty with respect to their prior failures to file the required US international information returns. It is important to emphasize that the Miscellaneous Offshore Penalty replaces not only FBAR penalties, but also penalties for noncompliance with respect to other US international information returns, such as Forms 5471, 8865, 926, et cetera. Depending on the specific circumstances of a case, the Miscellaneous Offshore Penalty is usually below the combined usual failure-to-file potential IRS penalties. In other words, noncompliant taxpayers can greatly reduce their IRS noncompliance penalties through their participation in the Streamlined Domestic Offshore Procedures. This is one of the most important SDOP benefits.

Another advantage of the Streamlined Domestic Offshore Procedures is the limited procedural scope of this voluntary disclosure option. What I mean by this is that the taxpayers should only submit the forms covered by the general statute of limitations unless they choose (i.e. not required, actually choose to do so) to do otherwise. The taxpayers only need to file three (sometime even less) amended US tax returns and six FBARs (sometimes seven and sometimes less than six). This limited disclosure stands in stark contrast with other major voluntary disclosure initiatives, such as 2014 OVDP (which required filings for the past eight years).

Moreover, despite the limited scope of the SDOP filings, taxpayers who utilize the Streamlined Domestic Offshore Procedures are usually able to fully resolve their prior US international tax noncompliance issues even if these years are not included in the actual SDOP filings. This means that the participating taxpayers are able “wipe the slate clean” – i.e. to erase their prior US international tax noncompliance from the time when it began. I should warn, however, that this is not necessarily always the case; I have already encountered efforts from the IRS to open years for which amended tax returns were not submitted (there were specific circumstances, however, in all of these cases that resulted in this increased IRS interference).

The last major advantage of the Streamlined Domestic Offshore Procedures is that this option only requires to establish non-willfulness rather than reasonable cause. Non-willfulness is a much easier legal standard to satisfy (be careful, this is NOT an “easy standard”, just an easier one) than reasonable cause.

2023 Streamlined Domestic Offshore Procedures: Main Disadvantages

Usually, participation in the Streamlined Domestic Offshore Procedures is highly advantageous to noncompliance taxpayers. However, there are some disadvantages and shortcomings in this program. In this article, I will concentrate only on the three most important of them.

First, this voluntary disclosure option is open only to taxpayers who filed their US tax returns for prior years. This requirement is the exact opposite of the Streamlined Foreign Offshore Procedures (“SFOP”) which allows for the late filing of original returns.

The problem is that there is a large segment of taxpayers who were perfectly non-willful in their prior US international tax noncompliance, but they never filed their US tax returns either due to special life circumstances (such as death in the family, illness, unemployment, et cetera), they were negligent or they believed that they were not required to file them (especially in situations where all of their income comes from foreign sources). These taxpayers would be barred from participating in the SDOP.

Second, when they participate in the Streamlined Domestic Offshore Procedures, the taxpayers have the burden of proof to establish their non-willfulness with respect to their inability to timely report their foreign income as well as file FBARs and other US international information returns. Outside of the SDOP, the IRS has the burden of proof to establish willfulness; if the IRS cannot carry this burden, then it has no choice but to automatically consider the taxpayer as non-willful.

The problem is that most cases have positive and negative facts at the same time. This means that a lot of taxpayers are actually in the “gray” area between willfulness and non-willfulness. In many of these cases, the burden of proof may play a critical role in determining whether a taxpayer is eligible to participate in the Streamlined Domestic Offshore Procedures. By the way, this decision should be made only by an experienced international tax attorney who specializes in this area of law, such as Mr. Eugene Sherayzen of Sherayzen Law Office.

Finally, participation in the Streamlined Domestic Offshore Procedures does not provide a definitive closure to its participants. Unlike OVDP, SDOP does not offer a Closing Agreement without an audit; there may be a follow-up audit after the IRS processes your voluntary disclosure package. This means that going through Streamlined Domestic Offshore Procedures may not be the end of your case; the IRS can actually audit you over the next three years. If this happens, the audit of your voluntary disclosure will focus not only on the correctness of your disclosure, but also on the truthfulness and correctness of your non-willfulness certification.

Contact Sherayzen Law Office for Professional Help With 2023 Streamlined Domestic Offshore Procedures

If you have undisclosed foreign accounts or any other foreign assets, contact Sherayzen Law Office for professional help with your offshore voluntary disclosure. We have successfully helped hundreds of US taxpayers around the world with their offshore voluntary disclosures, including Streamlined Domestic Offshore Procedures. We can also help you!

Contact Us Today to Schedule Your Confidential Consultation!

2022 Offshore Voluntary Disclosure Options | US International Tax Lawyers

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While the year 2021 has ended, numerous taxpayers continue to be substantially noncompliant with various US international tax laws. Hence, it is important for US taxpayers with undisclosed foreign assets to consider their 2022 offshore voluntary disclosure options. In this essay, I would like to provide an overview of these 2022 offshore voluntary disclosure options.

2022 Offshore Voluntary Disclosure Options: What is Offshore Voluntary Disclosure

The term “offshore voluntary disclosure” refers to a series of legal processes established by the IRS to allow noncompliant US taxpayers to voluntarily come forward and disclose their prior US international tax noncompliance in exchange for more lenient IRS treatment. This leniency can express itself in various ways: avoidance of criminal prosecution, lower and even zero penalties, a shorter voluntary disclosure period, ability to make certain retroactive tax elections, et cetera.

In general, the benefits of a voluntary disclosure usually far outweigh the consequences of a disclosure during a potential IRS audit. There are exceptions, but they are usually limited to mishandled cases where either an improper voluntary disclosure path was chosen or the process of the disclosure was mishandled by the taxpayer (usually) or his tax attorneys. This is why it is important that you chose the right international tax attorney to help you with your offshore voluntary disclosure.

Let’s review the main 2022 offshore voluntary disclosure options and briefly describe them.

2022 Offshore Voluntary Disclosure Options: Streamlined Foreign Offshore Procedures

While Streamlined Foreign Offshore Procedures (“SFOP”) was created already in 2012, it exists in its current form since June of 2014. It is a true tax amnesty program, because its participants do not pay IRS penalties of any kind, even on income tax due. The participants only need to pay the extra tax due on the amended tax returns plus interest on the tax.

Moreover, SFOP preserves SDOP’s non-invasive and limited scope of voluntary disclosure (see below). For example, you only need to amend the tax returns for the past three years and file FBARs for the past six years.

SFOP, however, is available to a limited number of US taxpayers who are able to satisfy its eligibility requirements, particularly those related to non-willfulness certification and physical presence outside of the United States. You should contact Sherayzen Law Office to help you determine whether you meet the eligibility requirements of SFOP.

2022 Offshore Voluntary Disclosure Options: Streamlined Domestic Offshore Procedures

Streamlined Domestic Offshore Procedures (“SDOP”) is currently the flagship voluntary disclosure option for US taxpayers who reside in the United States. While not as generous as SFOP, SDOP is still a very good voluntary disclosure option for non-willful taxpayers: it is simple, limited (in terms of the voluntary disclosure period for which tax returns and FBARs must be filed) and mild (in terms of its penalty structure). There are some drawbacks to SDOP, such as the potential imposition of the Miscellaneous Offshore Penalty on income-tax compliant foreign accounts, but the benefits offered by this option outweigh its deficiencies for most taxpayers.

The reason why the IRS is so generous lies in the fact that this voluntary disclosure option is open only to taxpayers who can certify under the penalty of perjury that they were non-willful with respect to their prior income tax noncompliance, FBAR noncompliance and noncompliance with any other US international information tax return (such as Form 3520, 5471, 8938 et cetera). It will be up to your international tax lawyer to make the determination on whether you are able to make this certification.

Moreover, a taxpayer cannot file a delinquent Form 1040 under the SDOP. SDOP only accepts amended tax returns (i.e Forms 1040X), not original late tax returns.

2022 Offshore Voluntary Disclosure Options: Delinquent FBAR Submission Procedures

Delinquent FBAR Submission Procedures (“DFSP”) is another voluntary disclosure option that fully eliminates IRS penalties. This is not a new option; in fact, in one form or another, officially or unofficially, it has always existed within the IRS procedures. Prior to 2019, it was even written into the OVDP (IRS Offshore Voluntary Disclosure Program) as FAQ#17 (though in a modified version).

While DFSP is highly beneficial to noncompliant US taxpayers, it is available to even fewer number of taxpayers than those who are eligible for SDOP and SFOP. This is the case due to two factors. First, DFSP has a very narrow scope – it applies only to FBARs. Second, DFSP has extremely strict eligibility requirements; even de minimis income tax noncompliance may deprive a taxpayer of the ability to use this option if it is sufficient to require an amendment of a tax return. In other words, DFSP only applies where SDOP, SFOP and VDP (see below) are irrelevant due to absence of unreported income.

2022 Offshore Voluntary Disclosure Options: Delinquent International Information Return Submission Procedures

Delinquent International Information Return Submission Procedures (“DIIRSP”) has a similar history to DFSP. In fact, it was “codified” into OVDP rules as FAQ#18. Similarly to DFSP, DIIRSP also offers the possibility of escaping IRS Penalties. DIIRSP has a broader scope than DFSP and applies to international information returns other than FBAR, such as Form 8938, 3520, 5471, 8865, 926, et cetera.

Since it turned into an independent voluntary disclosure option in 2014, DIIRSP’s eligibility requirements became much harsher. US taxpayers are now required to provide a reasonable cause explanation in order to escape IRS penalties under this option. On the other hand, the fact that there may be unreported income associated with international information returns is not an impediment by itself to participation in DIIRSP.

2022 Offshore Voluntary Disclosure Options: IRS Voluntary Disclosure Practice

The traditional IRS Offshore Voluntary Disclosure practice has existed for a very long time. However, it faded into complete obscurity once the IRS opened its first major OVDP option in 2009. The closure of the 2014 OVDP in September of 2018 has brought this option back to life.

On November 20, 2018, the IRS has completely revamped this traditional voluntary disclosure option, modified its procedural structure and imposed a new tough (but relatively clear) penalty structure. This new version of the traditional voluntary disclosure is now officially called IRS Voluntary Disclosure Practice (“VDP”).

The chief advantage of VDP is that it is specifically designed to help taxpayers who willfully violated their US tax obligations to come forward to avoid criminal prosecution and lower their civil willful penalties. In other words, VDP is now the main voluntary disclosure option for willful taxpayers.

2022 Offshore Voluntary Disclosure Options: Reasonable Cause Disclosure

Since 2014, the popularity of Reasonable Cause disclosure (also known as “Noisy Disclosure”) has declined substantially due to the introduction of SDOP and SFOP. Nevertheless, Reasonable Cause disclosure continues to be a highly important voluntary disclosure alternative to official IRS voluntary disclosure options. It is now primarily used when SDOP and SFOP are not available for technical reasons (i.e. some of their eligibility requirements are not met).

Reasonable Cause disclosure is based on the actual statutory language; it is not part of any official IRS program. Special care must be taken in using this option, because this is a high-risk, high-reward option. If a taxpayer is able to satisfy this high burden of proof, then, he will be able to avoid all IRS penalties. If the IRS audits the Reasonable Cause disclosure and disagrees, this taxpayer may face significant IRS penalties and, potentially, years of IRS litigation.

Contact Sherayzen Law Office for Professional Analysis of Your 2022 Offshore Voluntary Disclosure Options

If you have undisclosed foreign assets, contact Sherayzen Law Office for professional help as soon as possible. We have successfully helped hundreds of US taxpayers from over 70 countries with their voluntary disclosures of foreign assets to the IRS, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

2022 Streamlined Foreign Offshore Procedures | International Tax Lawyer

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Streamlined Foreign Offshore Procedures has been the best voluntary disclosure option for eligible US taxpayers with undisclosed foreign assets and foreign income, and I predict that it will remain so in the year 2022. Let’s discuss in more detail the unique advantages of the 2022 Streamlined Foreign Offshore Procedures.

2022 Streamlined Foreign Offshore Procedures: Background Information and Purpose

The IRS created the current Streamlined Foreign Offshore Procedures (usually abbreviated as “SFOP”) on June 18, 2014, though the Certification forms became available only a few months later. Streamlined Foreign Offshore Procedures quickly became the most popular option for US taxpayers who reside overseas, because it is the only voluntary disclosure option that can truly be called an “amnesty program”.

Why did the IRS create Streamlined Foreign Offshore Procedures and offered such favorable terms? The problem is that the enforcement of international tax compliance for taxpayers who reside overseas is highly complex and very expensive. Where such noncompliance is willful, the penalty framework and deterrence considerations make it worthwhile for the IRS to engage in these expenses (although, even in these cases, the IRS offered a special voluntary disclosure option). With respect to non-willful taxpayers, however, this logic does not work well.

Hence, the IRS (correctly, in my opinion) decided that it would be in the best interests of the United States to allow noncompliant US taxpayers overseas voluntarily came forward and resolve their prior tax noncompliance. In order to achieve this goal, the IRS decided to offer such a sweet deal to these taxpayers that it would make no sense for these taxpayers to remain noncompliant. Streamlined Foreign Offshore Procedures is precisely this “sweet deal” meant to encourage non-willful US taxpayers who reside overseas to voluntarily resolve their prior noncompliance with US international tax reporting requirements.

2022 Streamlined Foreign Offshore Procedures: the “Sweet Deal”

Streamlined Foreign Offshore Procedures offers four great advantages to eligible participants. First and most important, it is a true tax amnesty program, because there are no penalties for prior noncompliance. There are no income tax penalties; the taxpayers only need to pay the extra tax owed plus interest. There is also no Offshore Penalty for prior noncompliance with respect to FBAR and other US information tax returns. It is definitely the best deal a taxpayer can ever get when it comes to offshore voluntary disclosure programs.

Second, Streamlined Foreign Offshore Procedures offers a simplified (not simple, though) offshore voluntary disclosure procedure which covers a relatively short disclosure period. Unlike the now closed OVDP (Offshore Voluntary Disclosure Program), SFOP only demands the taxpayers to file tax forms within the general statute of limitations for tax returns (i.e. past three years) and a regular statute of limitations for FBARs (i.e. past six years).

Third, Streamlined Foreign Offshore Procedures allows its participants to resolve their prior non-willful noncompliance with respect to unreported foreign income as well as pretty much any US international information return (FBAR, Form 8938, Form 5471, Form 8621, Form 926, et cetera).

Finally, the last major advantage of the Streamlined Foreign Offshore Procedures is that this option only requires to establish non-willfulness rather than a reasonable cause. Non-willfulness is a much easier legal standard to satisfy (be careful, this is NOT an “easy standard”, just an easier one) than reasonable cause.

2022 Streamlined Foreign Offshore Procedures: Main Disadvantages

Usually, participation in the Streamlined Foreign Offshore Procedures is highly advantageous to noncompliant taxpayers. However, there are some disadvantages and shortcomings in this program. In this article, I will briefly discuss three of the most important of them.

First of all, Streamlined Foreign Offshore Procedures is available only to taxpayers who satisfied the program’s foreign residency requirements. Even if you resided outside of the United States during most of each year and you are a bona fide tax resident of a foreign country, you still may not satisfy the strict residency requirements of SFOP.

Second, there is an issue of a shifting burden of proof. When they participate in the Streamlined Foreign Offshore Procedures, taxpayers have the burden of proof to establish their non-willfulness with respect to their inability to timely report their foreign income as well as file FBARs and other US international information returns. Outside of the SFOP, the IRS has the burden of proof to establish willfulness; if it cannot carry this burden, then the taxpayer is automatically considered non-willful.

The problem is that most cases have positive and negative facts at the same time. This means that a lot of taxpayers are actually in the “gray” area between willfulness and non-willfulness. In many of these cases, the burden of proof may play a critical role in determining whether a taxpayer is eligible to participate in the Streamlined Foreign Offshore Procedures.

Finally, participation in the Streamlined Foreign Offshore Procedures does not provide a definitive closure to its participants. Unlike OVDP, SFOP does not offer a Closing Agreement without an audit; there may be a follow-up audit after the IRS processes your voluntary disclosure package. This means that going through Streamlined Foreign Offshore Procedures may not be the end of your case; the IRS can actually audit you over the next three years. If this happens, the audit of your voluntary disclosure will focus not only on the correctness of your disclosure, but also on the truthfulness and correctness of your non-willfulness certification.

Contact Sherayzen Law Office for Professional Help With 2022 Streamlined Foreign Offshore Procedures

If you have undisclosed foreign accounts or any other foreign assets, contact Sherayzen Law Office for professional help with your offshore voluntary disclosure. We have successfully helped hundreds of US taxpayers around the world with their offshore voluntary disclosures, including Streamlined Foreign Offshore Procedures. We can also help you!

Contact Us Today to Schedule Your Confidential Consultation!

2022 Streamlined Domestic Offshore Procedures: Pros and Cons

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As the year 2021 winds down, US taxpayers with undisclosed foreign assets and foreign income need to consider their 2022 offshore voluntary disclosure options. As it has been the case since the second half of 2014 (really the year 2018 when the 2014 OVDP was closed), I expect that Streamlined Domestic Offshore Procedures will continue to be the flagship voluntary disclosure option in 2022 for US taxpayers who reside in the United States. This is why noncompliant US taxpayers should understand well the main advantages and disadvantages of participating in the 2022 Streamlined Domestic Offshore Procedures.

2022 Streamlined Domestic Offshore Procedures: Background Information and Purpose

The IRS created the Streamlined Domestic Offshore Procedures (usually abbreviated as “SDOP”) on June 18, 2014, though the Certification forms became available only a few months later. Since its introduction, Streamlined Domestic Offshore Procedures quickly eclipsed the then-existing IRS Offshore Voluntary Disclosure Program (“OVDP”) and became the most popular offshore voluntary disclosure option for US taxpayers who reside in the United States. As we discuss the advantages of the 2022 SDOP, you will quickly understand the reason for this meteoric rise in popularity of the SDOP.

The main purpose of the Streamlined Domestic Offshore Procedures is to encourage non-willful US taxpayers to voluntarily resolve their prior noncompliance with US international tax reporting requirements in exchange for a reduced penalty, simplified disclosure procedure and a shorter disclosure period. Pretty much any non-willful US international tax noncompliance can be resolved through SDOP: foreign income, FBAR, Form 8938, Form 5471, Form 8621, Form 926, et cetera.

2022 Streamlined Domestic Offshore Procedures: Main Advantages

In exchange for a voluntary disclosure of their prior tax noncompliance through SDOP, US taxpayers escape income tax penalties and pay only a one-time Miscellaneous Offshore Penalty with respect to their prior failures to file the required US international information returns. It is important to emphasize that the Miscellaneous Offshore Penalty replaces not only FBAR penalties, but also penalties for noncompliance with respect to other US international information returns, such as Forms 5471, 8865, 926, et cetera. Depending on the specific circumstances of a case, the Miscellaneous Offshore Penalty is usually below the combined potential penalties normally associated with failure to file these forms. In other words, noncompliant taxpayers can greatly reduce their IRS noncompliance penalties through their participation in the Streamlined Domestic Offshore Procedures. This is one of the most important SDOP benefits.

Another advantage of the Streamlined Domestic Offshore Procedures is the limited procedural scope of this voluntary disclosure option. What I mean by this is that the taxpayers should only submit the forms covered by the general statute of limitations unless they choose (i.e. not required, actually choose to do so) to do otherwise. The taxpayers only need to file three (sometime even less) amended US tax returns and six FBARs (sometimes seven and sometimes less than six). This limited disclosure stands in stark contrast with other major voluntary disclosure initiatives, such as 2014 OVDP (which required filings for the past eight years).

Moreover, despite the limited scope of the SDOP filings, taxpayers who utilize the Streamlined Domestic Offshore Procedures are usually able to fully resolve their prior US international tax noncompliance issues even if these years are not included in the actual SDOP filings. This means that the participating taxpayers are able “wipe the slate clean” – i.e. to erase their prior US international tax noncompliance from the time when it began. I should warn, however, that this is not necessarily always the case; I have already encountered efforts from the IRS to open years for which amended tax returns were not submitted (there were specific circumstances, however, in all of these cases that resulted in this increased IRS interference).

The last major advantage of the Streamlined Domestic Offshore Procedures is that this option only requires to establish non-willfulness rather than reasonable cause. Non-willfulness is a much easier legal standard to satisfy (be careful, this is NOT an “easy standard”, just an easier one) than reasonable cause.

2022 Streamlined Domestic Offshore Procedures: Main Disadvantages

Usually, participation in the Streamlined Domestic Offshore Procedures is highly advantageous to noncompliance taxpayers. However, there are some disadvantages and shortcomings in this program. In this article, I will concentrate only on the three most important of them.

First, this voluntary disclosure option is open only to taxpayers who filed their US tax returns for prior years. This requirement is the exact opposite of the Streamlined Foreign Offshore Procedures (“SFOP”) which allows for the late filing of original returns.

The problem is that there is a large segment of taxpayers who were perfectly non-willful in their prior US international tax noncompliance, but they never filed their US tax returns either due to special life circumstances (such as death in the family, illness, unemployment, et cetera), they were negligent or they believed that they were not required to file them (especially in situations where all of their income comes from foreign sources). These taxpayers would be barred from participating in the SDOP.

Second, when they participate in the Streamlined Domestic Offshore Procedures, the taxpayers have the burden of proof to establish their non-willfulness with respect to their inability to timely report their foreign income as well as file FBARs and other US international information returns. Outside of the SDOP, the IRS has the burden of proof to establish willfulness; if it cannot carry this burden, then the taxpayer is automatically considered non-willful.

The problem is that most cases have positive and negative facts at the same time. This means that a lot of taxpayers are actually in the “gray” area between willfulness and non-willfulness. In many of these cases, the burden of proof may play a critical role in determining whether a taxpayer is eligible to participate in the Streamlined Domestic Offshore Procedures. By the way, this decision should be made only by an experienced international tax attorney who specializes in this area of law, such as Mr. Eugene Sherayzen of Sherayzen Law Office.

Finally, participation in the Streamlined Domestic Offshore Procedures does not provide a definitive closure to its participants. Unlike OVDP, SDOP does not offer a Closing Agreement without an audit; there may be a follow-up audit after the IRS processes your voluntary disclosure package This means that going through Streamlined Domestic Offshore Procedures may not be the end of your case; the IRS can actually audit you over the next three years. If this happens, the audit of your voluntary disclosure will focus not only on the correctness of your disclosure, but also on the truthfulness and correctness of your non-willfulness certification.

Contact Sherayzen Law Office for Professional Help With 2022 Streamlined Domestic Offshore Procedures

If you have undisclosed foreign accounts or any other foreign assets, contact Sherayzen Law Office for professional help with your offshore voluntary disclosure. We have successfully helped hundreds of US taxpayers around the world with their offshore voluntary disclosures, including Streamlined Domestic Offshore Procedures. We can also help you!

Contact Us Today to Schedule Your Confidential Consultation!

2021 FBAR Civil Penalties | IRS FBAR Tax Lawyer & Attorney

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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.

Contact Sherayzen Law Office for Professional Help With Your Prior FBAR Noncompliance

Sherayzen Law Office is a leader in US international tax law and FBAR compliance. We have successfully helped hundreds of clients from over seventy countries resolve their prior FBAR noncompliance concerning disclosure of their foreign bank and financial accounts. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!