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US Taxpayers’ Nightmare Continues: FBAR Penalty Inflation Adjustment

As if the FBAR penalties were not frightening enough, the Congress has mandated the IRS to adjust the FBAR penalties to account for inflation. As a result, the already complicated and severe system of FBAR penalties became even more complex and ruthless. In this article, I would like provide a general overview of the FBAR penalty inflation adjustment and what it means for noncompliant US taxpayers.

FBAR Penalty Inflation Adjustment: The “Old” FBAR Penalty System

The FBAR penalty system was already complex prior to the 2015 FBAR penalty inflation adjustment. It consisted of three different levels of penalties with various levels of mitigation. The highest level of penalties consisted of criminal penalties. The most dreadful penalty was imposed for the willful failure to file FBAR or retain records of a foreign account while also violating certain other laws – up to $500,000 or 10 years in prison or both.

The next level consisted of civil penalties imposed for the willful failure to file an FBAR – up to $100,000 or 50% of the highest balance of an account, whichever is greater, per violation. It is important to emphasize that the IRS has unilaterally interpreted the word “violation” to mean that a penalty should be imposed on each account per year, potentially going back six years (the FBAR statute of limitations is six years).

The third level of penalties were imposed for the non-willful failure to file an FBAR. The penalties were up to $10,000 per violation per year. It is also important to point out that the subsequent laws and IRS guidance imposed certain limitations on the application of the non-willful FBAR penalties.

Finally, there were also penalties imposed solely on businesses for negligent failure to file an FBAR. These penalties 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.

FBAR Penalty Inflation Adjustment: Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015

Apparently, the Congress did not believe that these FBAR penalties were sufficiently horrific. Hence, it enacted a law awkwardly named Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (“2015 Inflation Adjustment Act”) to “improve the effectiveness of civil monetary penalties and to maintain their deterrent effect.”

The 2015 Inflation Adjustment Act required federal agencies to do two things: (1) adjust the amounts of civil monetary penalties with an initial “catch-up” adjustment; and (2) make subsequent annual adjustments for inflation. It is important to note that only civil penalties, not criminal, were subject to the inflation adjustment.

While the annual adjustment requirement is fairly clear, the “catch-up” adjustment requires a bit more explanation. In essence, the catch-up adjustment requires a federal agency to adjust the penalty (as it was last originally established by an act of Congress) for inflation from the time of establishment through roughly the November of 2015. In other words, a penalty would be adjusted in one year for all of the inflation that accumulated between the time the statutory penalty was created and the time the 2015 Inflation Adjustment Act was enacted. The adjustment was limited to 2.5 times of the original penalty.

The end result of the penalty adjustment was a massive increase in federal penalties in 2016. For example, one OSHA penalty went up from $70,000 to $124,709.

New System under the FBAR Penalty Inflation Adjustment

Luckily, the FBAR penalties were last revisited by Congress in 2004 and the increase in FBAR penalties, while very large (about 25%), was not as dramatic as some of the other federal penalties. Nevertheless, the FBAR penalty inflation adjustment further complicated the multi-layered system of FBAR penalties.

The key complication came from the fact that the FBAR penalty became dependent on the timing of the IRS penalty assessment, bifurcating the already existing FBAR penalty system (that was broadly described above) into two distinct parts: pre-November 2, 2015 and post-November 2, 2015.

If an FBAR violation occurred on or before November 2, 2015, the old FBAR penalty system applies. This is also true even if the actual IRS assessment of the FBAR penalties for the violation occurred after this date. In other words, the last FBAR violation definitely eligible for the old statutory penalties is the one concerning 2014 FBAR which was due on June 30, 2015. Obviously, FBARs for prior years are also eligible for the same treatment.

If an FBAR violation occurred after November 2, 2015 and the FBAR penalty would be assessed after August 1, 2016, the new system of penalties (i.e. the one after the FBAR penalty inflation adjustment) applies. In other words, all FBAR violations starting 2015 FBAR (which was due on June 30, 2016) are subject to the ever-increasing FBAR civil penalties.

With respect to these post-November 2, 2015 violations, the exact amount of penalties will depend on the timing of the IRS penalty assessment, not when the FBAR violation actually occurred. For example, if the IRS penalty assessment was made after August 1, 2016 but prior to January 15, 2017, then maximum non-willful FBAR penalty per violation will be $12,459 and the maximum willful FBAR penalty per violation will be the greater of $124,588 or 50% of the highest balance of the account.

If, however, the penalty was assessed after January 15, 2017 but prior to January 15, 2018, the maximum non-willful FBAR penalty will increase to $12,663 per violation and the maximum civil willful FBAR penalty will be the greater of $126,626 or 50% of the highest balance of the account.

Contact Sherayzen Law Office for Help with Avoiding or Reducing Your FBAR Penalties

Whether you have undisclosed foreign accounts on which the FBAR penalties have not yet been imposed or the IRS has already imposed FBAR penalties for your prior FBAR noncompliance, you should contact Sherayzen Law Office as soon as possible to secure professional help. We have helped hundreds of US taxpayers to reduce and, under certain circumstances, completely eliminate FBAR penalties through properly made voluntary disclosures. We have also helped US taxpayers to fight the already imposed FBAR penalties through appeals to the IRS Office of Appeals as well as in a federal court.

We can help You! Contact Us Today to Schedule Your Confidential Consultation!

IRS Letter 3708: IRS Demand to Pay FBAR Penalty

After the IRS imposes an FBAR penalty on the taxpayer, the IRS will send the taxpayer IRS Letter 3708 to demand the payment of the part of the FBAR Penalty that remains unpaid. In this article, I would like to discuss IRS Letter 3708 in more detail, particularly focusing on the various FBAR Penalty Collection options that the letter lists.

First Part of IRS Letter 3708: Explanation of FBAR Penalty Imposed and Balance Unpaid

IRS Letter 3708 begins with the statement that this letter is a demand for the payment of the FBAR (Report of Foreign Bank and Financial Accounts) penalty that was assessed to the taxpayer under relevant IRC sections (such as §5321(a)(5) and §5321(a)(6)). Then, the IRS Letter 3708 mentions that the taxpayer should have previously received IRS Letter 3709 with the explanation of penalty imposed based on the facts of the taxpayer’s case.

Second Part of IRS Letter 3708: Account Summary and Payment Instructions

The next part of IRS Letter 3708 is devoted to the summary of the taxpayer’s account – i.e. the amounts owed per each relevant year. At total amount due is provided at the end.

The letter continues with the explanation of the precise payment instructions, including what information needs to be written on the check (in order for the payment to be applied correctly). Also, an option for an installment agreement is mentioned if the payment in full is not possible. However, even in the case of an installment agreement, the interest of at least 1% will be charged (interest rates may change); additional debt servicing fee of about 18% of the penalty amount may also be charged.

Third Part of IRS Letter 3708: Interest and Penalties

Failure to pay the amount due within 30 days may lead to the imposition of interest and penalties. The interest is imposed under IRC Section 3717(a)-(d); the current rate is 1% per year, but it may be raised in the near future.

The late payment penalty is imposed under IRC Section 3717(e)(2); currently, the rate if 6% per year. This penalty is imposed on portion of the FBAR penalty that remains unpaid 90 days from the date listed on IRS Letter 3708.

IRS Letter 3708 also mentions that both, interest and penalties, may be abated under 31 C.F.R. 5.5(b).

Fourth Part of IRS Letter 3708: Collection Enforcement and Costs

The fourth part of the IRS Letter 3708 is very important, because it is devoted entirely to how the IRS can collect the amount due. The letter lists seven different collection enforcement mechanisms that are available to the IRS if the debt not paid within 30 days:

• Referral to the Department of Justice to initiate litigation against the taxpayer.
• Referral to the Department of the Treasury’s Financial Management Service. (This referral involves an additional debt-servicing fee that is approximately 18% of the balance due.)
• Referral to private collection agencies. (Referral to a private collection agency increases the additional debt-servicing fee from approximately 18% to 28% of the balance due.)
• Offset of federal payments such as income tax refunds and certain benefit payments such as social security.
• Administrative wage garnishment.
• Revocation or suspension of federal licenses, permits or privileges.
• Ineligibility for federal loans, loan insurance or guarantees

These additional costs may be imposed on noncomplying taxpayer based on 31 U.S.C. §3717(e)(1).

Final Part of IRS Letter 3708: Contesting Penalty Assessment

At the end, IRS Letter 3708 advises the taxpayers of two main options for contesting the penalty assessment. First, the taxpayers can file an administrative appeal with the Appeals Office in Detroit. This option is available if an administrative appeal was not requested based on Letter 3709 or if new situations have occurred since the last administrative review. The appeal must be requested in writing within 30 days from the date listed on IRS Letter 3708.

The second option is to file a refund suit in the United States District Court or the United States Court of Federal Claims. IRS Letter 3708 does not state whether such a suit would be subject to the full-payment rule (such as one that applied in income tax matters).

Contact Sherayzen Law Office if Your Received IRS Letter 3708 or IRS Letter 3709

If you received IRS Letter 3708 or IRS Letter 3709, contact Sherayzen Law Office for legal help as soon as possible. We have helped taxpayers around the world to reduce their FBAR penalties and we can help you!

Call Today to Schedule Your Confidential Consultation!