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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!

IRS Increases Use of John Doe Summons for Unreported Offshore Bank Accounts

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Some time ago, in a joint statement before the Permanent Subcommittee on Investigations Committee on Homeland Security and Government Affairs of the United States Senate for a hearing on “Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Offshore Accounts”, Deputy US Attorney General James M. Cole and Assistant Attorney General, Tax Division, Kathryn Keneally detailed a number of enforcement actions targeting US taxpayers with undisclosed foreign bank accounts and the foreign banks in question.

The Internal Revenue Service and the U.S. Department of Justice utilize various tools to track and hold accountable individuals who evade their taxes and reporting obligations by sheltering money in undisclosed foreign bank accounts. One important law enforcement mechanism that has led to much success in gathering information about foreign accounts has been the use of John Doe summons. The IRS defines a John Doe summons as “[A]ny summons where the name of the taxpayer under investigation is unknown and therefore not specifically identified.” A John Doe summons, if authorized, allows the IRS request the identities of U.S. taxpayers who may have offshore bank accounts.

If you are an individual subject to U.S. taxes and you have an undisclosed foreign bank account, you should be aware that the odds are increasing each year that the IRS will eventually determine your identity. The penalties for not disclosing a foreign bank account are severe; if you have such an account you should seek the advice of a tax attorney. The experienced international tax law firm of Sherayzen Law Office, Ltd. can assist you in these important matters.

John Doe Summons and Other Enforcement Mechanisms

In a previous article, we covered the IRS John Doe summons seeking records of the correspondent account at Wells Fargo for Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB), a Barbados-based bank with branches in eighteen Caribbean countries. The IRS has been utilizing John Doe summons frequently and will likely increase its use in the future. For example, in a recent high-profile case, the federal district court for the Southern District of New York entered an order authorizing the IRS to issue a John Doe summons seeking records for Wegelin Bank’s U.S. correspondent account at the Swiss bank, UBS.

According to the joint statement, on November 13, 2013, the same court, “[E]ntered an order authorizing the IRS to issue John Doe summonses seeking records of the Zurcher Kantonalbank and its affiliates (collectively ZKB) correspondent accounts at Bank of New York Mellon and Citibank NA for information relating to U.S. taxpayers holding undisclosed accounts in ZKB.” Several days later the court also issued an order that authorized the IRS to issue John Doe summonses seeking correspondent account records held by the Bank of N.T. Butterfield & Son Limited and its affiliates in the Bahamas, Barbados, Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom at Bank of New York Mellon, Citibank NA, HSBC Bank NA, JPMorgan Chase Bank NA, and Bank of America NA.

In the joint statement, it was also noted that the DOJ has also “[E]nforced summonses and subpoenas for records that account holders are required to maintain concerning their foreign banking activities through the successful litigation of the applicability of the ‘required record’ exception to the production privilege under the Fifth Amendment.” The statement notes that every appellate court that has reviewed the issue has, “[R]ejected the argument that witnesses can refuse to comply with a subpoena for the bank records that are required by law to be kept and presented for inspection as a condition of maintaining an offshore account.”

Impact on U.S. Taxpayers with Undisclosed Foreign Accounts

John Doe Summons constitute a very useful technique for the IRS to find non-complying U.S. taxpayers with undisclosed foreign accounts. It is important to keep in mind that the enforcement mechanisms detailed in this article are in addition to other programs, such as the Offshore Voluntary Disclosure Program and the US-Switzerland Bank Disclosure program, among others. Moreover, with the continuous expansion of FATCA enforcement, the non-complying U.S. taxpayers are now running a very high risk of detection by the IRS.

The consequences for these non-complying U.S. taxpayers can be very grave. There are extremely high civil penalties as well as potential criminal penalties that may be applied in such cases.

Contact Sherayzen Law Office for Professional Help with Your Offshore Voluntary Disclosure

The analysis above means that, if you are a U.S. taxpayer with an undisclosed offshore bank account, you need to consider your voluntary disclosure options as soon as possible.

We can help you. At Sherayzen Law Office, Mr. Eugene Sherayzen an experienced international tax attorney will thoroughly analyze your case, estimate your potential FBAR exposure, create a plan for your voluntary disclosure and implement it (i.e. we will prepare all of the tax forms and legal documents that you need for the voluntary disclosure). We will guide you every step of the way and offer rigorous ethical representation before the IRS.

Contact Us to Schedule Your Confidential Consultation Now!