New IRS FBAR Penalty Guidance (5/29/15; 6/1/15; 6/10/16)

Heather Maloy, Commissioner, LB&I, has issued a memo, dated 5/13/15 titled Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties (SBSE-04-0515-0025 (5/13/15) ), here.  [JAT Note as of 6/10/16: the foregoing link has been been taken down by the IRS, apparently because the key provisions of the guidance have been incorporated into the IRM.  For example, the guidance below that the willful penalty is generally limited to 50% of the high aggregate is now incorporated in IRM 4.26.16.6.5.3  (11-06-2015), subpar. 2, Penalty for Willful FBAR Violations - Calculation, here.  I presume  that the other points of the memo now deleted from the IRS web page are similarly incorporated in the IRM.  See e.g., for the nonwillful penalty calculation, IRM 4.26.16.6.4.1  (11-06-2015), Penalty for Nonwillful Violations - Calculation, here.  Although the IRS took down the memo, another practitioners printed the memorandum and attachments in full on his website and provided a link to the memorandum in pdf format, here, although its importance now is historical only.]

The key points of the original memorandum that I find interesting are:

1.  The FBAR penalty provisions are "only maximum penalty amounts, leaving the IRS to determine the appropriate FBAR penalty amount based on the facts and circumstances of each case."  I think we all knew that, but I am glad the IRS is reminding its agents of that proposition.

2.  Attachment 1 provides procedures

developed to ensure consistency and effectiveness in the administration of FBAR penalties. They will help ensure FBAR penalty determinations are adequately supported and penalties are asserted in a fair and consistent manner. Examiners must continue to use their best judgment when proposing FBAR penalties. They must take into account all the available facts and circumstances of a case. See IRM 4.26.16.4.7, FBAR Penalties -- Examiner Discretion, concerning the use of examiner discretion when proposing FBAR penalties.

3.  The following are from Attachment 1 (bold-face supplied by JAT except for headings):

(2) Penalty Amount for Willful Violations 

For each year for which it is determined that there was a willful violation, examiners must fully develop and adequately document in the examination workpapers their analysis regarding willfulness. The examiner's report should clearly state the years for which it was determined that an FBAR violation was willful. 

For cases involving willful violations over multiple years, examiners will recommend a penalty for each year for which the FBAR violation was willful. In most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C) for each year. 

Example: Assume highest aggregate balances of $50,000, $100,000, and $200,000 for 2010, 2011, and 2012, respectively. The total penalty amount is $100,000 (50 percent of the $200,000 highest aggregate balance during the years under examination). The total of the highest aggregate balances for all years combined is $350,000. The penalty for 2010 is $14,286 ($50,000/$350,000 x $100,000). The penalty for 2011 is $28,571 ($100,000/$350,000 x $100,000). The penalty for 2012 is $57,143 ($200,000/$350,000 x $100,000). The penalty amounts for each year are subject to the maximum penalty limitation in 31 U.S.C. § 5321(a)(5)(C).\ 

Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner's workpapers must support all willful penalty determinations and document the group manager's approval. 

(3) Penalty Amount for Nonwillful Violations 

For most cases involving multiple nonwillful violations, examiners will recommend one penalty for each open year, regardless of the number of unreported foreign financial accounts. In those cases, the penalty for each year will be determined based on the aggregate balance of all unreported foreign financial accounts, and the penalty for each year will be limited to $10,000. 

For some cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager's approval after consultation with an Operating Division FBAR Coordinator, may assert a single penalty, not to exceed $10,000, for one year only. The examiner's workpapers must support such a penalty determination and document the group manager's approval. 

For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager's approval after consultation with an Operating Division FBAR Coordinator, may assert a separate penalty for each account and for each year. The examiner's workpapers must support such a penalty determination and document the group manager's approval. 

In no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination. A nonwillful penalty will not be recommended if the examiner determines that the FBAR violations were due to reasonable cause and the person failing to timely file correct and complete FBARs later files correct and complete FBARs. 

* * * * 

(4) Co-Owned Accounts 

Where there are multiple owners of an unreported foreign financial account, examiners must make a separate determination with respect to each co-owner of the foreign financial account as to whether there was a violation and, if so, whether the violation was willful or non-willful. For each co-owner against whom a penalty is determined, the penalty will be based on the co-owner's percentage ownership of the highest balance of the foreign financial account. If examiners are unable to determine a co-owner's percentage ownership, the penalty will be based on the amount determined by dividing the highest account balance equally among the co-owners. If examiners believe, based on the facts and circumstances of a particular case, that the penalty should be allocated among the co-owners in some other manner, they may do so with the group manager's approval after consultation with an Operating Division FBAR Coordinator. The examiner's workpapers must support such a determination and document the group manager's approval.

 JAT Comments:

1. The willful penalty mitigation in multiple years is just a general rule.  I suppose this leaves some discretion in the agent and manager to imagine egregious willfulness for multiple year assertion of a 50% penalty in each year.  There are some procedural approvals required, so hopefully this signals some notion that the IRS will not be punitive.  To quote Alexander Pope: "Hope springs eternal in the human breast,"
2. Attachment 1 also reminds agents of the availability of IRS Counsel and the Fraud Technical Adviser in appropriate cases.  The FTA becomes involved upon perceiving potential criminal investigation potential for the matter. 
3. Attachment 2 has some procedural requirements.

Addendum 6/2/15 7:30am:

Tax Notes has an article on the IRS memorandum.  Andrew Velarde, FBAR Penalty Cap Reflects Sensitivity to 8th Amendment Concerns, 2015 TNT 105-2 (6/2/15), no link available.  Most of the comments reported in the article are similar to comments of readers to this blog entry.  Nevertheless, I will summarize the key points.

1. The limitations on the willful and nonwillful penalties probably are in recognition of the constitutional prohibitions on excessive fines.
2. The limitations may encourage more taxpayers to opt out becuase the worst case scenario will, in most cases, be 50% for a single year rather than 300% (for 6 years).  The risk reward ratio may be greatly improved.  Although not said in this way in the article, the risk of opting out may thus be a potential 22 1/2% higher penalty with a potential reward of a penalty much, much less than 27 1/2%.  And, if the taxpayer is at 50% in OVDP anyway because of being on the financial institution list, the risk reward ratio is quite favorable.