Friday, May 29, 2015

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 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.

25 comments:

  1. Jack, the guidance can be found here: http://www.irs.gov/pub/foia/ig/spder/SBSE-04-0515-0025%5B1%5D.pdf

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  2. Thanks, Guest Esq. I have just posted the link above.


    Jack Townsend

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  3. I don't really see any changes here with regards to guidance. 50% penalty for willfull conduct per year is still a possibility, and the $10,000 per/account/year is still a possibility. Incredible really. What was the guidance before? Or are we just reading between the lines and as Jack mentions, the fact that the IRS is posting this guidance indicates that they might not be so "punitive"?

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  4. Jack
    what does that mean : ``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.``
    Example :
    Joint account Husband (american) and Wife (american).
    Husband works and earns 100% of the income.
    Do I interpret this guidance correctly in saying that the FBAR penalty will be based on 100% ownership from husband and 0% from the wife of the highest balance of the foreign financial account.

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  5. Jack I am confused I thought the date of the filing violation is 6/30 of the year following the calendar year for which the account is being reported.

    ----------In most cases, the total penalty amount for all years under
    examination will be limited to 50 % of the highest aggregate
    balance of all unreported foreign financial accounts during the years
    under examination.-------------------


    I assume by aggregate balance we are talking about the amount as of 6/30 for each year under examination.

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  6. ---------In no event will the total penalty amount exceed 100 % of the highest aggregate balance
    of all unreported foreign financial accounts during the years under examination-------------

    Example :
    2010 : $250.000 aggregate balances as of 6/30 and not high/max. balance
    2011 : $250.000 aggregate balances as of 6/30 and not high/max. balance
    2012 : $250.000 aggregate balances as of 6/30 and not high/max. balance


    Before for willful penalties was $100k or 50% whatever is greater. Which was $375K (3x125K)
    Now 100% of $250K = $250K which is a reduction of $125K from earlier guidance.

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  7. I think who earns may not be the same as who owns in your example. Assume, for example, the H (US citizen) and W (nonUS citizen) reside in country X with a community property law that says 50% of earnings for personal services belong 1/2 to each, then if W earns everything in the account, it is still owned 1/2 by each. So, if W has no FBAR filing obligation, H's penalty would be based on the 50% he owned. At least that is how I interpret the concept.

    If W has an FBAR filing requirement, then 100% of the account is the penalty base, but split 50-50 to each of them.

    Of course, in applying the offshore penalty in OVDP, the IRS has always only applied it to the owned portion of the account for the U.S. taxpayer.

    Jack Townsend.

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  8. I see. Yeah that's definetely a difference then. Thank you for pointing that out. How generous of the IRS to do this :)

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  9. Since 100% of europe goes by a community property law one way or another, this means very good news for ``H`` because his FBAR penalty will only be based on 50% of the account value. There are inconsistencies here.
    Why should it be based on the highest account balance ?
    Again the date of the filing violation is 6/30 of the year following the calendar year for which the account is being reported. I

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  10. --------In no
    event will the total amount of the penalties for nonwillful violations
    exceed 50% of the highest aggregate balance of all unreported
    foreign financial accounts for the years under examination.----------
    This really feels like a turkish bazar when I take into consideration the $10K max. penalty per year and account and holder vs. the NW mitigation guidelines.

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  11. It all goes back to the fact that FBARs penalties have nothing to do with
    income taxes. FBAR penalties exists — allegedly — to give law
    enforcement ways to financially cripple the real mean and nasty
    terrorist cells, criminal syndicates, and organized crimes (of course,
    the intent of FBAR penalties isn’t quite lining up with the results; but
    let’s not dwell on that too much, ok?). Title 26 of the US Code is the
    IRS’s bread and butter: the “Internal Revenue Code.” FBARs, however,
    come from Title 31 (and the Bank Secrecy Act of 1970).

    ReplyDelete
  12. No change here either . FinCEN doesn’t really want to administer the FBAR. Sure while you file your FBAR on June 30th with FinCEN, the agency who enforces FBAR penalties is…. the IRS.
    Why?
    Because reasons.
    I have listed my potential reasons:

    No other agency wanted to do it

    No other agency had the vast administrative resources, and possibly,

    The IRS’s has little prestige to lose (a 27% approval rate by the public; and not even all that well-liked by its employees); slapping onerous fines on regular Americans won’t do anything to diminish their esteem. It’s hard to tarnish a tarnished brand.

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  13. Always remember that I.R.S. no right to one thin Canadian dime. If you're a Canadian citizen under Canadian laws what difference does it make that some foreign laws classify you as a citizen of that foreign country? The boundary of the U.S.A. is the boundary of the U.S.A. Just say NO and stay in Canada. Why should you visit a foreign country's diplomatic mission and pay a fee to renounce a citizenship that foreign country unilaterally inflicted upon you?

    Just say NO. Open your accounts with a driver licence and other ID that does not show birth place. Transfer the money from your old account in cash so the old bank cannot be pressed to disclose where the money was transferred to as some Swiss banks have been.

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  14. Don't forget, in these low-interest times, the possibility of opening safe deposit boxes and storing cash or gold until the statute of limitations runs out. If a burglar breaks into one box, you still have the others.

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  15. Michael J. MillerMay 31, 2015 at 10:34 AM

    I disagree. While the 50% statutory maximum penalty (ignoring the $100,000 floor) is based on the value of the account on the date of the violation, and thus is specifically based on the 6/30 balance, this is something different. As I read the guidance, the "normal" cap of 50% is very clearly based on maximum values during the year.

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  16. I disagree. As I read the guidance the 50% cap is based on the highest aggregate balance but as of 6/30 and not high/max balance

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  17. The guidance is vague as to where the line is drawn between willfulness and lack thereof, and to what level of willfulness would be egregious enough as to justify more than 50%. So I'm not sure how much is really "new."

    On the other hand, many people were scared into settling for 20, 25 or 27.5% percent because of lack of such guidance. Even many of those who successfully transitioned to streamline have paid a 5% penalty that is more than $10K for each open year.

    It would seem appropriate to allow those who have signed closing agreements to have the agreement reviewed and receive a refund for overpayment if the penalty would have been lower under the guidelines in the memo. Sadly, I wouldn't hold my breath waiting for this to happen.

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  18. That is, if you are able to open one or more foreign accounts aggregating to under $10K. (No bank I know of will rent out a safe deposit box without an account from which they can debit the fee.) Therein lies the problem.

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  19. .......but in no circumstances will the penalty exceed 100% of the highest aggregate balance (6/30) ........ Since there have been instances where the IRS has threatened penalties of 150% or more this finally places a limit on the maximum civil penalties. Presumably this was done, in part, to undercut any argument by taxpayers that the penalty violated the Constitutional prohibition against "excessive fines" that was raised in the Zwerner case in Florida.

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  20. If the examiner determines that the conduct was non-willful then in most cases the penalty will be limited to $10,000 for each year regardless of the number of unreported financial accounts. Previously the IRS position was that it would assert a penalty of $10,000 per year, per account. The guidance does provide that in 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." Examiners may in those cases assert a single penalty not to exceed $10,000 for one year only. The starting point for all nonwillful calculations, however will be the "mitigation guidelines" set forth in IRM 4.26.16.4.6 et. seq.

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  21. The guidance provides that it is the examiner who makes a recommendation as to amount, and type of FBAR penalty that is appropriate, and the group manager who makes the final determination, after consultation with an Operating Division FBAR Coordinator. The guidance makes clear (despite what I have heard in the past) that it is not the FBAR Coordinator who makes the decision. In addition, except in cases where the recommendation is to assert a willfulness penalty, IRS Counsel review is not required.

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  22. While all of this leaves a fair amount of discretion with the IRS examiner, it does suggest that there are "norms" for FBAR penalties. I would still strongly suggest that TP do a cost/benefit analysis before hiring a tax lawyer. Their argument of course will be given that the actual amount of the penalties will be determined based upon "facts and circumstances"there remains a good deal of leeway for effective advocacy to keep the FBAR penalties as low as possible, and to keep them from reaching the maximum guideline amounts.

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  23. Michael J. MillerJune 2, 2015 at 7:32 PM

    The recent guidance provides in part as follows: "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." Since the guidance expressly refers to the highest aggregate balance "during" the years under examination, I am at a bit of a loss to understand how you would read this to say something else. I did not see one reference to the highest aggregate balance on the date of the violation or any other indication that the language means anything other than what it says.


    Also, as you may or may not be aware, the Internal Revenue Manual has for some time set forth certain FBAR penalty guidelines based on the maximum value of an account during the year (and not the value on the date of the violation), so it seems to be entirely plausible that the recent guidance would similarly be keyed to some percentage of maximum account value during the year.


    With respect to your point about the "normal' 50% cap possibly achieving worse results than the statutory penalty, keep in mind that the 50% cap figure under the recent guidance applies to the total penalty for multiple years, whereas the 50% statutory penalty applies to a single year (and the statutory maximum penalty also has a floor of $100,000 per violation). It is possible to construct a fact pattern where the 50% cap under the recent guidance for multiple years would exceed the statutory penalties for those years, but it would be an unusual case. And, in any event, the possibility of the cap exceeding the statutory penalty would not seem to have any significance. If the cap is higher then the statutory penalty, it is simply irrelevant.



    "

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  24. I would like to thank
    you for the efforts you have made in writing this post.


    Really a helping blog on the FBAR.

    FBAR Amnesty

    ReplyDelete
  25. ``The IRS's position looks quite reasonable and is to be commended. It appears
    to reflect sensitivities over the argument in the Eighth Amendment
    against excessive fines and penalties and may make it more likely that
    non-offshore voluntary disclosure program penalty cases will settle
    before the court action necessary for the government to collect the
    Title 31 penalty.

    Scott
    D. Michel of Caplin & Drysdale

    ReplyDelete

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