On September 8, 2023, the IRS issued a News Release suggesting that FBAR compliance investigations and audits would heat up in the near future. For those unfamiliar with FBARs, federal law requires United States persons to file an FBAR annually if such persons have a financial interest in or signature or other authority over foreign financial accounts exceeding $10,000 at any time during the year. The failure to file a timely and proper FBAR can have significant financial consequences. If the failure is deemed “willful,” the IRS may impose civil penalties equal to the greater of $100,000 (indexed for inflation) or 50% of the amount of the balances in the accounts at the time of the violation. Even if the failure is deemed “non-willful,” the IRS may still impose civil penalties equal to $10,000 (also indexed for inflation) for each year there is a filing violation.
Predictably, a taxpayer’s primary defense against willful FBAR penalties is that the conduct at issue was not willful. But because federal courts have interpreted “willfully” broadly to include recklessness, these arguments usually do not carry the day in federal court. Indeed, the IRS has taken the position, accepted by some courts, that taxpayers may be per se willful when they submit a Schedule B with their income tax return on the basis that the Schedule B questions put the taxpayer on notice of the FBAR filing requirement. This is because taxpayers have a duty to read their tax returns, regardless of whether they do so or not.
Given the difficulties in defending against the willful FBAR penalty, taxpayers and tax professionals should be mindful that other FBAR penalty defenses also exist. For example, as indicated above, a willful FBAR penalty may be computed as 50% of the amount of the balance in the foreign account at the time of the violation. Because the FBAR itself requires a taxpayer to report the maximum account balance at any time in the tax year, this tax professional has often seen the IRS mistakenly compute the FBAR willful FBAR penalty based on the maximum account balance, rather than the violation date. In some instances, the maximum value of the accounts at issue during the year in question can significantly depart from the value of the accounts at the time of the violation, to the taxpayer’s benefit.
Federal courts have bought into this argument, concluding that an IRS miscalculation not made on the FBAR filing date (i.e., the violation date) requires the court to remand the computational issue back to the IRS. Indeed, in a recent decision, a federal court held that the government’s summary judgment motion should be denied because the government did not provide sufficient factual support for the value of the accounts as of the filing deadline.[1]
Accordingly, taxpayers with significant civil FBAR penalties should ensure that they raise all credible arguments at the IRS administrative level and, if necessary, at the federal court level. Raising these arguments timely can result in significant reductions in FBAR penalties if done properly.
[1] U.S. v. Gaynor, No. 2:21-cv-382-JLB-KCD (M.D. Fla. Sept. 6, 2023).