Congress enacted the statutory basis for the requirement to report foreign bank and financial accounts in 1970 as part of the “Currency and Foreign Transactions Reporting Act of 1970,” which came to be known as the “Bank Secrecy Act” or “BSA.” These anti-money laundering and currency reporting provisions, as amended, were codified at 31 USC 5311 – 5332, excluding section 5315.
The Secretary of the Treasury subsequently delegated the authority to administer civil compliance with Title II of the BSA to the Director of FinCEN. IRS Criminal Investigation (CI), however, maintains authority to enforce the criminal provisions of the BSA.
While FinCEN retains rule-making authority with respect to FBAR reporting, FinCEN redelegated civil FBAR enforcement authority to the IRS.
The FBAR regulations require that a United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, file an FBAR to report:
A failure to file a FBAR report may result in criminal exposure—that is, the possibility of a criminal indictment or investigation. For several years, the IRS has publicly touted its intention to strongly enforce the FBAR reporting requirements.
In addition, a failure to file a FBAR report may result in exposure to civil penalties, including up to half of the balance in all unreported accounts if the government determines that the failure to report was willful or reckless.
Current penalties (adjusted for inflation) are as follows:
Civil Monetary Penalty Description
The statutory authority for the FBAR is found under 31 USC § 5314. Section 5314 directs the Secretary of the Treasury to require a resident or citizen of the United States to keep records and/or file reports when making transactions or maintaining a relationship with a foreign financial agency.
31 USC § 5321(a)(5) and (a)(6) establish civil penalties for violations of the FBAR reporting and recordkeeping requirements.
31 CFR § 1010.350 sets forth the FBAR definitions and requirements. Section 1010.350 requires that “each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 USC § 5314 to be filed by such persons.”
The report is required to be electronically filed with FinCEN on FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR).
31 CFR § 1010.420 requires maintenance and retention of FBAR records for a period of five years. 31 CFR 1010.810(g) references a Memorandum of Agreement between FinCEN and the IRS, which redelegates, to the IRS, FinCEN’s authority to enforce the provisions of 31 USC 5314 and 31 CFR 1010.350 and 1010.420. This includes the authority to:
An FBAR is required if all of the following apply:
A “United States person” is defined by 31 CFR § 1010.350(b) to include:
Notably, the federal tax treatment of a United States person does not determine whether the person has an FBAR filing requirement.
Example: Single-member Limited Liability Companies (LLCs) are disregarded for federal tax purposes, but would have to file the FBAR if otherwise required to do so.
Example: Some trusts may not file tax returns but may have an FBAR filing requirement.
The definition of “United States” for this purpose is found in 31 CFR § 1010.100(hhh). For FBAR and other Title 31 purposes, a “United States” includes:
U.S. territories and insular possessions currently include:
A citizen of the U.S. has a U.S. birth certificate or naturalization papers.
U.S. citizenship is not defined by residency. A citizen of the U.S. may reside outside the U.S.
Children born of U.S. citizens living abroad are U.S. citizens despite the fact that they may never have been to the U.S.
Prior to February 24, 2011, when revised regulations were issued, the FBAR regulations did not define the term “U.S. resident.”
For FBARs required to be filed by June 30, 2011, or later, 31 CFR 1010.350(b) defines “United States resident” using the definition of resident alien in IRC 7701(b), but using the Title 31 definition of “United States.” The major tests of residency found in section 7701(b) are:
Individuals residing in the U.S. who do not meet one of these residency tests are not considered U.S. residents for FBAR purposes. This includes individuals in the U.S. under a work visa who do not meet the substantial-presence test.
Using these rules of residency can result in a non-resident being considered a U.S. resident for FBAR purposes. This would occur when a green-card holder actually resides outside the U.S.
FinCEN clarified in the preamble to the regulations that an election under IRC 6013(g) or (h) is not considered when determining residency status for FBAR purposes.
U.S. tax treaty provisions do not affect residency status for FBAR purposes. A treaty provision which allows a resident of the U.S. to file tax returns as a non-resident does not affect residency status for FBAR purposes if one of the tests of residency in IRC 7701(b) is met.
Diplomats residing at foreign embassies in the U.S. are not generally considered U.S. residents since foreign embassies are generally considered part of the sovereign nation they represent.
A U.S. entity is a legal entity formed under the laws of the U.S., any state, the District of Columbia, any territory or possession of the U.S., or an Indian tribe.
31 CFR 1010.350(b) specifically names, but does not limit these types of entities to:
The preamble to the regulations clarifies that pension plans and welfare benefit plans are included as U.S. entities.
The definition of entities allows for new types of legal entities to be included in the future.
The preamble to the regulations clarifies that there need be no current payment of an income stream to trigger reporting. The cash value of the policy is considered the account value.
A reportable account may exist where the financial institution providing the safety deposit box has access to the contents and can dispose of the contents upon instruction from, or prearrangement with, the person.
31 USC 5314 defines “foreign financial agency” as “a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.” Therefore, a reportable account relationship may exist where a foreign agency holds precious metals on deposit or provides insurance or other services as an agent of the person owning the precious metals.
Financial Account Exceptions
The following are not considered reportable financial accounts for FBAR purposes:
Individuals don’t report individual retirement accounts and tax-qualified retirement plans described in Internal Revenue Code Sections 401(a), 403(a) or 403(b) on the FBAR. The FBAR instructions list other exceptions.
The FBAR is required for each calendar year during which the aggregate amount(s) in the foreign account(s) exceeded $10,000, valued in U.S. dollars, at any time during that calendar year. To determine the account value to report on the FBAR follow these steps:
If the statement closing balance is $9,000 but at any time during the year a balance of $15,000 appears on a statement, the maximum value reportable on an FBAR is $15,000.
If periodic account statements are not issued, the maximum account asset value is the largest amount of currency and non-monetary assets in the account at any time during the year.
If the filer has more than one account to report on the FBAR, each account is valued separately in accordance with the previous paragraphs.
If a person has one or more but fewer than 25 reportable accounts and is unable to determine whether the maximum value of these accounts exceeded $10,000 at any time during the calendar year, the FBAR instructions state that the person is to complete the applicable parts of the FBAR for each of these accounts and enter “value unknown” in Item 15.
Direct Financial Interest:
Because the FBAR is a report of foreign financial accounts, the entire account value for jointly-owned accounts is reported on each FBAR. Accounts are not prorated for a person’s percentage of ownership interest.
Indirect financial interest: A U.S. person has an “other financial interest” in each bank, securities, or other financial account in a foreign country for which the owner of record or holder of legal title is:
The family attribution rules under Title 26 do not apply to FBAR reporting.
Anti-avoidance rule: A U.S. person that causes an entity including, but not limited to, a corporation, partnership, or trust, to be created for the purpose of evading the FBAR reporting and/or recordkeeping requirements shall have a financial interest in any bank, securities, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title. 31 CFR 1010.350(e)(3).
An individual has signature or other authority over an account if that individual (alone or in conjunction with another) can control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.
Individuals not considered as having signature authority:
Only individuals can have signature authority. Signature authority attributed to entities must be exercised by individuals.
An officer or employee of the following institutions need not report signature or other authority over a foreign financial account owned or maintained by the institution if the officer or employee has no financial interest in the account:
Authorized Service Provider is an entity that is registered with and examined by the Securities and Exchange Commission and that provides services to an investment company registered under the Investment Company Act of 1940.
Previously, instructions to the form allowed a “large corporation” exception for listed corporations. That exception was expanded to include all listed entities.
A foreign country includes all geographical areas located outside of the United States as defined in 31 CFR 1010.100(hhh). An account is “foreign” for FBAR purposes if it is located outside:
It is the location of an account, not the nationality of the financial institution, that determines whether an account is “foreign” for FBAR purposes. Accounts of foreign financial institutions located in the U.S. are not considered foreign accounts for FBAR; conversely, accounts of U.S. financial institutions located outside the U.S. are considered foreign accounts. Examples are:
The final criterion triggering the FBAR filing requirement is the aggregate value of all foreign financial accounts in which the person has a financial interest, or over which the individual has signature or other authority, must be greater than $10,000, valued in U.S. dollars, at any time (on a particular day) during the calendar year.
Steps to aggregate account values:
Money moved from one foreign account to another foreign account during the year must only be counted once.
All reportable accounts should be aggregated, including:
The determination to file the FBAR is made annually. For example, a person may be required to file an FBAR for one calendar year but not for a subsequent year if the person’s aggregate foreign account balance does not exceed $10,000 at any time during the year.
An FBAR must be filed for each calendar year that the person has a financial interest in, or signature authority over, foreign financial account(s) whose aggregate balance exceeds the $10,000 threshold at any time during the year.
The FBAR must be filed on or before June 30 each year for the previous calendar year.
All FBARs filed after June 30, 2013, must be filed electronically through the FinCEN BSA E-Filing website at www.bsaefiling.fincen.gov/main.html unless the filer requested, and was granted, an exception to e-filing by FinCEN.
The FBAR should not be filed with the filer’s federal income tax return or information return.
FBAR Filing Exceptions
Individual Retirement Account (IRA) owners and beneficiaries, and participants in and beneficiaries of U.S. tax-qualified retirement plans, are not required to report a foreign financial account held by or on behalf of the IRA or retirement plan.
This exception is for U.S. plans only. Foreign plans (e.g., a Canadian Registered Retirement Savings Plan (RRSP) and accounts managed by Mexico’s Administrators of Retirement Funds (AFORES) are normally reportable on an FBAR.
A trust beneficiary with a financial interest is not required to report the trust’s foreign financial accounts on an FBAR if the trust, trustee of the trust, or agent of the trust:
Accounts owned jointly by spouses may be filed on one FBAR. The spouse of an individual who files an FBAR is not required to file a separate FBAR if the following conditions are met:
The completed Form 114a is not filed but must be retained for five years. It must be provided to IRS or FinCEN upon request.
If these conditions are not met (as when both spouses have individual accounts in addition to the jointly-owned accounts), both spouses are required to file separate FBARs, and each spouse must report the entire value of the jointly-owned accounts.
For calendar years prior to 2014, use the instructions for spousal filing current for that filing year.
FBAR filers may authorize a paid preparer or other third party to electronically file the FBAR for them.
The person reporting financial interest in, or signature authority over, foreign accounts must complete and sign Part I of FinCEN Form 114a.
The preparer or other third-party filer must complete Part II of Form 114a.
Form 114a is not filed. Both parties must retain the form for five years. It must be provided to IRS or FinCEN upon request.
It remains the responsibility of the filer to ensure that filing takes place timely and the report is accurate. Form 114a contains a disclaimer that states: “…it is my/our legal responsibility, not that of the preparer listed in Part II, to timely file an FBAR if required by law to do so.”
31 CFR 1010.350(g) provides that a United States person that has a financial interest in 25 or more foreign financial accounts only needs to provide the number of financial accounts and certain other basic information on the report, but will be required to provide detailed information concerning each account if the IRS or FinCEN requests it.
Filers must comply with FBAR record-keeping requirements.
FBAR Filing for Signature Authority for 25 or More Accounts
31 CFR 1010.350(g) provides that A United States person that has signature or other authority over 25 or more foreign financial accounts only needs to provide the number of financial accounts and certain other basic information on the report, but will be required to provide detailed information concerning each account if the IRS or FinCEN requests it.
The FBAR filing instructions allow for modified reporting by a U.S. person who meets all three of the following criteria:
In such cases, the U.S. Person should file the FBAR by:
31 CFR 1010.350(g) allows an entity that is a U.S. person that owns directly or indirectly a greater than 50 percent interest in another entity that is required to file an FBAR to file a consolidated FBAR on behalf of itself and such other entity.
Each controlled entity that has an FBAR filing obligation must be listed in Part V, even if that entity owns foreign accounts only indirectly.
No FBAR Filing Extension
There is no statutory authority to extend the time for filing an FBAR, and any request for such an extension will be denied.
Extensions of time to file federal income tax returns or information returns do not extend the time for filing FBARs.
IRC section 7508 “Time for performing certain acts postponed by reason of service in combat zone or contingency operation” does not grant U.S. persons that are U.S. Armed Forces members an extension to file the FBAR.
This is not to be confused with extension of the statute of limitations on assessment or collection of penalties, which is possible.
Delinquent FBARs should be filed using the current electronic report, but using the instructions for the year being reported to determine if an FBAR filing requirement exists.
On page one of FinCEN Report 114, explain the reason the FBAR was not filed timely. Select a common reason from the drop-down box or select Other, and a 750-character text box appears to allow an explanation.
Keep a copy of the FBAR for recordkeeping purposes.
No penalty will be asserted if the IRS determines that the failure to timely file an FBAR was not willful and was due to reasonable cause.
To amend a filed FBAR, filers should:
If the FBAR is required, certain records must be retained by the filer. 31 CFR 1010.420. Each person having a financial interest in or signature or other authority over any such account must keep the following records:
The records must be kept for five years from the June 30 due date for filing the FBAR for that calendar year and be available at all times for inspection as provided by law.
Note that persons are not required to keep copies of FBARs filed, only the records that underlie the filing.
An officer or employee who files an FBAR to report signature authority over an employer’s foreign financial account is not required to personally retain records regarding that account.
FBAR Recordkeeping For Filers Having 25 Or More Accounts
A filer who has financial interest in or signature authority over 25 or more foreign financial accounts must also comply with the record keeping requirements.
Filers will be required to provide detailed information concerning each account if the IRS or FinCEN requests it.
The IRS has been delegated authority to assess civil FBAR penalties.
When there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, Warning Letter Respecting Foreign Bank and Financial Accounts Report Apparent Violations, or determine a penalty. However, when multiple years are under examination and a monetary penalty is imposed for some but not all of the years under examination, a Letter 3800 will not be issued for the year(s) for which a monetary penalty is not imposed.
Penalties should be determined to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising discretion, examiners must consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the determination of a penalty, will achieve the desired result of improving compliance in the future.
An individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts, but properly reported the income from each account and made no attempt to conceal the existence of the accounts. The examiner must consider all the facts and circumstances of this case to determine if a warning letter is appropriate in this case or if it would be appropriate to determine civil FBAR penalties.
IRS was delegated the authority to assess and collect civil FBAR penalties. 31 CFR 1010.810(g). The delegation includes the authority to investigate possible civil FBAR violations, provided in Treasury Directive No. 15-41 (December 1, 1992), and the authority to assess and collect the penalties for violations of the reporting and recordkeeping requirements.
When performing these functions, IRS is not acting under Title 26 but, instead, is acting under the authority of Title 31. Provisions of the Internal Revenue Code generally do not apply to FBARs.
Criminal Investigation was delegated the authority to investigate possible criminal violations of the Bank Secrecy Act. 31 CFR 1010.810(c)(2).
There are four civil penalties available for FBAR violations:
Although the term “non-willful” is not used in the statute, it is used to distinguish this penalty from the penalty for willful violations.
A filing violation occurs at the end of the day on June 30th of the year following the calendar year to be reported (the due date for filing the FBAR).
A recordkeeping violation occurs on the date when the records are requested by the IRS examiner if the records are not provided.
A civil money penalty may be imposed for an FBAR violation even if a criminal penalty is imposed for the same violation. 31 USC 5321(d).
There are two negligence penalties that apply generally to all BSA provisions. 31 USC 5321(a)(6)
These two negligence penalties apply only to trades or businesses, and not to individuals.
The FBAR penalties under section 5321(a)(5) and the FBAR warning letter, Letter 3800, adequately address most FBAR violations identified. The FBAR warning letter may be issued in the cases where the revenue agent determines none of the 5321(a)(5) FBAR penalties are warranted. If the revenue agent believes, however, that assertion of a section 5321(a)(6) negligence penalty is warranted in a particular case, the revenue agent should contact a Bank Secrecy Act FBAR program analyst for guidance.
Actual knowledge of the reporting requirement is not required to find negligence. For example, if a financial institution or nonfinancial trade or business exercising ordinary business care and prudence for its particular industry should have known about the FBAR filing and record keeping requirements, failure to file or maintain records is negligent. Therefore, standards of practice for a particular industry are relevant in determining whether a negligent violation of 31 USC 5314 occurred. If the failure to file the FBAR or to keep records is due to reasonable cause, and not due to the negligence of the person who had the obligation to file or keep records, the negligence penalty should not be asserted.
Negligent failure to file does NOT exist when, despite the exercise of ordinary business care and prudence, the person was unable to file the FBAR or keep the required records.
Use general negligence principles in determining whether or not to apply the negligence penalty. Treas. Reg. 1.6664-4, Reasonable Cause and Good Faith Exception to section 6662 penalties, may serve as useful guidance in determining the factors to consider.
BSA Simple Negligence Penalty
A negligence penalty up to $500 may be assessed against a business for any negligent violation of the BSA, including FBAR violations.
The simple negligence penalty applies only to businesses, not individuals.
BSA Simple Negligence Penalty Amount
For each negligent violation of any requirement of the Bank Secrecy Act committed after October 27, 1986, a civil penalty may be assessed not to exceed $500.
Generally, the full amount of this $500 penalty is assessed. Although 31 USC 5321(a)(6) permits discretion to assert a lower amount, there are no mitigation guidelines for this penalty.
BSA Pattern of Negligence Penalty
31 USC 5321(a)(6)(B) provides for a civil money penalty of not more than $50,000 on a business that engages in a pattern of negligent BSA violations including violations of the FBAR rules. This penalty is in addition to any $500 negligence penalty.
The pattern of negligence penalty has applied to financial institutions since 1986. For violations occurring after October 26, 2001, the penalty applies to all trades or businesses. This penalty does not apply to individuals.
BSA Pattern of Negligence Penalty Amount
If any trade or business engages in a pattern of negligent violations of any provision (including the FBAR requirements)] of the BSA, a civil penalty of not more than $50,000 may be imposed. This is in addition to the simple negligence $500 penalty. 31 USC 5321(a)(6)(B). The examiner is given discretion to determine the penalty amount up to the $50,000 ceiling.
There are no mitigation guidelines for this penalty. The pattern of negligence penalty should be asserted only in egregious cases.
For violations occurring after October 22, 2004, a penalty, not to exceed $10,000 per violation, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements. 31 USC 5321(a)(5)(B).
The penalty should not be imposed if:
Penalty for Nonwillful Violations – Calculation
After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate.
For multiple years with nonwillful violations, examiners may determine 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.
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.
The penalty for willful FBAR violations may be imposed on any person who willfully violates or causes any violation of any provisions of 31 USC 5314 (the FBAR filing and recordkeeping requirements). 31 USC 5321(a)(5)(C).
The penalty applies to individuals as well as financial institutions and nonfinancial trades or businesses for all years.
For violations occurring after October 22, 2004, the statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation.
There may be both a reporting and a recordkeeping violation regarding each account.
The date of a violation for failure to timely file an FBAR is the end of the day on June 30th of the year following the calendar year for which the accounts are being reported. This date is the last possible day for filing the FBAR so that the close of the day with no filed FBAR represents the first time that a violation occurred. The balance in the account at the close of June 30th is the amount to use in calculating the filing violation.
The date of a violation for failure to keep records is the date the examiner first requests records. The balance in the account at the close of the day that the records are first requested is the amount used in calculating the recordkeeping violation penalty. The date of the violation is tied to the date of the request, and not a later date, to assure the taxpayer is unable to manipulate the amount in the account after receiving a request for records. The balance in the account at the close of the day on which the records are first requested is the amount to use in calculating the penalty for failing to keep records as required by statute.
IRS developed guidelines for the exercise of the examiner’s discretion in arriving at the amount of a penalty for a willful violation. See discussion of mitigation, below.
Willful FBAR Violations – Defining Willfulness
The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.
A finding of willfulness under the BSA must be supported by evidence of willfulness.
The burden of establishing willfulness is on the Service.
Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the person only need know that a reporting requirement exists. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.
Under the concept of “willful blindness,” willfulness is attributed to a person who made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.
Willful blindness may be present when a person admits knowledge of, and fails to answer questions concerning, his interest in or signature or other authority over financial accounts at foreign banks on Schedule B of his Federal income tax return. This section of the income tax return refers taxpayers to the instructions for Schedule B, which provides guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file the FBAR. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to act on this information and learn of the further reporting requirement, as suggested on Schedule B, may provide evidence of willful blindness on the part of the person.
The failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved, may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, in itself, to establish that the FBAR violation was attributable to willful blindness.
The following examples illustrate situations in which willfulness may be present:
Willfulness can rarely be proven by direct evidence, since it is a state of mind. It is usually established by drawing a reasonable inference from the available facts. The government may base a determination of willfulness on inference from conduct meant to conceal sources of income or other financial information. For FBAR purposes, this could include concealing signature authority, interests in various transactions, and interests in entities transferring cash to foreign banks.
Documents that may be helpful in establishing willfulness include:
Documents available in an FBAR case worked under a Related Statute Determination under Title 26 that may be helpful in establishing willfulness include:
Penalty for Willful FBAR Violations – Calculation
For violations occurring after October 22, 2004, a penalty for a willful FBAR violation may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation, 31 USC 5321(a)(5)(C). For cases involving willful violations over multiple years, examiners may recommend a penalty for each year for which the FBAR violation was willful.
After May 12, 2015, 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 USC 5321(a)(5)(C) for each year.
Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate
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.
If an account is co-owned by more than one person, a penalty determination must be made separately for each co-owner. The penalty against each co-owner will be based on his her percentage of ownership of the highest balance in the account. If the examiner cannot determine each owner’s percentage of ownership, the highest balance will be divided equally among each of the co-owners.
The statutory penalty computation provides a ceiling on the FBAR penalty. The actual amount of the penalty is left to the discretion of the examiner.
IRS has adopted mitigation guidelines to promote consistency by IRS employees in exercising this discretion for similarly situated persons. Exhibit 4.26.16-1.
Mitigation Threshold Conditions
For most FBAR cases, if IRS has determined that if a person meets four threshold conditions, then that person may be subject to less than the maximum FBAR penalty depending on the amounts in the accounts.
For violations occurring after October 22, 2004, the four threshold conditions are:
FBAR Penalties – Examiner Discretion
The examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty.
When a penalty is appropriate, IRS penalty mitigation guidelines aid the examiner in applying penalties in a uniform manner. The examiner may determine that a penalty under these guidelines is not appropriate or that a lesser penalty amount than the guidelines would otherwise provide is appropriate or that the penalty should be increased (up to the statutory maximum). The examiner must make such a determination with the written approval of the examiner’s manager and document the decision in the workpapers.
Factors to consider when applying examiner discretion may include, but are not limited to, the following:
Given the magnitude of the maximum penalties permitted for each violation, the assertion of multiple penalties and the assertion of separate penalties for multiple violations with respect to a single FBAR, should be carefully considered and calculated to ensure the amount of the penalty is commensurate to the harm caused by the FBAR violation.
Managerial Involvement and Approval of FBAR Penalties
Managers must perform a meaningful review of the examiner’s penalty determination prior to assessment.
The manager must verify that the penalties were fairly imposed and accurately computed; that the examiner did not improperly assert the penalties in the first instance; and that the conclusions regarding “reasonable cause” (or the lack thereof) were proper.
For BSA cases, written managerial approval must be documented on the Violations Summary Form – Title 31, workpaper 400-1.1.
For SB/SE examination cases, written managerial approval must be documented on the Penalty Approval Form, workpaper 300.
For LB&I cases, managerial approval must be documented on the penalty leadsheets.
For SB/SE campus cases, written managerial approval must be documented on Form 4700, Examination Workpapers.
FBAR Penalty Mitigation Guidelines for Violations Occurring After October 22, 2004
The Bank Secrecy Act (BSA) allows the Secretary of the Treasury some discretion in determining the amount of penalties for violations of the FBAR reporting and record keeping requirements. There is a penalty ceiling but no minimum amount. This discretion has been delegated to the FBAR examiner.
The examiner may determine that the facts and circumstances of a particular case do not justify a penalty.
If there was an FBAR violation but no penalty is appropriate, the examiner must issue the FBAR warning letter, Letter 3800.
When a penalty is appropriate, IRS established penalty mitigation guidelines to ensure the penalties determined by the examiner’s discretion are uniform. The examiner may determine that:
The examiner must make this determination with the written approval of that examiner’s manager. The examiner’s workpapers must document the circumstances that make mitigation of the penalty under these guidelines appropriate. When determining the proper penalty amount, the examiner should keep in mind that manager approval is required to assert more than one $10,000 non-willful penalty per year, and in no event can the aggregate non-willful penalties asserted exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue. Similarly, manager approval is required to assert willful penalties that, in the aggregate, exceed 50% of the highest aggregate balance of all accounts to which the violations relate during the years at issue, and in no event can the aggregate willful penalties exceed 100% of the highest aggregate balance of all accounts to which the violations relate during the years at issue.
To qualify for mitigation, the person must meet four criteria:
$10,000 per violation, the statutory maximum penalty for non-willful violations.
For each account for which there was a violation, the greater of $5,000 or 10% of the maximum account balance during the calendar year at issue.
Money transmitters in the U.S. send money overseas generally through the use of foreign banks or non-bank agents located in foreign countries. The arrangement permits the money transmitter to readily send payments, in the currency of the foreign country, to the recipient. The U.S. money transmitter wires funds to the foreign bank or non-bank agent and provides instructions to make payments to the recipient located in the foreign country. The money transmitter typically does not have signature or other authority over the agent’s bank account. In this situation, the money transmitter is not required to file an FBAR for the agent’s bank account.
However, if the money transmitter has a direct financial interest in the foreign financial account, has signature authority, or other authority, over the foreign financial account and the aggregate value is in excess of $10,000 at any time during the year in question, the money transmitter is required to file an FBAR. Another person holding the foreign account on behalf of the money transmitter does not negate the FBAR filing requirement.
Frequently Asked Questions (FAQ’s):
Is there an FBAR filing requirement when the money transmitter wires funds to a foreign bank account or has a business relationship with someone located in a foreign country?
Answer: No. Merely wiring funds to a foreign bank account or having a business relationship with someone located in a foreign country does not create an FBAR filing requirement.
Is there an FBAR filing requirement where the money transmitter owns a bank account located in a foreign country or has signature authority over someone else’s bank account located in a foreign country?
Answer: Yes, if the account exceeded $10,000 at any time during the calendar year and the money transmitter was a United States person for FBAR purposes.
Is an FBAR required to be filed by a money transmitter engaged in Informal Value Transfer System (IVTS)/Hawala transactions?
Answer: There would be no FBAR filing requirement if there is no foreign bank or other foreign financial accounts involved. The money transmitter’s relationship with a foreign affiliate, by itself, does not create an FBAR filing requirement. However, if the money transmitter owned a bank account located in a foreign country or had signature authority over someone else’s bank account located in a foreign country, was a United States person, and the account value exceeded $10,000 at any time, the money transmitter would be required to file an FBAR.
What constitutes “other authority” for FBAR reporting purposes?
Answer: “Other authority” is comparable to signature authority in that a person exercising “other authority” can through communication to the bank or other person with whom the account is maintained exercise power over the account. A distinction, however, must be drawn between having authority over a bank account of a non-bank foreign agent and having authority over a foreign agent who owns a foreign bank account. Having authority over a person who owns a foreign bank account is not the same as having authority over a foreign bank account.
Does a money transmitter who has a business relationship with a person located in a foreign country have a financial interest in a foreign financial account if the person in the foreign country is providing services of a financial institution (such as money transmission services) and both parties maintain books and records of their business transactions (including books and records of offsetting transactions or trade accounts receivable or payable)?
Answer: No. The money transmitter does not have a financial interest in a foreign financial account. A “financial account” for FBAR filing purposes includes bank accounts, investment accounts, savings accounts, demand checking, deposit accounts, time deposits, or any other account maintained with a financial institution or other person engaged in the business of a financial institution. “Accounts” as used to describe or identify the books and records of ordinary business transactions between businessmen are not “financial accounts” for FBAR reporting purposes.
Do receivables accounts maintained by foreign non-bank agents which net out the US money transmitter settlement obligations to the foreign agent constitute a financial account for FBAR filing purposes?
Answer: No. Such receivables in accounting records are not financial accounts for FBAR reporting purposes.
Do the FBAR filing requirements apply when a money transmitter maintains a bank account with a foreign bank for the purpose of settling money transmission transactions with a foreign bank?
Answer: Yes. If a money transmitter owns the account maintained with the foreign bank or has signature or other authority over it, the money transmitter may be required to file an FBAR.
If you need assistance in managing the Tax Compliance process, Freeman Law can help clients navigate International & Offshore tax laws. We offer value-driven services and provide practical solutions to tax complex issues. Schedule a consultation or call (214) 984-3410 to discuss your tax concerns.