2023 will go down in history as a banner year for taxpayers across the globe who have unreported foreign accounts and are facing FBAR penalties. That is because, in February 2023, the Supreme Court issued a ruling limiting civil non-willful FBAR penalties — the most common type of foreign bank account penalty — to a $10,000 per year penalty (the $10,000 adjusts for inflation each year). Prior to this ruling, the IRS seemingly had carte blanche to issue penalties upwards of $10,000 per account per year — typically not to exceed the 50% willfulness threshold. As a result of this new Supreme Court ruling, even if a taxpayer failed to report millions of dollars in their foreign accounts, as long as they are non-willful, the IRS should be limited to issuing a $10,000 per year penalty if they were found to be non-willful.
It is important to take the Court’s ruling in stride, specifically, as to the fact that the IRS still has the power to issue willful penalties, which can reach 50% maximum value of the highest value of the unreported accounts each year. While there is also the potential of criminal FBAR penalties, do not get too overwhelmed by all the nonsense and fearmongering you will undoubtedly find online about going to jail or prison for an FBAR violation. In general, criminal FBAR penalties are rare – and they typically only appear in situations in which other crimes have been committed, such as money laundering, structuring, smurfing, etc. Let’s take a look at what the FBAR penalties may look like in 2023 and beyond.
According to the court’s new ruling, non-willful Civil FBAR penalties are limited to a ‘per form, per year’ penalty. In other words, even if a Taxpayer failed to report several foreign financial accounts in a single year on the FBAR, the penalty is limited to one penalty per year — because it is based on the form being filed and not the number of accounts.
The penalties for willful FBAR penalties can be substantial. The IRS has the right to issue penalties upwards of 50% of the maximum aggregate value of unreported foreign accounts per year, for six (6) years. In recent years, the total FBAR penalty for the entire compliance period has generally been limited to a 100% maximum value for the non-compliance period — noting that it previously used to be a 300% maximum, with 300% representing the fact that is a 50% penalty per year and the statute of limitation is for six years.
Taxpayers do not have to have acted intentionally in order to become subject to willful FBAR penalties. That is because there are two lower levels of behavior that qualify as willful: Reckless Disregard and Willful Blindness. Unfortunately, there is no hard and fast rule as to how a person is deemed to have acted with reckless disregard or willful blindness. The IRS’s findings of willfulness are based on the application of a ‘totality of the circumstance’ approach for each taxpayer. Willful FBAR penalties are not impacted by the new ruling.
Taxpayers can also become subject to criminal penalties if they are deemed to be criminally willful. Like any criminal case, the Taxpayer hast to be found guilty by a jury of his peers and the Government must show the crime was committed ‘beyond a reasonable doubt.’ In general, criminal FBAR liability is rare and limited to situations in which there are various other issues at play, such as hiding offshore money, tax evasion, structuring, etc.
Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
