By admin 
Non-US financial accounts must be reported on FBAR. The penalties can be severe, but are often higher … (+)
Getty
The Financial Crimes Enforcement Network, FinCEN Form 114, Report of Foreign Bank and Financial Accounts, is a critical but often misunderstood requirement for U.S. persons with foreign financial accounts. The FBAR may be familiar to many Americans living abroad, but it remains largely unknown to many US-based individuals who may still be required to file it. This can happen if, for example, they inherit a foreign account, a foreign relative grants them signature authority on a foreign account, or if a U.S. parent gains control of a foreign account created for their child. It is critical that you are aware of these requirements because failure to file can result in significant fines.
Mine earlier article explained the purpose behind FBAR, who must file it, the types of foreign financial accounts that must be reported, and more. This article examines civil FBAR penalties and why it is more difficult for the IRS to enforce collection.
FBAR Sanctions
Civil FBAR penalties can be divided into two main categories: intentional and non-intentional FBAR violations. The distinction depends in part on the account holder’s intent and awareness of the obligation to file the FBAR.
FBAR Unintentional Violations
Non-intentional violations carry a maximum fine of $10,000 per violation per year. The IRS may exercise discretion and, in some cases, reduce or waive unintentional penalties, depending on the circumstances.
In Bittner v. United States21-1195 (February 28, 2023), the U.S. Supreme Court has weighed in on how to calculate unintentional FBAR penalties. The Court ruled that non-intentional violations must be assessed per FBAR form, and not per individual account, as the government advocates. This decision has significantly reduced the potential financial penalties faced by individuals who commit unintentional violations but have multiple offshore accounts.
Under what circumstances is an FBAR violation “unintentional”? Well, it’s hard to say; no definition is given in the articles of association or regulations. To better understand what constitutes a non-intentional FBAR violation, it helps to first understand what is meant by an intentional violation. The trend has shown that the The IRS is aggressive in claiming that the taxpayer’s violation was intentional.
FBAR Intentional violations
Intentional violations carry much harsher penalties and are imposed when the failure to report is found to be intentional, or when there is evidence of “willful blindness” or “reckless disregard” of the FBAR reporting requirement.
“Willful blindness” is a form of “willful ignorance” and involves the concept that an individual could easily obtain information which, if he did so, would inform him that his action or inaction might violate a law . ‘Recklessness’ occurs when a person’s act or omission creates a clear and unjustified risk of harm or danger. This may include, for example, failure to read or understand clear instructions on tax forms that refer to reporting requirements for offshore accounts.
Penalties for willful violations may be up to $100,000 or 50% of the account balance at the time of the violation, per year of noncompliance. This can lead to significant fines, especially if it lasts for several years. The determination of intent depends on facts and circumstances, such as whether an individual took steps to conceal their accounts, ignored advice to comply, or deliberately failed to seek clarification of their obligations.
FBAR Penalty Collection Challenges
FinCEN has delegated authority over FBAR matters to the IRS. Although the IRS has the authority to collect FBAR penalties, its powers are much more limited than its expansive powers to collect taxes. FBAR penalties are not imposed by the Internal Revenue Code and are therefore not “tax” penalties. Because these fines are not tax-related, collection and enforcement are unique and more challenging for the U.S. government.
When a tax debt is involved, the IRS can place a lien on the taxpayer’s property in favor of the government and seize assets to settle those tax debts. That could be an American passport denied or withdrawn due to seriously delinquent tax debts. However, these measures do not directly apply to FBAR fines as they are categorized as non-tax debts. Consequently, different mechanisms are involved in collecting such fines.
Limitations on Enforcing FBAR Fines
To enforce FBAR penalties, the IRS generally relies on two main options.
FBAR collection lawsuit
First, it can refer the debt to the Department of Justice for a collection case. While this path is feasible, it also poses significant challenges. The DOJ may not always be able to take collection action due to limited resources or other priorities, and even if it does, obtaining a final judgment may take years. This delay often allows debtors to implement asset protection strategies, making it more challenging for the government to actually recover the fine amounts owed.
Several international issues may come into play, including the U.S. government’s ability to seize assets located abroad and the potential use of treaty provisions. Generally, seizure and attachment mechanisms cannot extend beyond the U.S. to reach assets held abroad, for example, seizing foreign bank accounts. The US has no jurisdiction over these foreign assets.
However, jurisdiction over the person of the American debtor is allows the court to order the debtor to repatriate the assets back to the US. Once repatriated, the assets fall under U.S. jurisdiction and may be seized. Whether the debtor complies with the repatriation order is another question.
Granting a repatriation order is not done lightly as it involves grappling with the laws of a foreign jurisdiction. The complexity was demonstrated in the case of United States v. Monica Harrington et al (No. 1:19-CV-02965 Dist. Ct. Dist. Colo. Feb 28, 2024). The Harrington The court made it clear that before such an order can be issued, the court must carefully examine whether it has the authority to do so, often understanding various relevant foreign laws.
Compensation Procedures for Collecting the FBAR Penalty
The second option available for collecting FBAR fines is through the process of “offsetting” using the Treasury Compensation Programadministered by the Bureau of Fiscal Services. This program allows the collection of FBAR penalties by offsetting an individual’s debts against any government payments owed to him or her, such as tax refunds or Social Security benefits.
These collection limitations highlight a fundamental distinction between FBAR penalties and typical tax liabilities. Although non-compliance can lead to significant financial consequences, the mechanisms available for collecting FBAR debts are different and sometimes less expedient than those used for tax enforcement.
Conclusion
It may be more difficult for the IRS to enforce collection of FBAR penalties since they are not tax related. Despite this, most taxpayers want peace of mind and want to avoid fines altogether. It helps to know that in many cases, delinquent FBARs can be filed without incurring penalties. Seek the right guidance from a qualified tax professional to navigate the process and ensure all FBAR reporting requirements are met. Taking proactive steps can help reduce potential problems and bring that all-important peace of mind.
I help with tax matters all over the world.
Contact me at [email protected]
Visit my US tax blog www.us-tax.org It is an invaluable guide to all areas of U.S. international tax. It will help you stay abreast of legislative developments so you can stay informed about U.S. tax changes that impact your life, family or business.