Fighting Non-Willful FBAR Penalties: A 10-Step Roadmap

Fighting Non-Willful FBAR Penalties

Fighting Non-Willful FBAR Penalties Against IRS

In general, US Taxpayers have a very difficult time with the IRS enforcement of non-willful FBAR penalties. This is because the penalties are unfair — and oftentimes are issued arbitrarily and far exceed any potential violation that was committed. Common reasons for the extreme distaste of FBAR penalties are:

• • • the FBAR is not even a tax form;

    • penalties are issued even if there is no unreported income;

    • penalties are issued without an audit;

    • many foreign accounts pre-date becoming a US person; and

    • oftentimes maximum penalties are issued even though examiners and agents actually have the discretion to minimize and abate these types of penalties from the outset.

Currently in 2022, different appellate circuits are split on how FBAR penalties should be issued when the Taxpayer qualifies as non-willful but is unable to demonstrate to the court that they acted with reasonable cause and not willful neglect – because if Taxpayer is able to show reasonable cause and not willful neglect, then there should be no FBAR penalties issued in the first place.

Here’s a quick roadmap to how a person goes from being out of FBAR compliance (non-willful) –– to filing an appeal in Federal Court.

31 USC 5321 (5): Statutory Authority

The statutory authority for FBAR enforcement is under Title 31 and not Title 26 (Internal Revenue Code):

• • • (5) Foreign financial agency transaction violation.

      • (A) Penalty authorized.

        • The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

      • (B) Amount of penalty

      •  (i) In general.

        • — Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

      • (ii) Reasonable cause exception.—

        • No penalty shall be imposed under subparagraph (A) with respect to any violation if—

          • (I) such violation was due to reasonable cause, and

          • (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

First, You Missed Filing the FBAR

The trouble starts when a Taxpayer has foreign bank and financial accounts that should have been reported on the annual FBAR (aka FinCEN Form 114), but the Taxpayer failed to do so. This could be for any number of different reasons — but in any case, let’s presume the foreign account holder is non-willful and the IRS and US government are not claiming Taxpayer acted willfully.

Taxpayer Did Not Submit to an FBAR Amnesty Program

Had Taxpayer submitted to one of the non-willful offshore disclosure programs before FBAR penalties were issued, the resulting FBAR penalties would be significantly less than the penalties Taxpayer would receive as a result of an audit notice — or assessable penalty. For purposes of this roadmap, let’s presume the Taxpayer did not submit to offshore disclosure and was instead issued penalties.

Missed FBAR Amnesty, Hit With FBAR Penalties

Taxpayer receives either pre-assessment or post-assessment FBAR penalties. While pre-assessed penalties are generally easier to negotiate or mitigate, Taxpayer (usually) only gets one chance to appeal when it comes to disputing penalties with the IRS.

Pre-Appeal/Appeal or Direct to Federal Court but No Tax Court

Conveniently for the Internal Revenue Service, FBAR penalties are not considered taxes, so Taxpayer cannot litigate the matter in Tax Court. In order to formally challenge and litigate against the US government on FBAR Penalties, Taxpayer must file a lawsuit in federal court – but at least in the recent Court of Federal Claims Case of Mendu, the court found Taxpayer did not have to actually pre-pay the full amount of the debt under the Flora Rule (a big win for Taxpayers wanting to litigate in Federal Court). 

Court of Claims vs Circuit Court

The Taxpayer has the opportunity to either file the case in District Court or in the Federal Court of Claims. It is not a “one-size-fits-all” decision and Taxpayers should carefully evaluate the facts and circumstances of their noncompliance to see where the case law may work out best for Taxpayers’ position as to why the non-willful FBAR penalties should not be issued.

Qualify for FBAR Reasonable Cause?

Different jurisdictions are currently split as to how non-willful FBAR penalties should be issued. But, as long as the Taxpayer is able to show that they acted with reasonable cause (which usually includes having filed subsequent accurate FBARs) and not willful neglect, non-willful FBAR penalties should be avoided or removed (aka abated). Convincing any court that a Taxpayer acted with reasonable cause can be difficult, since it is based on the totality of the circumstance – and two perfectly reasonable judges can evaluate the same set of facts objectively while coming to two completely different outcomes.

Per Form & Boyd – California Appellate Ninth Circuit

The Ninth Circuit Court recently issued a ruling on non-willful FBAR penalties, which was taxpayer-friendly. In the recent Ninth Circuit appellate court case of Boyd, the court held that non-willful FBAR penalties should be limited to per form and not per account. We have a detailed article on Boyd which can be found here.

Per Account & Bittner – Texas Appellate 5^th Circuit

Unfortunately, the Fifth Circuit is not as taxpayer-friendly on the issue of non-willful FBAR penalties. In the appellate court case of Bittner (in Texas), the court held that penalties could be issued per account and are not limited to just per form. In fact, the Bittner court acknowledged the court in Boyd — and then distinguished itself based on various factors as to why they decided that non-willful FBAR penalties should not be limited to just a per form basis.

Is Your FBAR Case Distinguishable from Current Appellate Rulings?

It is important to note that with these different circuits, these are cases and not statutory law. Oftentimes a Taxpayer may have key facts necessary to distinguish them from other cases. If a Taxpayer finds themselves at the receiving end of non-willful FBAR penalties, they should consult with an experienced Board-Certified Tax Law Specialist first, before making any proactive representations to the US government on the issue of FBAR.

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Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

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