When if Failing to File an FBAR (form 114 - foreign account report) WillFul or Unwillful

The penalty for willfully failing to file the FBAR is the greater of $100,000 or 50% of the account balance at time of violation.  The penalty for a non-willful violation is up to $10,000.  The documents released in late 2014 by the IRS list some of the items that the IRS considers when determining whether an FBAR violation was willful:

Factors supporting a willful FBAR penalty:

• Opened the foreign bank account
• Owner of, or a financial interest in, the foreign account
• Tax non-compliance
• Did not seek advice, or relied upon the advice of a promoter, foreign banker, or other unqualified tax professional.
• Violations persist after notification of FBAR reporting requirements
• Foreign account not disclosed to return preparer
• No business reason for the foreign account
• No family or business connection to the foreign country
• An offshore entity owns the account
• Previously-filed FBARs do not include all foreign accounts
• Illegal income in the foreign account
• Participated in an abusive tax avoidance scheme

Factors not supporting a willful FBAR penalty:

• Inherited the foreign bank account
• Only signature authority over the foreign bank account
• Tax compliance
• Relied upon the advice of a tax return preparer, a CPA, an attorney, or another
  qualified tax professional.
• Full compliance after notification of FBAR reporting requirements
• Foreign account disclosed to return preparer
• Business reason for the foreign account
• Family or business connection to the foreign country
• Person owns the account in his name

This week a district court held that the $10,000 per year penalty was valid and did not result in excessive penalties or denial of due process when the taxpayer had originally marked the Schedule B with a NO stating he had no foreign bank accounts when he actually did and had them for some time.  The amount kept abroad  in foreign banks was approximately $300,000.  The Court apparently felt that marking the box on Schedule B with a NO  was not unwillful.

The FBAR statute does not define what constitutes a separate FBAR "violation."  See 31 U.S. Code § 5321(a)(5).  Therefore,  the IRS could impose multiple FBAR penalties per year.  The documents released by the IRS use the example of an individual who failed to file the FBAR for three years to report two foreign accounts.  The IRS examiner would have the discretion to assert either (i) 6 violations, one per account per year, (ii) 3 violations, one per FBAR, or (iii) one violation for the entire three year period. The document  does state that "assertion of multiple penalties and the assertion of separate penalties for multiple violations with respect to a single FBAR form should only be taken in the most egregious cases."