The IRS imposes severe penalties on taxpayers who fail to file a Report of Foreign Bank and Financial Accounts (FBAR). Those who are required to file an FBAR and fail to do so can face the following penalties:
- a civil penalty not to exceed $12,459 per violation for non-willful violations that are not due to reasonable cause
- a penalty equal to the greater of $124,588 or 50 percent of the balance in the account at the time of the violation, for each willful violation
- criminal penalties and possible jail time can also be imposed
The IRS can impose these penalties up to six years after the date the FBAR should have been filed, and a separate penalty can be imposed for each delinquent account. Even non-willful violators can face penalties of hundreds of thousands of dollars.
However, FBAR penalties are treated differently than other federal tax penalties because an FBAR penalty is imposed under Title 31. This leads to several important differences in how FBAR penalties can be collected or negotiated.
FBAR Collection Options
For most taxes and tax penalties, the IRS has broad administrative collection powers, including:
- serving a levy on all of the funds in your bank account
- levying a portion of your wages from each paycheck
- filing a federal tax lien against your property
- seizing other assets, including your house, car, or retirement accounts
In these cases, the IRS has so many weapons at its disposal that it will usually be able to get its money from taxpayers who have sufficient assets or income to pay off their tax debt.
In the case of FBAR penalties, the IRS cannot use these administrative remedies. Instead, the IRS must attempt to collect similar to an ordinary creditor. For an enforced collection action, the IRS must file a lawsuit in federal court to receive a civil judgment.
It takes a bit more work for the IRS to collect an FBAR penalty, but the IRS is also interested in cracking down on FBAR violators, so you should assume that they will take the necessary steps to collect these penalties.
From a taxpayer’s perspective, FBAR penalties are also not subject to an Offer in Compromise or an installment agreement. Taxpayers who want to challenge the FBAR penalty assessment can do so administratively during the examination process or at IRS appeals. If these negotiations are unsuccessful, you will either have to pay the penalty and file suit for a refund, or wait for the government to file a suit to collect the penalty, where you can attempt to dispute its assessment.
If you are under examination for an FBAR penalty, contact a tax problem attorney immediately to discuss your case. For more information on options to disclose unreported foreign financial accounts, download our free report, Nine Questions You Should Be Asking About the IRS Streamlined Filing Compliance Procedure for Unreported Foreign Accounts.