The IRS has the authority to impose civil and criminal penalties for the failure to file Foreign Bank Account Reports (FBARs), but it is has the authority to impose lesser penalties, or none at all, in certain cases. If there is a reasonable cause for your FBAR violations, and your conduct was non-willful, you may not have to pay any penalties at all.
Internal Revenue Manual (IRM) 22.214.171.124 states that when an FBAR violation is found, the IRS examiner must either issue a Letter 3800 or issue a penalty. The Letter 3800 is warning letter notifying you of your apparent FBAR violations. Some taxpayers may get lucky and receive a warning without any FBAR penalties.
The civil penalties for non-willful FBAR violations are up to $10,000 per account per year, for up to six years. However, these are the maximum penalties allowable. The IRS has the discretion to reduce or eliminate the penalties in some cases.
The IRM uses the example of a taxpayer who has five small foreign accounts that total $20,000. If the taxpayer does not file FBARs for these accounts, but reports all income from them and pays taxes on that income, the IRS examiner has the discretion to decide whether a warning letter is appropriate or if penalties should be assessed, based on all the facts and circumstances.
IRM 126.96.36.199.4 also states that no penalty should be imposed if there was reasonable causer the FBAR violation and the taxpayer files any delinquent FBARs and reports the previously unreported account.
Non-Willful Penalties May Be Less Than $10.000 Per Year Per Account
In 2015 the IRS issued guidance authorizing its revenue agents to limit non-willful penalties to $10,000 per year, rather than $10,000 per year per account. However, IRS revenue agents still have authority to impose multiple penalties for one year. In addition, IRS revenue agents can impose only one $10,000 penalty for all open years. Therefore you may still need to engage a tax litigation attorney to assist you in getting the lowest possible penalty.
Low Dollar Balance Penalties
If four threshold conditions are met, the IRS may decide to impose less than the maximum FBAR penalty on a taxpayer. For violations occurring after October 22, 2004, the four threshold conditions are:
1.The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as no history of past FBAR penalty assessments.
2.No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.
3.The person cooperated during the examination (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews; and the taxpayer back-filed correct reports).
4.IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.
If these criteria are met, the IRS examiner may assign a lower penalty based on the maximum aggregate value of the foreign accounts. If the maximum balance did not exceed $50,000 a penalty of $500 per violation, not to exceed $5,000 per year, should be assigned. Balances between $50,000 and $250,000 should be assigned a penalty of $5,0000 per violation, while balances over $250,000 will receive the maximum penalty of $10,000 per violation.