Court Holds Penalties for Failure to File FBAR Not Time Barred
While the IRS has great discretion in penalizing taxpayers for filing FBARs late, they are also limited in a number of significant ways, including the extent of the penalty amount and the extent of time it has to assess a penalty.
Normally, the IRS has a 6-year window of time to assess FBAR penalties, but in a recent case, U.S. v. Schwarzbaum (DC FL 8/23/2019) 124 AFTR 2d ¶2019-5172), a federal district court disregarded this limitation under a unique set of circumstances.
In this blog, we review the basics of the FBAR filing requirement and penalties, and summarize the salient facts of the Schwarzbaum case.
The FBAR Filing Requirement
The Bank Secrecy Act (BSA) requires that a US person file a Report of Foreign Bank and Financial Accounts (FBAR) if the maximum values of the foreign financial accounts of such person exceed $10,000 in the aggregate at any time during the calendar year.
The FBAR form (officially known as “FinCEN Form 114”) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The FBAR due date is April 15th, currently with an automatic extension of 6 months.
Failure to File FBAR – Penalties and Limitations
A “non-willful”’ failure to file the FBAR, including filing late, can result in a penalty of up to $10,000 per account per year, subject to inflation. A “willful” failure to file the FBAR may be subject to “enhanced” FBAR penalties equal to the greater of $100,000, subject to inflation, or 50% of the balance in each unreported account.
In addition, criminal penalties of up to $250,000 or 5 years in jail (or both) may apply in the case of egregious willful conduct.
Under 31 USC § 5321(b)(1), a penalty for a failure to file the FBAR may be assessed at any time before the end of a 6-year statute of limitations period.
Failure to File FBAR – The Schwarzbaum Case
The taxpayer in the Schwarzbaum case held several foreign financial accounts (in Costa Rica and Switzerland) between 2006 and 2009. He did not file FBARs for certain of his accounts until joining an IRS amnesty program, the Offshore Voluntary Disclosure Initiative (“OVDI”). As part of his participation, the taxpayer agreed to extend the six-year FBAR statute of limitations.
The taxpayer then opted out of OVDI and underwent a full examination by the IRS. The IRS then penalized the taxpayer for late filing the FBAR. In court, the taxpayer argued that the IRS was time-barred, because the 6-year window had passed by the time the FBAR penalty was imposed.
The Court found the taxpayer’s argument to be meritless, holding that the agreement to extend the six-year statute of limitations was still in effect. The IRS could therefore impose the FBAR penalties.
Failure to File FBAR Is a Serious Matter
Failing to file the FBAR can have serious consequences, so it’s important for late filers to explore all options available to them. There are in fact amnesty programs provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.
The team at Expat Tax Professionals has years of experience helping FBAR delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case, so that you can put past delinquencies behind you.
By Joshua Ashman, CPA & Nathan Mintz, Esq.