IRS caps penalties for offshore banking violations in new memo

Recently, the IRS released new guidance that caps the notoriously high penalties facing taxpayers who fail to report their foreign bank accounts. However, even under the new structure, those penalties remain harsh.

Federal tax laws in the United States require you to report all of your worldwide income, regardless of where it was earned, even if you have already reported it in another country and paid taxes on it there. The same is true of foreign bank accounts if their combined value at any point during the year has reached $10,000 or more.

Who must file an FBAR?

If you have foreign accounts totaling $10,000 or more, you must file a Foreign Bank Account Report (FBAR), which is now formally referred to as FinCEN Form 114. An FBAR is required even if you have already reported your income from the foreign accounts on your income tax returns - and even if you are just a signatory on the account without beneficial ownership.

Because foreign banks do not send out Form 1099s like U.S. institutions do, it can be easy to overlook this step when filing your taxes. However, the penalties for FBAR violations can be quite harsh, even they are unintentional. For willful violations, the penalties can be even more severe and may even equal the total balance of the account. In some cases, failure to file an FBAR can even result in criminal charges and potential jail time.

Three-tiered penalty structure

While the penalties remain harsh, however, a recent memo from the IRS softens the potential penalties somewhat and provides more clarity for people with concerns about unreported foreign assets. Under a penalty structure outlined in new interim guidelines from the IRS, non-willful FBAR violations are penalized according to a three-tiered structure as follows:

  • Default penalty of $10,000 per year
  • Strict penalty of $10,000 per year for each unreported account
  • Lenient penalty of $10,000 total

The tiered penalty structure leaves room for IRS examiners to exercise their own discretion on a case-by-case basis according to the individual circumstances of the violation involved. The memo also clarifies that the penalties for non-willful violations will not total more than 50 percent of the non-compliant accounts' combined balance, and that penalties will not be recommended if it is determined that there was due cause for the violation and the taxpayer files the missing FBARs correctly and completely.

Seek legal advice before you act on unresolved tax issues

If you are concerned about potential penalties for unreported foreign bank accounts, it is important to seek legal advice from a knowledgeable tax lawyer about how to protect your interests and resolve the issue without unnecessary legal or financial risk. Contact the Law Office of Luis R. De Luna, PLLC, to arrange a consultation.