The Financial Crimes Enforcement Network’s FinCEN Form 114, Report of Foreign Financial and Bank Accounts, is a crucial but often misunderstood requirement for US persons with foreign financial accounts. FBAR it may be familiar to many Americans living abroad, but it remains largely unknown to many people in the US who may still be required to file it. This can happen if, for example, they inherit a foreign account, a foreign relative gives them signature authority over an overseas account, or a US parent gets control of a foreign account created for their child. Awareness of these requirements is crucial, as failure to file can result in significant penalties.

My previous article explained the purpose behind the FBAR, who must file it, the types of foreign financial accounts that must be reported, and more. This article explores FBAR civil penalties and why it is more difficult for the IRS to enforce collection.

FBAR Penalties

Civil FBAR penalties can be divided into two main categories: willful and unintentional FBAR violations. The distinction depends in part on the account holder’s intent and awareness of the FBAR filing obligation.

Unintentional FBAR violations

Unintentional violations carry a maximum penalty of $10,000 per violation per year. The IRS may exercise discretion and, in some cases, reduce or waive unintended penalties, depending on the circumstances.

In Bittner v. United States21-1195 (February 28, 2023), The US Supreme Court has addressed how unintentional FBAR penalties should be calculated. The Court ruled that unintentional violations should be assessed on the FBAR form, rather than on an individual account basis, as the government contends. This decision significantly reduced the potential financial penalties faced by individuals who commit unintentional violations but have multiple accounts abroad.

Under what circumstances is an FBAR violation “involuntary”? Well, it’s hard to say; no definition is provided in the statutes or regulations. To better understand what constitutes an unintentional violation of FBAR, it helps to first understand what is meant by willful violation. The trend showed that The IRS is aggressive in asserting that the taxpayer’s violation was intentional.

Willful violations of FBAR

Willful violations carry much more severe penalties and are imposed when the failure to report is deemed willful or when there is evidence of “willful blindness” or “reckless disregard” of the FBAR filing obligation.

“Willful blindness” is a form of “willful ignorance” and involves the concept that a person could easily obtain information which, if they did, would inform them that their actions or inactions could violate a law. “Recklessness” occurs when one’s actions or failure to act involve an obvious and unreasonable risk of harm or danger. For example, this could include not reading or understanding clear instructions on tax forms that refer to foreign account reporting requirements.

Penalties for willful violations may be the greater of $100,000 or 50% of the account balance at the time of the violation, per year of noncompliance. This can lead to substantial fines, especially if several years are involved. Determining intent is based on facts and circumstances, such as whether a person has taken steps to conceal their accounts, ignored advice to comply, or willfully failed to seek clarification of their obligations.

FBAR Penalty Collection Challenges

FinCEN has delegated authority over FBAR matters to the IRS. While the IRS has the authority to collect FBAR penalties, its powers are much narrower than its broad powers to collect taxes. FBAR penalties are not imposed by the Internal Revenue Code and, accordingly, are not “tax” penalties. Because these penalties are not tax-related, collection and enforcement are unique and more difficult for the US government.

When a tax debt is involved, the IRS can impose a government lien on the taxpayer’s property and seize assets to satisfy those tax debts. A US passport can be denied or revoked for seriously delinquent tax debt. However, these measures do not directly apply to FBAR penalties because they are classified as non-tax liabilities. Consequently, the collection of such penalties involves different mechanisms.

Constraints on the Application of FBAR Penalties

To enforce FBAR penalties, the IRS generally relies on two main options.

FBAR collection process

First, it can refer the debt to the Department of Justice for a collection process. This path, while viable, presents significant challenges. DOJ may not always be able to pursue collection actions due to resource limitations or other priorities, and even when it does, obtaining a final judgment may take years. This delay often allows debtors to engage in asset protection strategies, making it more difficult for the government to actually recover penalty amounts owed.

Various international issues may come into play, including the ability of the US government to attach assets located abroad and the possible use of treaty provisions. In general, seizure and garnishment mechanisms cannot extend beyond the US to reach assets held in a foreign country, for example, attaching foreign bank accounts. The US has no jurisdiction over those foreign assets.

However, jurisdiction over the person of the US debtor allows the court to order the debtor to repatriate the assets back to the US. Once repatriated, the goods are subject to US jurisdiction and may be attached. Whether the debtor complies with the repatriation order is another matter.

Granting a repatriation order is not easy because it involves fighting the laws of a foreign jurisdiction. The complexities were demonstrated in the case United States v. Monica Harrington et al (No. 1:19-CV-02965 Dist. Ct. Dist. Colo. February 28, 2024). The Harrington the court stated that before such an injunction can be granted, the court must carefully consider whether it has the authority to do so and must often understand various foreign laws relevant to the case.

Offset Procedures to Collect FBAR Penalty

The second option available for collecting FBAR penalties is through the “offset” process using Treasury Compensation Programmanaged by the Fiscal Services Office. This program allows FBAR penalties to be collected by offsetting a person’s debts against any government payments owed to them, such as tax refunds or Social Security benefits.

These collection constraints highlight a fundamental distinction between FBAR penalties and typical tax liabilities. Although noncompliance can result in substantial financial consequences, the mechanisms available to recover FBAR debts are different and sometimes less expedient than those used for tax enforcement.

Conclusion

It can be more difficult for the IRS to enforce the collection of FBAR penalties because they are not related to taxes. Despite this, most taxpayers want peace of mind and want to avoid penalties altogether. It’s helpful to know that in many cases, delinquent FBARs can be filed without penalty. Seek appropriate guidance from a qualified tax professional to navigate the process and ensure compliance with all FBAR reporting requirements. Taking proactive steps can help mitigate potential problems and bring that all-important peace of mind.

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