By Karen Yip, LexisNexis Federal & International Tax Analyst

The IRS requires the Report of Foreign Bank and Financial Accounts, TD F 90-22.1 (commonly known as the Foreign Bank Account Report, or "FBAR"), when a U.S. person has a financial interest in, or signature authority over, one or more foreign financial accounts with an aggregate value greater than $10,000. If a report is required, certain records must also be kept.

Since the statutory FBAR penalties can be very burdensome, the IRS has developed and adopted mitigation guidelines to assist examiners in determining the appropriate FBAR penalty. See IRM 4.26.16.4.5 (07-01-2008).  The Internal Revenue Manual directs that "... examiners are to use discretion, taking into account the facts and circumstances of each case, in determining whether a warning letter or penalties that are less than the total amounts provided for in the mitigation guidelines are appropriate." [IRM § 4.26.16.4.4(3) (07-01-2008).]  The IRM reminds examiners that "[t]he sole purpose for the FBAR penalties is to serve as a tool to promote compliance with respect to the FBAR reporting and recordkeeping requirements." [IRM § 4.26.16.4.4(3) (07-01-2008).]

According to the IRS, a taxpayer that meets the following threshold requirements qualifies for the FBAR penalty mitigation [IRM § 4.26.16.4.6.1 (07-01-2008)]:

1. The person has no history of past FBAR penalty assessments and (for violations after October 22, 2004) the person has no history of BSA or criminal tax convictions for the preceding ten years;

2. No money passing through any of the foreign accounts associated with the person are from illegal sources or were used to further criminal purposes;

3. The person cooperated during examination (i.e., IRS did not resort to summons power); and

4. The IRS did not sustain a civil fraud penalty for underpayment of tax for the year in question due to failure to report income related to any foreign account.

In the case of a non-willful violation, the statutory penalties are mitigated as follows [IRM § 4.26.16.4.6.2  (07-01-2008)]:

• Level 1 - If the aggregate balance of all accounts is not in excess of $50,000, the penalty for each violation is $500, not to exceed a total of $5,000.
• Level 2 - If the aggregate balance of all accounts is in excess of $50,000, but less than $250,000, the penalty per violation is the lesser of $5,000 or 10% of the highest balance in each account during the year.
• Level 3 - If the amount in the account is in excess of $250,000, the penalty per violation is the statutory maximum of $10,000.

In the case of a willful violation, the IRS directs that the following penalties be imposed [IRM § 4.26.16.4.6.3(3) (07-01-2008)]:

• Level 1 - If the maximum aggregate balance of all accounts to which the violations relate does not exceed $50,000, the level 1 penalty applies.  The maximum value of each account is determined and added together to determine the aggregate maximum balance.  The level 1 penalty is the greater of $1,000 for each violation or 5% of the maximum account balance of each account during the calendar year.
• Level 2 - If level 1 does not apply and the maximum account balance to which the violations relate did not exceed $250,000 during the calendar year, the level 2 penalty applies.  The level 2 penalty is the greater of $5,000 per violation or 10% of the maximum account balance during the calendar year for each account.
• Level 3 - If the maximum account balance to which the violations relate exceeded $250,000 but not $1,000,000, the level 3 penalty applies.  The level 3 penalty is the greater of 10% of the maximum account balance during the calendar year or 50% of the closing balance in the account as of the last day for filing the FBAR.
• Level 4 - If the maximum balance in the account exceeded $1,000,000, the statutory maximum penalty applies.

RELATED LINKS: For additonal insight into FBAR reporting rules, penalties and related issues, see:

• 1-2 Rhoades & Langer, U.S. International Taxation & Tax Treaties 2.05[5]

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