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 126.96.36.199.5 (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 § 188.8.131.52.4(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 § 184.108.40.206.4(3) (07-01-2008).]
According to the IRS, a taxpayer that meets the following threshold requirements qualifies for the FBAR penalty mitigation [IRM § 220.127.116.11.6.1 (07-01-2008)]:
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;
No money passing through any of the foreign accounts associated with the person are from illegal sources or were used to further criminal purposes;
The person cooperated during examination (i.e., IRS did not resort to summons power); and
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 § 18.104.22.168.6.2 (07-01-2008)]:
In the case of a willful violation, the IRS directs that the following penalties be imposed [IRM § 22.214.171.124.6.3(3) (07-01-2008)]:
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
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