The IRS devotes significant resources to ensure timely reporting of overseas financial accounts.
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As the IRS looks to increase tax compliance, unreported foreign accounts are a top target. The agency continues to devote significant resources to get U.S. owners of overseas financial accounts to timely report them each year if the aggregate value exceeded $10,000 at any time during the prior year.
You still have time to report foreign accounts for 2022. Taxpayers who missed the April 18 deadline to e-file FinCEN Form 114 to disclose the accounts automatically have until Oct. 16 to electronically submit the FBAR form.
Nonwillful violations of foreign account reporting rules
Penalties for nonreporting overseas accounts or inaccurate filings are stiff. The penalty for nonwillful violations is $10,000 per nonfiled FBAR form. The IRS used to take the position that the $10,000 fine applied per unreported account. But in March, the U.S. Supreme Court dealt a blow to the agency by ruling that the fine for nonwillful failures to disclose foreign accounts applies per nonfiled FBAR form.
In the case, a man with dozens of foreign accounts didn’t file FBAR forms for five years. Though his failure to report was nonwillful, the IRS assessed penalties of $2.72 million. Because of the Supreme Court’s ruling, his total fine was reduced to $50,000…$10,000 for each year of nonreporting.
The IRS recently revised its internal procedures to account for the High Court’s ruling.
Willful violations of foreign account reporting rules
The fine for willful violations is much steeper: The larger of $100,000 or 50% of the highest balance in the account. The willfulness penalty can be particularly harsh, especially if there are multiple accounts and/or multiple years of nonfiling involved.
Foreign account owners have fought the willfulness penalty on many fronts. Here are three examples:
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What is the standard for willfulness? A U.S. citizen facing a $1.3 million fine asked the Supreme Court to reverse an appellate court ruling, which found that he willfully violated his reporting obligations because he acted with objectively reckless disregard of the rules. The court chose not to take his case.
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Is such a large fine constitutional? If there are multiple years of nonreporting or many accounts, the willfulness penalty can exceed the amount in the accounts. Some say a penalty of that size is an excessive fine barred by the Eighth Amendment. So far, taxpayers haven’t had luck with this argument. For instance, just last year the 1st Circuit Court of Appeals upheld a fine of over $2 million against a U.S. citizen who didn’t report her Swiss account. The court found that the penalty is not a fine for Eighth Amendment purposes, saying the penalty is remedial…not punitive… and is not tied to a criminal action. The account owner asked the Supreme Court to step in, but it decided not to. Another person, who owes $13 million in penalties for not disclosing offshore accounts in 2007-09, wants the 11th Circuit Court of Appeals to rule that such a penalty is an unconstitutional fine under the Eighth Amendment.
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Is the willfulness penalty capped at $100,000? A number of taxpayers over the years have argued that IRS regulations that were issued in 1987, before the statute was amended in 2004 to add the 50% language, state that the fine is capped at $100,000. Four appeals courts have sided with the IRS, that the statute supersedes the regs. No appeals courts have ruled for the taxpayer on this issue.
This first appeared in The Kiplinger Tax Letter. It helps you navigate the complex world of tax by keeping you up-to-date on new and pending changes in tax laws, providing tips to lower your business and personal taxes, and forecasting what the White House and Congress might do with taxes. Get a free issue of The Kiplinger Tax Letter or subscribe.