Exploring the Civil Penalties for Non-Compliance and the Potential for Criminal Prosecution

Aug 13, 2017

The United States is among very few countries that tax their citizens’ worldwide income, even when those citizens choose to live abroad for an indefinite period of time. Even though they have no resulting tax obligations, under the Foreign Account Tax Compliance Act ("FATCA"), nonresident Americans are generally required to file tax returns and reports regarding their foreign (i.e., non-U.S.) financial accounts and assets, subject to threats of significant civil penalties and criminal sanctions. This blog post will explore the nuances of civil penalties imposed for failing to comply with various offshore reporting obligations, along with exploring the threat of potential referral for criminal prosecution for the willful evasion of taxes.

Persons required by law to file an FBAR, and who fail to properly file a complete and correct one, may be subject to civil penalties for negligence, a pattern of negligence, nonwillful violations, and willful violations. When a violation occurs, the IRS examiner assigned to the case will either issue Letter 3800, Warning Letter for Apparent Foreign Bank and Financial Accounts Report Violations, or determine a penalty based upon the exact violation. The purpose of imposing penalties for violations is, unsurprisingly, to encourage filing compliance. Each IRS examiner has discretion in determining the amount of the penalty, if any, taking into account the facts and circumstances of each case. FBAR penalties are determined per account, for each person required to file.

Negligence penalties

There are two primary negligence penalties that generally apply to all Bank Secrecy Act ("BSA") provisions:

  • A negligence penalty up to $500 may be assessed against a business for any negligent violation of the BSA, including FBAR violations.
  • An additional penalty up to $50,000 may be assessed against a business for a pattern of negligent violations. Generally, these two negligence penalties apply only to trades or businesses, not to individuals.
Non-willful violations

A penalty, not to exceed $10,000, may be imposed on any individual who violates or causes any violation of the FBAR filing and recordkeeping requirements that are not due to "reasonable cause" (as defined in Internal Revenue Manual §

Willful violations

Persons who willfully fail to report an account may be subject to a penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation, under 31 U.S.C. Section 5321(a)(5) (IRM § Willful violations may also be subject to criminal penalties under 31 U.S.C. Section 5322(b) or 18 U.S.C. Section 1001. Mitigating factors such as natural disasters, emergencies, or other systemic issues may prevent a U.S. person from filing a timely FBAR. Financial institutions and individuals filing FBARs affected by these circumstances may contact FinCEN's Regulatory Helpline at 1-800-949-2732 (703-905-3975 from outside the United States) to make FinCEN aware of their compliance concerns and to determine possible alternatives for timely reporting. FinCEN will work with financial institutions to develop necessary alternatives and to ensure that their primary federal regulator is informed of the situation and potential remedies. The statute of limitation for FBAR civil penalties is six years from the date of the transaction with respect to which the penalty is assessed pursuant to 31 U.S.C. §5321(b). For purposes of the penalty for failing to file an FBAR, the IRS interprets "transaction" as the due date of the report. For a penalty for failing to maintain required records, it is the date the IRS first asks for the records.