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FBAR: Where there's a willful violation, there's a hefty penalty p2

It may be hard for taxpayers with foreign bank accounts not to suspect the IRS of occasionally putting the cart before the horse. The agency has made it clear that it expects every U.S. citizen holding a foreign bank account to disclose the information by the June 30 deadline (which, at this writing, is rapidly approaching). For a while, though, the consequences for not reporting were a little fuzzy.

Some wags suggested, for example, that the IRS should warn, "Or else!" and be done with it. Others said the lack of clarity conjured images of the Three Stooges: "Why I oughta…." Clenched fists and all.

It turns out that the agency has been working on guidelines for examiners, guidelines that both rein in potentially overzealous examiners and make it clear to taxpayers that the agency is not kidding about this. As we said in our last post, the key to any penalty determination is whether the taxpayer willfully violated the rules.

The revised rules do set a maximum penalty. While the calculations differ, the penalty for one year or multiple years cannot exceed 50 percent of the highest total balance of all unreported foreign accounts for the years that are the subject of the examination.

However, the examiner is permitted to recommend a higher penalty if the facts point to a particularly egregious violation. Taxpayers will be relieved, perhaps, to know that the penalty will under no circumstances "exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination."

That is, the IRS will try not to demand all of your money and then some. And don't think it hasn't happened: Tax attorneys outside of Georgia have reported that the IRS has threatened taxpayers with penalties of 150 percent or more of the account balances.

For the "nonwillful" FBAR violators, the calculation is slightly different. The IRS caps this at $10,000, and the same 50 percent rule applies.

The message to every taxpayer with a foreign bank account is that the IRS remains serious about the reporting requirement. Examiners may have to document their findings and justify the recommended penalties, but no violation will escape a fine.

Source: Accounting Today, "IRS Issues New Guidance on FBAR Penalties," Michael Cohn, June 3, 2015

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