This post appeared on the RenounceUScitizenship blog.
#FBAR – Your new Best Friend Forever? You decide! | AccountingWEB http://t.co/cfQ5lObz60 – Reasonable cause and automatic penalties
— U.S. Citizen Abroad (@USCitizenAbroad) July 2, 2013
Since the filing of FBARs online became possible I have heard various things about whether and/or how penalties are to be assessed. Effective July 1, 2013, the presumption is that FBARs are to be e-filed. This raises the question of filing FBARs online and the possibility of penalties. The issue is described by David Treitel as follows:
Will penalties be automatically generated?
The BSA E-Filing agency claim they cannot discuss policies about penalties. US laws certainly permit penalties to be charged whenever an FBAR is filed late. However under US law, if there is reasonable cause for late filing such penalties should not be charged – or if assessed should be cancelled. Given that the electronic filing system does not even ask why an FBAR is being filed late; there is now a considerable risk that “the computer” might spit out penalties automatically even where there is reasonable cause. Only time will tell what policy the BSA will actually decide to implement here; but with non-wilful penalties set at up to $10,000 per account per year the overall message is to think very carefully before filing any FBAR that is late.
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How do I explain I have reasonable cause?
Well you can’t! According to the BSA E-Filing agency late filers cannot currently explain why they are filing late as they have no system in place. Advice that we and others are receiving is that late filers should keep their own records in their own files as to why FBARs are being filed late. This is certainly different from previous practice and it will be interesting to see how this new policy develops over time.
I don’t believe that FBAR penalties can be automatically assessed when an FBAR is filed online. The law of governing Mr. FBAR is a combination of the enabling statute, the regulations and the form itself. Treasury and the IRS are bound by the enabling legislation described in “Looking for Mr. FBAR” as follows:
5321 Civil Penalties – Horrifying, Frightening and Unreasonable
Since I am writing this for the benefit of the average person, who just didn’t know about FBAR, I am going to ignore the “Willful” penalties. If you see what the “Willful penalties are, you might have a “heart attack” and be unable to read on.
Here we go – it’s in 5321 (5) which reads as follows:
(5) Foreign financial agency transaction violation.—
(A) Penalty authorized.— The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.
(B) Amount of penalty.—
(i) In general.— Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.
(ii) Reasonable cause exception.— No penalty shall be imposed under subparagraph (A) with respect to any violation if—
(I) such violation was due to reasonable cause, and
(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.
Commentary:
– There is no required penalty (“may impose”)
– The maximum non-willful penalty is $10,000
– Reasonable cause exception: No penalty SHALL be imposed if there is “reasonable cause” and you file the delinquent reports
All parties (both the taxpayer and the government are bound by this statute.
Bottom line: Without an inquiry into “reasonable cause” no penalty may be imposed. This does not say that “penalties will be abated” if there is reasonable cause. It says no penalty shall be imposed! Obviously by filing online the account is being reported.
Therefore, the IRS must find that there was no reasonable cause. This would require a separate determination.
Finally, this is just my opinion. This validity of this opinion depends on whether the IRS follows the law. That’s anybody’s guess. Therefore, try to stay out of “harm’s way”.
One note of interest. With the end of paper filing it appears it at least part of the IRS role in administering FBAR’s has now been eliminated. The 703 phone number is that of the FINCEN main office. All other FINCEN forms are required to be submitted electronically(largely by domestic US businesses such as casinos) so the filing system is now under the control of FINCEN not the IRS. In the past paper FBAR’s were either sent by mail to the IRS office in Detroit or could be hand delivered to any “local” IRS office in the US.
The removal of the IRS from any part of this is good news. It will be very interesting to see how this plays out. I suspect there will be fewer penalties simply because of less IRS involvement.
How are you supposed to file six years of back fbars when you are renouncing if it’s only done online and they only have one year up there?
FBAR is title 31. Tax is Title 26. Although there are differing opinions on this point, 5 years of tax compliance is arguably 5 years of Title 26 compliance. Not sure that FBAR matters on the renunciation issue. Obviously, the lack of FBAR compliance can’t be a bar to renouncing.
I just don’t want to end up a “covered expat” if I don’t file those FBARS.
As far as I’m concerned, the DoTreas can kiss my ***. They make it more and more difficult to file forms with reasonable cause…which means only one damned thing. They’re carte-blanche penalizing overdue forms. In that case, they may as well just suck rocks…because I’ll be damned if I’m going to stick my neck out to get it chopped off.
Yes, Animal it does seem like just what they are doing. I’d have to just laugh if I got FBAR fines for the ones I haven’t filed as we don’t have it and you cannot get blood from a turnip.
@AtticusinCanada, FBARs have nothing to do with tax compliance and renunciations, so not filing FBAR’s won’t cause one to become a “covered expat”. This is, at least, a summary of everything that I have read and heard so far.
Am I a covered expatriate because I didn’t file FuBARS? Not likely. It was not a part of the tax expatriation process in the opinion of Phil Hodgen (comment some months ago at Expat Forum).
Form 8854 doesn’t ask about FBAR compliance. As others have mentioned, it is not part of the tax code but the Bank Secrecy Act and filing such forms has nothing to do with tax compliance. So no, a failure to FBARs would not make a person a covered expatriate.
Two thoughts:
1. I am well aware of the rule requirement tax compliance for the prior 5 years if one wishes to renounce and avoid covered expatriate status. The only requirements are under Title 26 (Internal Revenue Code), however, and this does not include the FBAR. Failure to file FBARs will not result in covered expatriate status. (Of course, it may be a problem and may cause distress for other reasons.)
2. In my opinion, the view expressed above that the IRS can no longer impose FBAR penalties for late-filed FBARs, because you can’t include an explanation of the reasons for the untimely filing, and because they need to determine whether reasonable cause exists, are just wishful thinking. The IRS can simply send a letter proposing the penalty and affording the later filer the opportunity to explain why the FBAR wasn’t timely filed. If an explanation is provided, the IRS can then determine whether the explanation given constitutes reasonable cause.
Postscript: I see now (too late, alas it’s always too late) the poster above was saying FBAR penalties would not / could not be “automatically” assessed. I think that’s true as far as it goes. But even with snail mail filing, I would not expect (or have I ever heard of) an automatic assessment.
@Michael
As always thanks for your insight. The post was not as clear as it should have been.