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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law


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Foreign Bank Account Reporting – IRS Enforcement Update

Posted on in Tax Rants

Frequently, clients come to us believing that the IRS won’t impose Foreign Bank Account Reporting (“FBAR”) penalties on people who don’t actually owe the U.S. any tax. 

Sadly, that’s simply not the case.

For FBAR noncompliance, the penalty may be up to $10,000 if the failure to file is non-willful, and up to the greater of $100,000 or 50% of the total account balances if willful (i.e., intentional).  Some tax practitioners used to believe that the higher willful penalty would be capped at $100,000 – at least until this summer, when the Court of Federal Claims held in Norman v. United States that the taxpayer was liable for the 50% penalty imposed by 31 U.S.C. sec. 5314, significantly more than the regulatory “limit” of $100,000.   A huge bite!

Some legislative history on the penalty amount here:  Treasury Regulation 31 C.F.R section 1010.820 was written under the previous version of the Bank Secrecy Act, and capped the penalty at $100,000.  In 2004, Congress amended the law to increase the penalty.  Based on the reasoning set forth in Colliot v. United States (Texas District Court 2018), and Wadhan v. United States (Colorado District Court 2018), the court held that the new 2004 law did not supersede the regulation promulgated under the prior statute.  Good news for noncompliant taxpayers, but it didn’t last long.  In Norman, the Court of Federal Claims instead confirmed that Congress did indeed supersede the regulation and accordingly would not cap the penalty amount at $100,000.  Most likely, the IRS will update the regulation to avoid the issue being tried again. 

For those of you who have or had foreign bank accounts and are not in compliance with the FBAR requirements - even if you do not believe you were willful in your non-reporting - we encourage you to contact us and discuss your options, including the IRS Offshore Voluntary Disclosure Program.  Notably, the IRS continues to offer an attractive Streamlined Program for non-willful taxpayers that can bring you into compliance quickly, and also significantly limit the penalties exposure.




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