Recent case questions limit on FBAR penalties

The Internal Revenue Service (IRS) requires those who hold an interest in or signature authority over a foreign account with a value over $10,000 at any point during the applicable tax year file the Foreign Bank Account Report (FBAR). A failure to do so can lead to both civil and criminal penalties.

But how harsh are the penalties? A recent case out of Texas delves into this question.

This case of government versus taxpayer questioned the maximum monetary penalty allowed for an FBAR violation. The government argued the maximum allowable penalty was 50 percent of the amount within the account for each year the taxpayer was in violation of reporting requirements.

The taxpayer countered this argument. The taxpayer argued a lower fine was more appropriate and used a statue that specifically states the monetary penalty for an FBAR filing violation is set at a maximum of $100,000 per account to support his contention. The government claims it updated this statute in 2004. The change, the government argued, led to a penalty of $100,000 or 50 percent of the value of each account in question.

The court ruled in favor of the taxpayer.

Although the outcome is good news for those facing allegations of a failure to come into compliance with reporting requirements, it is important to point out two things. First, the accused could still face a $100,000 fine per account. In this case, the taxpayer held two accounts that were not in compliance with applicable tax law. As a result, he faced a $200,000 penalty. Second, the government could change this law to impose a greater financial penalty. Such a change would impact future cases. As such, it is wise to seek legal counsel to discuss compliance options.

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