FBAR First Time Abate ("FTA") Relief for First Year Delinquent FBAR Filings (6/3/24)

I have just focused on the IRS’s adoption in the IRM of First Time Abate (“FTA”) opportunity for failure to file an FBAR. First Time Abate has long been available even without a showing of reasonable cause for a first-time failure to file, failure to pay, and/or failure to deposit penalties. The FBAR FTA, however, is more limited.  The relief is described:

IRM 8.11.6.2(20) (09-27-2018), FBAR Overview [link here; go to (20)]

First Time Abatement (FTA) - Effective with the Calendar year 2016 FBAR, FTA is available to the taxpayer who failed to file the FBAR the first time an FBAR was required to be filed by the taxpayer. At the time of publication, procedures have not been established with FTA.

I am not aware that the procedures have yet been established.

Note the restricted wording. FTA will apply only for the year that was the first year the FBAR was required. So, for example, if the taxpayer failed to file FBARs for years 1-4, the IRS might abate the penalty for year 1 but then assert the penalty for years 2-4. So, effectively, the FTA relief will apply to only the first year, but not any other year. By contrast, the income tax FTA can apply to a year even after the taxpayer has failed to file in earlier years so long as the relevant penalties were not asserted in earlier years.

Thus, as a practical matter, the benefit from this FTA would be for persons failing to file in year 1 but then timely filing in the following years.

Also, just as the income tax FTA, I doubt that FBAR FTA will apply to the FBAR willful penalty. However, with possible FTA relief facially available for one delinquent year, if timely filings were made in later years, an agent might not pursue the complex investigation required for asserting a willful civil or criminal FBAR penalty. (This is analogous to criminal fraud cases where willfulness is usually shown in a multi-year pattern.) Note that, whether or not FTA could apply if the delinquency is willful, if the willful penalty were to apply in other years, the penalty might not be affected at all. For example, assume failure to file in years 1-4. Even if year 1 would not be penalized under FTA, years 2-4 could and, since the willful penalty is calibrated to the high year aggregate balances, the quantum of the  penalty would not be affected if years 2-4 included the aggregate high balances; all it would mean is that the penalty is spread over 3 years rather than 4. But, in any event this latter comment may not be meaningful if the IRS does not grant FTA to a multi-year pattern of willfulness.

New IRM provision on Offers in Compromise Including FBAR Penalties (10/8/20)

 I just picked up this provision in the IRM, here:

5.8.4.24.2 (09-24-2020)

Foreign Bank and Financial Reporting (FBAR) Assessments

An offer may be submitted which includes FBAR assessments or a taxpayer who submitted an offer to compromise their tax liabilities also has assessments based on FBAR. Since, the IRS does not have authority to compromise assessments based on FBAR, the taxpayer should be requested to submit an amended offer to remove FBAR liabilities which are included on the Form 656.

Note: FBAR penalties are assessed under Title 31 and do not appear in IDRS.

If the taxpayer has a liability for assessments under FBAR, an offer for tax liabilities other than the FBAR may be investigated. During the review of the taxpayer’s financial information, the OE/OS should conduct additional investigation actions to determine if the taxpayer continues to have assets outside the United States. Review the ICS history to determine what research may have been conducted by a field revenue officer. The OE/OS may also issue an other investigation (OI) to an ATAT or International RO group to research FinCEN and/or CBRS to assist in identifying current foreign assets in which they retain an interest.

Note: The taxpayer may also have pending assessments related to Offshore Voluntary Disclosure Initiative.

If the taxpayer is unable or unwilling to submit an amended offer removing the FBAR liabilities, the offer should be closed as a processable return.

JAT Comments:

1.  I am not sure how or if compromises of the FBAR penalties may be achieved.  I assume that there is some way to do that outside the IRS processes for tax liabilities.

2.  The known route to compromises of tax liabilities may be a side benefit of avoiding an FBAR penalty assessment under the various IRS programs (e.g., OVDP and Streamlined) where a substitute penalty is assessed as a miscellaneous tax penalty (sometimes called the “in lieu of” penalty).

This blog is cross-posted on the Federal Tax Crimes Blog, here.

District Court Holds FBAR Nonwillful Penalty Is Per Form Rather than Per Account (7/1/20)

In United States v. Bittner (E.D. Tex. Dkt.4:19-cv-415 Dkt Entry 75 Order Dtd 6/29/20), CL Order here & CL Docket Entries here, the Court held that the nonwillful FBAR penalty was per form and not per account.  The holding is the first to so hold and rejects the holding in United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), CL Order here and CL Docket Entries here  I previously wrote on Boyd:  Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19), here.  As the Bittner court noted (Slip Op. 21 n. 8), the Boyd case is presently on appeal to the Ninth Circuit and oral argument is scheduled for September 1, 2020.

The Bittner result was significant, for it reduced the number of $10,000 per violation from 177 as asserted by the Government amounting to $1,770,000 to 4 as asserted by Bittner and held by the court, for an amount of $40,000.

The Bittner court also held that there was no material fact issue on summary judgment, so Bittner had not established reasonable cause that might have exempted him from some or all of the FBAR nonwillful penalties.

Readers of this blog can read the Bittner and Boyd opinions and make their own minds up.  I will say that, for a long time, I just assumed without detailed analysis that the nonwillful FBAR penalty was per form.  The conduct being penalized is the failure to file the form, regardless of the number of accounts.  Still, there are countervailing arguments.  They are presented in the Bittner and Boyd Orders, linked above.

I do call to readers attention the following from the opinion (Slip Op. 14):

New Third Circuit Decision on Suits to Recover FBAR Penalties and on Expanded Meaning of Willfulness (11/23/18)

Tax Procedure Enthusiasts might be interested in this posting on my Federal Tax Crimes Blog:  Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (Federal Tax Crimes Blog 12/21/18; 12/22/18), here.  I discuss Bedrosian v. United States, ___ F.3d ___, 2018 U.S. App. LEXIS 36146 (3rd Cir. 2018), here.

Quick summary with more detail in the linked blog:  In this case, the Third Circuit:

1. Discusses important jurisdictional issues with respect to a suit by a person imposed the FBAR penalties (there the willful penalty) to recover a partial payment of the penalty.  It has been conventional wisdom among practitioners is that the FBAR penalty recovery suit is not a suit to recover taxes and thus not subject to Flora's full payment requirement.  The Third Circuit opinion might cast doubt about that.

2. Discusses appellate venue in FBAR willful penalty recovery suits.

3. Raises at least the possibility that the refund suit predicate requirements (claim for refund and either denial or lapse of six months) may apply to FBAR penalty recovery suits.

4. Discusses the expanded meaning of FBAR willful penalty into reckless conduct.

Note to Federal Tax Procedure Blog readers, I generally discuss the FBAR penalties on the Federal Tax Crimes Blog, so look for more detail there.

GAO Report on IRS Whistleblower Processing and Improvement of Data Controls (10/30/18)

The GAO issued a report titled "Whistleblower Program: IRS Needs to Improve Data Controls for Some Award Determinations (GAO-18-698 published 9/28/18 and publicly released 10/29/18).  The fast facts, highlights and recommendations are here.  The full report is here.

I cut and paste the highlights below:

What GAO Found 

Prior to February 9, 2018, when Congress enacted a statutory change requiring the Internal Revenue Service (IRS) to include penalties for Report of Foreign Bank and Financial Accounts (FBAR) violations in calculating whistleblower awards, IRS interpreted the whistleblower law to exclude these penalties from awards. However, GAO found that some whistleblowers provided information about FBAR noncompliance to IRS. In a sample of 132 whistleblower claims closed between January 2012 and July 2017, GAO found that IRS assessed FBAR penalties in 28 cases. It is unknown whether the whistleblower's information led IRS to take action in all of these cases. These penalties totaled approximately $10.7 million. Had they been included in whistleblower awards, total awards could have increased up to $3.2 million. Over 97 percent of the FBAR penalties collected from these 28 claims came from 10 cases with willful FBAR noncompliance, for which higher penalties apply.

Report of Foreign Bank and Financial Accounts (FBAR) Penalties and Potential Whistleblower Awards for Selected IRS Whistleblower Claims Closed between January 1, 2012, and July 24, 2017

FBAR penalty type	Number of claims	FBAR penalty amount (dollars)	Maximum potential whistleblower awarda(dollars)
Willful penalty	10	10,485,847	3,145,754
Non-willful & negligent penalty	18	263,039	78,912
Total	28	10,748,886	3,224,666

Source: GAO analysis of IRS data. | GAO-18-698
a Maximum potential award is defined as 30 percent of the FBAR penalty amount.

IRS forwards whistleblower allegations of FBAR noncompliance to its operating divisions for further examination. However, IRS Form 11369, a key form used for making award determinations, does not require examiners to include information about the usefulness of a whistleblower's information FBAR and other non-tax issues. After Congress enacted the statutory change, IRS suspended award determinations for 1 week, but resumed the program before updating the form or its instructions, or issuing internal guidance on new information required on the Form. As of June 28, 2018, IRS had not begun updating the Form 11369 or its instructions. The lack of clear instructions on the form for examiners to include information on FBAR and other non-tax enforcement collections may result in relevant information being excluded from whistleblower award decisions.

IRS maintains FBAR penalty data in a standalone database. It uses these data for internal and external reporting and to make management decisions. Because of the change in statute, IRS will need these data for determining whistleblower awards. GAO found that IRS does not have sufficient quality controls to ensure the reliability of FBAR penalty data. For example, IRS staff enter data into the database manually but there are no secondary checks to make sure the data entered are accurate. Without additional controls for data reliability, IRS risks making decisions, including award determinations, with incomplete or inaccurate data. 

This is a public version of a sensitive report issued in August 2018. Information on the FBAR Database that IRS deemed to be sensitive has been omitted. 

Why GAO Did This Study 

Tax whistleblowers who report on the underpayment of taxes by others have helped IRS collect $3.6 billion since 2007, according to IRS. IRS pays qualifying whistleblowers between 15 and 30 percent of the proceeds it collects as a result of their information. However, until February 9, 2018, IRS did not pay whistleblowers for information that led to the collection of FBAR penalties. 

GAO was asked to review how often and to what extent whistleblower claims involve cases where FBAR penalties were also assessed. Among other objectives, this report (1) describes the extent to which FBAR penalties were included in whistleblower awards prior to the statutory change in definition of proceeds; (2) examines how IRS used whistleblower information on FBAR noncompliance, and how IRS responded to the statutory change in definition of proceeds; and (3) describes the purposes for which IRS collects and uses FBAR penalty data, and assesses controls for ensuring data reliability. GAO reviewed the files of 132 claims closed between January 1, 2012, and July 24, 2017, that likely included FBAR allegations; analyzed IRS data; reviewed relevant laws and regulations, and IRS policies, procedures and publications; and interviewed IRS officials. 

What GAO Recommends 

GAO recommends IRS update IRS Form 11369 and improve controls for the reliability of FBAR penalty data. IRS agreed with all of GAO's recommendations.

JAT Comments: