Opinion: #FBAR penalties cannot be automatically assessed on an e-file

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.

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”.

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