IRS Signals Major Changes to FBAR Compliance and Penalty Relief Programmes

American taxpayers generally must file US income tax returns and comply with other informational reporting obligations, including the Report of Foreign Bank and Financial Accounts (“FBAR”) regardless of where they reside in the world. Last week the Internal Revenue Service (“IRS”) signaled major changes to two remediation paths for when these obligations are overlooked.

Delinquent FBAR Submission Procedure

The FBAR is governed under the authority of the Financial Crimes Enforcement Network (“FinCEN”), an arm of the United States Treasury, which has delegated reporting and enforcement authority of the FBAR to the IRS. An FBAR filing obligation is triggered where a US person possesses a financial interest or signature authority over non-US bank and financial accounts which in the aggregate exceed a value of $10,000 at any point during the year.

US taxpayers should be mindful of FBAR filing obligations because of the draconian enforcement mechanisms associated with noncompliance. At the low end these penalties include an unpleasant $16,536 fine for each year of noncompliance and escalate to a penalty of the greater of $165,353 or half the account value for each noncompliant tax year in cases of willful noncompliance. Criminal penalties are also possible, including potential jail time.

The IRS offers several administrative programs to remediate an FBAR filing oversight. Historically, one of these programs has been the Delinquent FBAR Submission Procedure (“DFSP”). The DFSP allowed qualifying taxpayers to come into compliance with their delinquent FBAR filing obligations while avoiding the aforementioned penalties provided the taxpayer was not under an IRS civil exam or criminal investigation, and the taxpayer properly reported, and paid all US tax on income generated by the accounts subject to reporting.

However, given IRS administrative programs like the DFSP are offered by the IRS as an administrative grace the IRS is free to modify, update, or even terminate these programs at any time. While there has been no formal announcement, the IRS website discussing the DFSP was taken down earlier this month, and nothing has been put back up in its place. Nonetheless, there remain several options for US taxpayers with FBAR noncompliance to make right at more favorable penalty outcomes (perhaps even $0 penalties) should the DFSP truly be over. Links to these programs may be found here:

Delinquent international information return submission procedures | Internal Revenue Service

IRS Criminal Investigation Voluntary Disclosure Practice | Internal Revenue Service

Streamlined filing compliance procedures | Internal Revenue Service

First Time Abatement

Like the DFSP the IRS First Time Abatement (“FTA”) program was offered by the IRS as an administrative grace and is now being phased out.

On July 8th, the IRS issued news release IR-2006-83 IRS simplifies penalty relief, introduces automatic process for eligible taxpayers | Internal Revenue Service. In the release the IRS makes clear that the new Automatic Exemption from Penalty (“AEP”) program will begin this summer beginning with tax year 2025 and 2026 quarterly returns and will phase out the prior long-standing FTA.

Taxpayers were eligible for FTA relief if they had a history of timely filing their returns and paying tax due for the prior three years. Provided these criteria were met FTA relief was granted, however taxpayers had to take the somewhat perfunctory step of requesting the relief (either by phone call to the IRS or written request). These same qualifications apply to the new AEP program but the relief is now automatic with no need for further action from taxpayers. As with the FTA, the AEP applies to the failure-to-file, failure-to-pay, and failure-to-deposit penalties.

Please feel free to reach out if you have any questions about either of these changes.