There are two types of FBAR penalties. The first, and quite serious, is a willful FBAR penalty. The second, not as bad as a willful FBAR, is a non-willful FBAR penalty. These can add to be in the tens of thousands of dollars. But…there is a subset of non-willful FBAR penalties, and that is the FBAR warning Letter 3800, which is about a good of a win as you can hope for during an Opt-out of an OVDP or an FBAR audit. It means that the IRS will not impose any monetary FBAR penalty against you.
So, how to get this coveted FBAR warning letter 3800? According to the Internal Revenue Manual (IRM):
- If the FBAR violation was due to reasonable cause, and
- The balance in the account was subsequently reported on a (delinquent or amended) FBAR form
Sounds pretty straight forward, right? As long as you make sure you file any delinquent FBARs (now FinCEN Form 114) and demonstrate to an FBAR examiner how you had a reasonable cause, you should be fine, right? Well, not so quick.
"The first question to ask is "what is FBAR reasonable cause?" Quite simply, it means you had good reason or reasons why you didn't file an FBAR. Good reasons we have used and seen are (this is not an exhaustive list):
- You didn't know about the FBAR and didn't even know you should dig deeper;
- You had little reason not to report the account (income was deferred or taxes would be small);
- You didn't know that you had the type of account that needed to be reported;
- You didn't understand the law:
- You relied on professional advice.
How the IRS FBAR examiners are trained to think about reasonable cause
We have noticed a trend of IRS FBAR examiners focusing on just one aspect of FBAR reasonable cause. That is the last reason on the list above, the "reliance on professional advice." This, however, is not what the law requires and is not even what the Internal Revenue Manual (IRM) states. There is more to consider.
The IRM calls for the IRS examiner to not only look to whether or not FBAR reasonable cause exists based not just upon professional advice, but to conduct a complete analysis. They must then determine, under all the facts and circumstances of a FBAR penalty case, whether a warning letter or smaller penalties would be appropriate. See IRM 4.26.16.4.4.3.
In fact, every portion of the IRM dealing with FBAR penalties is replete with references to the need for examiners to exercise discretion in determining whether FBAR penalties are even appropriate in a given case in light of the overriding goal of what is necessary in order to ensure future compliance.
To reiterate: Based on a complete reading of the IRM, the sole purpose of imposing these FBAR penalties is to ensure future compliance by the same taxpayer. Therefore, the FBAR examiner should consider all of the facts and circumstances in determining whether the imposition of any FBAR penalty is appropriate at all. See IRM 4.26.16.4.
Here is a rhetorical question for you: How many people, after dealing with an FBAR penalty nightmare need to be hit with a current FBAR penalty to convince them to file FBARs in the future? Really?
What to do if you think the IRS FBAR examiner is being unreasonable about reasonable cause
The thing to understand is that assessing non-willful FBAR penalties is very new for the IRS. FBAR penalties — as far as I can determine — were not assessed prior to the Williams case or McBride cases. These FBAR cases dealt with the imposition of willful FBAR penalties. As of this writing, this author knows of no FBAR litigation involving non-willful FBAR penalties. Some will undoubtedly be coming.
Some FBAR examiners only know what they have been trained on (they certainly don't have time to conduct independent research), and they typically possess a bias that everyone should know everything about US tax law because they think they do. Some FBAR examiners think that everyone should know about the Bank Secrecy Act of 1970 because they think they do. Some can't put themselves in the shoes of a typical average taxpayer who does not share the voracious appetite for the onerous compliance mandates the IRS, unlike any other country in the world, places upon US persons.
So the key is — if you think an FBAR examiner is being unreasonable about FBAR reasonable cause do not give up. Do not think an IRS examiner is the final word. If you would like a second or third opinion about any proposed FBAR penalties the IRS is looking to assess, feel free to contact us for a strategy session with us. We have clients from all around the world and passionately believe in protecting US taxpayers from the ever-expanding regulatory leviathan that is the IRS.
