FBAR Penalty Time Limits Explained

The Internal Revenue Service (IRS) operates under distinct statutory regimes for federal income tax and Foreign Bank Account Report (FBAR) penalties, with significant implications for taxpayers. Unlike federal income tax non-filings, which allow the IRS unlimited time to make assessments until a filing occurs, the FBAR framework limits the agency to a six-year window from the filing deadline to impose civil penalties. Taxpayers can voluntarily waive this limitation through agreements with the IRS, a practice that some federal courts have upheld even when such agreements are made outside the six-year period. In a recent case involving taxpayer Rund, the IRS assessed willful FBAR penalties in April 2021 for tax years spanning from 2003 to 2008 and 2013. Rund had previously entered the Offshore Voluntary Disclosure Program (OVDP) but failed to finalize a closing agreement with the IRS, leaving him without penalty mitigation options. This situation highlights the critical distinction between the statute of limitations for federal income taxes and FBAR penalties, with the latter lacking provisions for extending the limitation period through agreements. The court's decision emphasized that while federal income tax statutes allow for extensions only within a three-year timeframe, FBAR statutes do not provide similar guidance. Consequently, the IRS maintains that taxpayers can voluntarily waive the six-year statute of limitations for FBAR penalties, a stance supported by previous federal court rulings. This legal landscape underscores the complexities taxpayers face when navigating audits and investigations, often leading them to engage with the IRS in hopes of favorable outcomes.