Should You Extend the FBAR Penalty Statute of Limitations Period?
Introduction
Title 31 of the U.S. Code allows the Internal Revenue Service (IRS) to impose civil penalties for the failure of a U.S. person to file a timely and proper Foreign Bank Account Report (FBAR) by the statutory deadline. However, the IRS does not have an unlimited time to make a penalty assessment. Unlike federal income tax non-filing cases, which allow the IRS to make assessments indefinitely (unless a filing is made), the FBAR statute of limitations grants the IRS only six years from the applicable FBAR filing deadline to impose civil penalties.
This article discusses whether taxpayers should voluntarily agree to extend the statute of limitations period for FBAR penalties, considering the implications and potential risks of such decisions.
The FBAR Statute of Limitations and Exceptions
Under Title 31 of the U.S. Code, the general rule for FBAR penalties is that the IRS has six years from the applicable FBAR filing deadline to assess civil penalties for a taxpayer’s failure to file an FBAR. However, this period can be extended under certain conditions, most notably through voluntary agreements between the taxpayer and the IRS.
Voluntary Waiver of Statute of Limitations
The exception to the six-year statute arises when a taxpayer voluntarily agrees to extend this period. This can be done by executing a statute extension form with the IRS, which allows the IRS to assess FBAR penalties beyond the original six-year window. In fact, several federal courts have upheld the IRS’s ability to extend the statute of limitations period for FBAR penalty assessments, even if the extension agreement is made after the six-year limit has passed.
Case Study – U.S. v. Rund
A significant case, U.S. v. Rund, highlights the impact of voluntarily extending the FBAR statute of limitations. Rund, a U.S. citizen with undisclosed foreign accounts, was assessed willful FBAR penalties in April 2021 for tax years between 2003 and 2014. The IRS initially offered tax relief under the Offshore Voluntary Disclosure Program (OVDP), but Rund did not finalize a closing agreement with the IRS.
In his case, the six-year statute of limitations for penalty assessments had generally expired for tax years 2003 to 2008 and for 2013-2014. However, Rund had voluntarily agreed to extend the statute of limitations period through several signed statute extension forms. These forms clearly stated that the extension applied to FBAR penalties under 31 U.S.C. 5321, and the last extension agreed to in 2015 allowed the IRS to assess penalties until December 31, 2021.
Rund argued that the penalties were imposed after the statute of limitations period, but the court sided with the IRS. The court determined that the statute extension forms were valid and had been agreed to voluntarily by Rund. As a result, Rund waived the six-year statute of limitations, making the penalties enforceable.
Statute of Limitations vs. IRS Penalties: The Risks of Extending the Period
Rund’s case underscores the critical point that extending the statute of limitations, while it may seem like a good strategy for negotiating with the IRS, can have unintended consequences. By agreeing to extend the period, Rund opened the door for the IRS to impose penalties well beyond the typical six-year limit. The court found that the statute extension benefited Rund by allowing him extra time for negotiations, though it ultimately enabled the IRS to assess substantial penalties.
Key Considerations When Extending the Statute of Limitations:
- Extended Negotiation Time: A statute extension can allow a taxpayer more time to negotiate terms with the IRS, but it can also increase the potential for further penalties.
- Penalty Assessment Risk: By agreeing to extend the statute of limitations, taxpayers may risk facing large penalties years later, as the IRS may reassess penalties even after the typical six-year period.
- Lack of Awareness: Many taxpayers, in their efforts to resolve disputes, may unknowingly extend the period during which the IRS can impose penalties, leading to significant tax liabilities.
Lesson Learned from Rund – Should You Extend the FBAR Statute?
The Rund case provides a significant lesson for taxpayers: while cooperating with the IRS, including signing a statute extension form, might seem beneficial in certain circumstances, it can also result in the IRS imposing substantial penalties later on. Extending the statute of limitations for FBAR penalties can be a double-edged sword—providing the IRS with more time to assess penalties while also offering taxpayers more time to negotiate terms.
Taxpayers should carefully evaluate whether extending the statute of limitations aligns with their best interests. Consultation with an experienced tax lawyer is crucial when considering any actions related to FBAR penalties or statute extension agreements.
Conclusion
The FBAR penalty statute of limitations is generally set at six years, but taxpayers can voluntarily waive this period through agreements with the IRS. The U.S. v. Rund case serves as a cautionary tale, illustrating how taxpayers might unintentionally expose themselves to more significant penalties by extending the statute of limitations. While this strategy may allow for more negotiation time, it can also delay penalty assessments, which may result in considerable liabilities.
Before agreeing to extend the FBAR statute of limitations, it is essential to carefully consider the risks and benefits. Consulting with a knowledgeable tax lawyer can help navigate these complex decisions and avoid future penalties.
This article is written for educational purposes.
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