Specialized Returns for Individuals · International information reporting

Potential penalties (e.g., failure to file, underreporting, substantially incomplete, statute of limitations, reduction of tax attributes)

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

The penalties in this area are severe, but severity is not what makes them dangerous. What makes them dangerous is their structure. They are per-form and they stack, so one unreported account can produce three penalties under three provisions. They run from the date the Service mails a notice rather than from the missed deadline, which means a failure discovered by the taxpayer is in a very different position from one discovered by the Service. And underneath all of them sits a limitation rule that keeps the entire tax year open — not just the foreign item — until the missing information is actually furnished.

The rule

Form 8938. $10,000 for the failure, and where it continues more than 90 days after the Secretary mails notice, a further $10,000 for each 30-day period or fraction of one after that 90-day period expires — the additional penalty capped at $50,000, so $60,000 is the maximum (IRC § 6038D(d))^TY2026 The timing is the part that decides cases: 90 days from the mailing of notice before any additional penalty begins to run — a failure cured inside that window carries the $10,000 base penalty and nothing more (IRC § 6038D(d)(2))^TY2026

Forms 5471 and 8865. $10,000 for each annual accounting period, plus a further $10,000 for each 30-day period beginning 90 days after the Service mails notice, capped at $50,000 of continuation penalty^TY2026 And a second penalty that is not a dollar amount at all: a 10 percent reduction of the foreign taxes paid or deemed paid for the year, and where the failure continues 90 days or more after notice, 10 percent plus a further 5 percent for each 3-month period or fraction of one after that — a reduction of tax attributes on top of the dollar penalty (IRC § 6038(c)(1), (2))^TY2026

Foreign trusts. the greater of $10,000 or 35 percent of the gross reportable amount for a failure under IRC § 6048, reduced to 5 percent for the annual return of a foreign trust with a United States owner, plus $10,000 for each 30-day period after a 90-day grace following notice (IRC § 6677(a), (b))^TY2026

Foreign gifts. the Secretary determines the tax consequences of the receipt, and the recipient pays 5 percent of the gift for each month the failure continues, capped at 25 percent — subject to a reasonable cause exception (IRC § 6039F(c))^TY2026

The FBAR, which is not in the Internal Revenue Code. Non-willful: a civil money penalty not exceeding $10,000, with no penalty at all where the violation was due to reasonable cause and the balance in the account was properly reported — figures in title 31 are adjusted annually for inflation (31 U.S.C. § 5321(a)(5)(A), (B))^TY2026 Willful: the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, and the reasonable cause exception does not apply (31 U.S.C. § 5321(a)(5)(C), (D))^TY2026 And criminally, a fine of up to $250,000 or up to 5 years' imprisonment or both for a willful violation, rising to $500,000 and 10 years where the violation occurs while violating another federal law or as part of a pattern of illegal activity involving more than $100,000 in a 12-month period (31 U.S.C. § 5322(a), (b))^TY2026

The accuracy-related penalty is doubled. 40 percent instead of 20 percent on the portion of an underpayment attributable to an undisclosed foreign financial asset — an asset for which information was required under IRC § 6038, 6038B, 6038D, 6046A or 6048 and was not provided (IRC § 6662(j))^TY2026

And the limitation period does not run. the assessment period for any tax to which the information relates does not expire before 3 years after the information is actually furnished — reaching failures under IRC §§ 1295(b), 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A and 6048, and confined to the items related to the failure only where it was due to reasonable cause and not willful neglect (IRC § 6501(c)(8))^TY2026

Current figures

Item	Rule
Form 8938 penalty	$10,000 for the failure, and where it continues more than 90 days after the Secretary mails notice, a further $10,000 for each 30-day period or fraction of one after that 90-day period expires — the additional penalty capped at $50,000, so $60,000 is the maximum (IRC § 6038D(d))^TY2026
Form 8938 grace period	90 days from the mailing of notice before any additional penalty begins to run — a failure cured inside that window carries the $10,000 base penalty and nothing more (IRC § 6038D(d)(2))^TY2026
Section 6038 penalty	$10,000 for each annual accounting period, plus a further $10,000 for each 30-day period beginning 90 days after the Service mails notice, capped at $50,000 of continuation penalty^TY2026
Foreign tax credit reduction	a 10 percent reduction of the foreign taxes paid or deemed paid for the year, and where the failure continues 90 days or more after notice, 10 percent plus a further 5 percent for each 3-month period or fraction of one after that — a reduction of tax attributes on top of the dollar penalty (IRC § 6038(c)(1), (2))^TY2026
Foreign trust penalty	the greater of $10,000 or 35 percent of the gross reportable amount for a failure under IRC § 6048, reduced to 5 percent for the annual return of a foreign trust with a United States owner, plus $10,000 for each 30-day period after a 90-day grace following notice (IRC § 6677(a), (b))^TY2026
Foreign gift penalty	the Secretary determines the tax consequences of the receipt, and the recipient pays 5 percent of the gift for each month the failure continues, capped at 25 percent — subject to a reasonable cause exception (IRC § 6039F(c))^TY2026
FBAR, non-willful	a civil money penalty not exceeding $10,000, with no penalty at all where the violation was due to reasonable cause and the balance in the account was properly reported — figures in title 31 are adjusted annually for inflation (31 U.S.C. § 5321(a)(5)(A), (B))^TY2026
FBAR, willful	the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, and the reasonable cause exception does not apply (31 U.S.C. § 5321(a)(5)(C), (D))^TY2026
FBAR, criminal	a fine of up to $250,000 or up to 5 years' imprisonment or both for a willful violation, rising to $500,000 and 10 years where the violation occurs while violating another federal law or as part of a pattern of illegal activity involving more than $100,000 in a 12-month period (31 U.S.C. § 5322(a), (b))^TY2026
Accuracy-related penalty	40 percent instead of 20 percent on the portion of an underpayment attributable to an undisclosed foreign financial asset — an asset for which information was required under IRC § 6038, 6038B, 6038D, 6046A or 6048 and was not provided (IRC § 6662(j))^TY2026
Limitation period	the assessment period for any tax to which the information relates does not expire before 3 years after the information is actually furnished — reaching failures under IRC §§ 1295(b), 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A and 6048, and confined to the items related to the failure only where it was due to reasonable cause and not willful neglect (IRC § 6501(c)(8))^TY2026
FBAR threshold	an aggregate value greater than $10,000 at any time during the calendar year^TY2026
Form 8938 thresholds	exceeding $50,000 on the last day of the taxable year, or $75,000 at any time during the year^TY2026

How it works in practice

Count the exposures separately (IRC §§ 6038D(d), 6677, 6662(j)). A client with an unreported foreign trust that holds an unreported foreign account, generating unreported income, has a § 6677 penalty, an FBAR penalty, a § 6662(j) understatement penalty and an open limitation period. None of them is an alternative to any other.

Read the 90-day grace as the whole game. Under § 6038D(d)(2), § 6677(a) and § 6038(b)(2) alike, the escalating penalty begins only after 90 days have passed since the Service mailed notice. A failure corrected inside that window carries the base penalty and stops there. Diary the notice date, not the original due date.

Distinguish the two FBAR standards early. Non-willful and willful are separated by an order of magnitude and by the availability of the reasonable cause exception, which willfulness removes altogether. The willful figure is measured against the account balance rather than the tax, so it can exceed the entire tax at stake by a wide margin.

Explain that the limitation period has not started. This is the point clients understand least and should understand best. Section 6501(c)(8) keeps the assessment period open until three years after the information is furnished — and where the failure was not due to reasonable cause, it holds open the whole return, not just the foreign item. A client with a fifteen-year-old unreported account has fifteen open years, and filing is what closes them.

Reasonable cause is the hinge in three places. It removes the non-willful FBAR penalty where the balance was properly reported, it excuses the foreign gift penalty, and it confines the § 6501(c)(8) extension to the related items. Documenting it contemporaneously is worth more than arguing it later.

And note what the § 6038 credit reduction does. It is not a fine. It reduces the foreign taxes treated as paid, escalating with time, so a client who owes no United States tax on the foreign income because of the credit can be made to owe it by the reporting failure alone.

The 75 days that cost nothing extra

A client fails to file Form 8938. The Service mails a notice of the failure on 4 March. She files the form on 18 May, 75 days later.

Her penalty is $10,000 and no more. The additional $10,000-per-30-day-period penalty in § 6038D(d)(2) begins only where the failure continues for more than 90 days after the notice was mailed, and she cured it inside that window. Had she filed on 10 June — 98 days — the first additional period would have run and the penalty would have been $20,000.

The account that reopened fifteen years

A client discloses in 2026 that he has held an account in Ireland since 2011 and has never filed an FBAR or a Form 8938. The unreported interest is modest — a few thousand dollars a year.

The income tax at stake is small; the exposure is not. Under § 6501(c)(8) the assessment period for each year in which Form 8938 was required has not begun to run, so every one of those years is open, and because the failure was not obviously due to reasonable cause the extension is not confined to the foreign items. Filing the missing information starts a three-year clock; not filing leaves the years open indefinitely. The limitation rule, not the penalty tables, is what makes the disclosure urgent.

The credit that was reduced away

A client controls a foreign corporation and pays substantial tax abroad on its income. She has never filed Form 5471. Nine months after the Service mails notice, she still has not.

She faces the § 6038(b) dollar penalty, and separately her foreign taxes for the year are reduced under § 6038(c) — by 10 percent initially, and by a further 5 percent for each three-month period or fraction of one after the 90-day period expired. The reduction attacks the credit that was eliminating her United States tax, so the reporting failure creates a tax liability where the underlying transaction created none.

Willful, and measured against the wrong number

A client held $2,000,000 in an undeclared account and told his preparer, in writing, not to mention it. The unreported income over the years came to about $180,000 and the tax on it to about $60,000.

The willful FBAR penalty is the greater of $100,000 or 50 percent of the account balance at the time of the violation — here $1,000,000, for a single year’s violation, against $60,000 of tax. The penalty is not proportionate to the tax because it was never designed to be: it is measured against the balance concealed. The reasonable cause exception is unavailable to him by definition.

Running the escalating penalty from the due date. It runs from 90 days after the Service mails notice, under § 6038D(d)(2), § 6677(a) and § 6038(b)(2) alike.

Adding an increment for a period inside the grace. Seventy-five days after notice is inside 90 days: base penalty only.

Using 60-day periods. The additional increments are per 30-day period or fraction of one.

Treating the penalties as alternatives. They are cumulative across forms, and the § 6662(j) understatement penalty and the FBAR penalty apply on top of the information return penalties.

Assuming the willful FBAR penalty relates to the tax. It is measured against the account balance (31 U.S.C. § 5321(a)(5)(D)).

Forgetting the reasonable cause exception has conditions. For the non-willful FBAR penalty it requires that the balance was properly reported, not merely that the failure was innocent.

Overlooking the credit reduction. Section 6038(c) reduces foreign taxes deemed paid and escalates in three-month steps — a penalty in the form of a lost attribute rather than a bill.

Believing the years are closed. Section 6501(c)(8) means they never opened. Filing starts the clock.

How this has changed

The information return penalties were built up in layers and were, for most of their history, rarely asserted. That changed after 2009. The § 6038D penalty arrived with FATCA in 2010 and was drafted deliberately to mirror the § 6038 structure — base penalty, 90-day grace after notice, escalating increments, a cap on the increments — which is why the three regimes now look so alike.

Section 6501(c)(8) was rewritten in 2010 to reach the full list of information provisions and to hold the whole return open rather than only the related items where the failure was not due to reasonable cause. That amendment did more to change practice than any penalty increase, because it converted a set of discrete filing failures into an indefinite exposure on the underlying tax.

Pub. L. 119-21 amended none of these provisions. The one figure that moves without amendment is the FBAR civil penalty: the $10,000 non-willful maximum and the $100,000 willful floor printed in 31 U.S.C. § 5321 are statutory bases adjusted annually for inflation, so the figures in the section are not the operative amounts — the IRS notes on its own FBAR materials that published penalty figures may not be current^TY2026 That is the same pattern as the criminal fines in title 26 — a printed figure that is not the operative one.

Exam focus

The reliable question gives a notice date and a number of days and asks for the penalty. Apply the 90-day grace first, then count 30-day periods or fractions, then apply the cap.

Know that the FBAR splits non-willful from willful, that the willful figure is the greater of a fixed amount or 50 percent of the account balance, and that reasonable cause is unavailable for a willful violation.

Know that § 6662(j) doubles the accuracy-related penalty to 40 percent for an undisclosed foreign financial asset understatement, and know § 6501(c)(8) — that the assessment period does not expire until three years after the information is furnished, and is confined to related items only where the failure was due to reasonable cause and not willful neglect.

Check yourself

1. A taxpayer fails to file Form 8938. The Service mails notice on 1 April; the taxpayer files on 20 June, 80 days later. What is the penalty?

Answer: $10,000. The additional penalty under IRC § 6038D(d)(2) applies only where the failure continues for more than 90 days after notice is mailed, and 80 days is inside that period.

2. Same facts, but the taxpayer files 155 days after the notice. What is the penalty?

Answer: $30,000. The 90-day period expires, leaving 65 further days — three 30-day periods counting fractions — so $10,000 base plus $20,000 for the first two full periods and $10,000 for the fraction, capped well below the $50,000 ceiling on the additional penalty.

3. What is the maximum civil penalty for a willful FBAR violation?

Answer: The greater of $100,000 or 50 percent of the balance in the account at the time of the violation (31 U.S.C. § 5321(a)(5)(C), (D)), with the reasonable cause exception unavailable. Title 31 maximums are adjusted annually for inflation.

4. A taxpayer never filed Form 5471 for a controlled foreign corporation and the failure has continued for a year after notice. Beyond the dollar penalty, what else happens?

Answer: The foreign taxes paid or deemed paid for the year are reduced under IRC § 6038(c) — 10 percent initially, plus a further 5 percent for each 3-month period or fraction of one after the 90-day period expires.

5. A taxpayer failed to file a required Form 8938 for a year six years ago. Has the assessment period expired?

Answer: No. Under IRC § 6501(c)(8) the time for assessment of any tax to which the information relates does not expire before 3 years after the information is furnished, and it has not been furnished. Where the failure was not due to reasonable cause the extension applies to the whole return, not only the foreign items.

Change log

2026-08-21Initial draft. Sets out the penalty regime attached to each international information return — IRC § 6038D(d) for Form 8938, § 6038(b) and (c) for Forms 5471 and 8865 with its reduction of the foreign tax credit, § 6677 for foreign trusts, § 6039F(c) for unreported foreign gifts, the FBAR penalties in 31 U.S.C. §§ 5321 and 5322 — together with the 40 percent accuracy-related penalty in § 6662(j) and the open-ended limitation period in § 6501(c)(8).