WATCH OUT FOR NON-WILLFUL FBAR PENALTIES

Every US person with financial interest or signature authority over a foreign financial account(s), which have an aggregate value in excess of $10,000 at any point during the calendar year, must file a FinCEN Form 114 (FBAR) to the Treasury Department annually.

Non-compliance may result in the imposition of civil penalties and the level of penalty depends on whether the violation was willful or non-willful. The maximum penalty for a non-willful violation is $10,000. The maximum penalty for a willful violation is the greater of $100,000 or 50% of the value of the account, determined under certain tax provisions. Penalties assessed after August 2016 for violations occurring after November 2015 are adjusted for inflation.

Cases

U.S. v. Boyd 2019 (California)
The individual in this case was subject to an FBAR penalty for each account that was unreported on the FBAR; albeit reduced through mitigation. The total penalty was in the region of $47,000 and exceeded 6% of the total value of all accounts. The taxpayer appealed that the total FBAR penalty cannot exceed $10,000 per the writing of the code and that she should be limited in her penalty.

The court agreed that the rules surrounding the penalties were somewhat unclear but found the individual potentially liable to a $10,000 penalty on a per account per year basis should this be the way they had been charged. Fortunately for the individual the penalty was mitigated and only charged for one period.

U.S. v. Bittner 2020 (Texas)
The individual in this case non-willfully failed to file an FBAR for the 2007 tax year. He had 51 foreign accounts with an aggregate value of more than $10,000 and was therefore required to file. Due to the non-willful nature of his violation, the IRS assessed a penalty of $510,000, i.e. a $10,000 penalty for each account. The defendant appealed in court arguing that the violation should be $10,000 per FBAR report, not per account. The district court concluded in favor of the defendant resulting in a final penalty of $10,000.

The ruling specifically noted that the penalties under the code relate to the violation of the FBAR rules. It specifically noted that if Congress wanted to make these specific to each account violation, then the code would have been written in such. The decision was substantiated by the fact Congress had already used the word ‘account’ three times under separate parts of the code section.

Conclusion
If you have interest or signatory authority over a foreign financial account, then it is imperative that you comply with your reporting obligations. Whilst in one of the cases above it was possible to mitigate the penalties, they were still detrimental; let alone to cost of the appeal. Contact us when we can be of assistance.