Court finds non-willful FBAR penalty not limited to $10,000 per year

Tax Hot Topics newsletterThe U.S. District Court for the Central District of California ruled in U.S. v. Jane Boyd (No. 2:18-cv-00803) that the non-willful penalty for failing to file foreign bank account reports (FBARs) is not limited to $10,000 per year, and may be imposed on a per account basis.

If a taxpayer has a reportable foreign financial account, it may be required to report the account annually. Under the Bank Secrecy Act, each U.S. person must file a FBAR when the person has a financial interest in, or signature authority over, one or more accounts in a foreign country and the aggregate value of all such accounts exceeds $10,000 at any time during the calendar year. The FBAR is generally due April 15, but that date is most commonly extended to Oct. 15 each year. For more details on FBAR filing requirements, see our prior coverage.

Under 31 U.S.C. 5314, the IRS is directed to require a resident or citizen of the United States to keep records and/or file reports when making transactions or maintaining a relationship with a foreign financial agency. The IRS is granted the authority to impose a civil penalty on “any person who violates, or causes any violation of, any provision of (S)ection 5314” under Section 5321(a)(5)(A). Section 5321(a)(5)(B)(i) provides “(t)he amount of any civil penalty imposed (for non-willful violations) shall not exceed $10,000.”

During the 2010 tax year, the taxpayer in the case failed to report a number of bank accounts located in the United Kingdom in which she held a financial interest in and had signature authority over or controlled. The taxpayer was accepted into the Offshore Voluntary Disclosure program, but subsequently opted out. As a result of doing so, she was subject to IRS examination, which determined that her failure to file an FBAR was non-willful, and assessed penalties of $47,279 (determined as 10% of each respective account balance, not to exceed $5,000).

The parties did not dispute the 2010 FBAR penalty assessment against the taxpayer. Rather, the IRS argued that the statutory maximum penalty of $10,000 under 31 U.S.C. § 5321(a)(5)(B) for non-willful violations relates to each foreign financial account. The taxpayer contended that, if there is a non-willful failure to file an FBAR, the penalty should not exceed $10,000 per FBAR, irrespective of the number of bank accounts required to have been listed on the FBAR.

The court viewed Section 5321 as “somewhat unclear” as to whether the $10,000 negligence penalty applies per year or per account. However, it found that the government’s position was a more reasonable interpretation of the statute. It held that a violation relates to an individual “account” not a per form basis, and thus, that the non-willful FBAR penalty is not limited to $10,000 per year. Given the court’s decision, taxpayers should be aware of the increased monetary penalty that may result from a non-willful failure to file an FBAR with multiple accounts.

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

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