Tax Law Center Blog

On January 7, 2026, the United States Court of Appeals for the Second Circuit issued its opinion in United States v. Reyes, holding that “willfulness” for purposes of civil FBAR penalties encompasses reckless conduct.

For tax practitioners, this decision underscores a critical reality: a taxpayer’s subjective intent or perceived lack of sophistication may not be a viable defense against the IRS’s most aggressive penalty assessments.

Factual Background: The Perils of “Hold Mail” and Non-Disclosure

The defendants, Dr. Juan Reyes and Catherine Reyes, maintained a Swiss bank account with balances exceeding $2 million. Despite the account representing the vast majority of their liquid assets, the taxpayers failed to file a Report of Foreign Bank and Financial Accounts (FBAR) for several years.

Key facts that the court found dispositive included:

• Concealment Efforts: The taxpayers utilized “hold mail” services at the foreign bank and directed credit card statements to be sent to a third party in Spain rather than their U.S. residence.
• Explicit Rejection of Disclosure: The taxpayers signed bank forms explicitly stating they did not authorize the bank to make disclosures to the U.S. regarding withholding tax, and they declined to provide a Form W-9.
• Inaccurate Tax Returns: On Schedule B of their federal returns, the taxpayers checked “No” in response to questions regarding interests in foreign financial accounts.

The Legal Standard: Objective Recklessness

The Second Circuit’s analysis relied heavily on the Supreme Court’s decision in Safeco Insurance Co. of America v. Burr, which established that in a civil context, “willfulness” generally includes both knowing and reckless violations.

The court adopted an objective test for recklessness: conduct that entails an “unjustifiably high risk of harm that is either known or so obvious that it should be known.” By applying this objective standard, the court effectively dismissed the taxpayers’ defense that they lacked business sophistication or held a subjective belief that they were exempt from reporting. Under Reyes, the inquiry is not what the taxpayer actually thought, but what a “reasonable person” in their position would have done.

Strategic Implications for Tax Professionals

The Reyes decision serves as a stark warning. The threshold for “willful” conduct is low. When representing clients with undisclosed foreign assets, it is imperative to:

1. Evaluate Objective Risks: Analyze the client’s actions (such as signing bank forms or checking “No” on Schedule B) through the lens of a “reasonable person” rather than the client’s subjective intent.
2. Assess the Viability of Defenses: Understand that “sophistication” arguments are losing their potency in the face of clear documentary evidence.
3. Act Preemptively: The risks of waiting for an IRS examination are higher than ever. Voluntary disclosure or streamlined filing compliance procedures remain the most effective tools for mitigating exposure.

Expert Representation in International Tax Matters

The intersection of the Bank Secrecy Act and the Internal Revenue Code is increasingly complex and unforgiving. If your client is facing FBAR risks or has undisclosed foreign accounts, they need counsel that understands the nuances of the “recklessness” standard and can navigate the rigid penalty structures.

Contact our firm today for a consultation to discuss how we can protect your client’s interests and resolve their international tax challenges.