For the first time, in the case of James Moore, Plaintiff v. United States of…
US Court finds non-willful FBAR penalty not limited to $10,000 per year
Earlier this month, the 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 an 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.
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.”
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.
The court stated that “In light of the prominence of “transactions” and “accounts” in the language of section 5321, the Court determines that the statute contemplates that the relationship with each foreign financial account constitutes the non-willful FBAR violation.” This means that each unreported foreign financial account (which is often defined by each account number) could attract a $10,000 penalty. Given the court’s decision, taxpayers should be aware of the increased penalty exposure that may result from a non-willful failure to file an FBAR with multiple accounts. In light of the court ruling, taxpayers with unreported foreign financial accounts should consider entering one of the IRS’ voluntary disclosure programs, such as the Streamlined Domestic Offshore Procedure. Noncompliant taxpayers are strongly recommended to seek competent legal counsel in such cases.
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