This article applies to a United States person including a citizen, resident or a corporation, partnership, limited liability company, or a trust and estate that has a financial interest in or signature or other authority over at least one financial account located outside the United States that exceeds $10,000 USD.
Abstract: Another U.S. District Court recently concluded that the penalty for a non-willful violation of the rules relating to FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR) applies to each report rather than to each account. This article takes a closer look at the case, as well as two similar previous cases.
U.S. v. Kaufman, No. 3:18-CV-00787 (KAD), Jan. 11, 2021 (District of Connecticut); U.S. v. Bittner, No. 4:19-cv-415, June 29, 2020 (Eastern District of Texas); U.S. v. Boyd, No. CV 18-803-MWF, April 23, 2019 (Central District of California).
In the recent case of U.S. v. Kaufman, a U.S. District Court found that the penalty assessed for non-willfully failing to file FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR), applies per FBAR form ― not per the number of accounts required to be reported on that form.
Two district courts have now come to this conclusion, while one district court has found the opposite. Here’s where things stand.
Who Must File?
Under the Internal Revenue Code, every U.S. person who has a financial interest in or signature or other authority over a financial account or accounts in a foreign country must report the account(s) annually using an FBAR if the aggregate value of the foreign financial account(s) exceeds $10,000 at any time during the calendar year. One FBAR is used to report multiple accounts.
The U.S. Secretary of the Treasury may impose a civil money penalty on any person who violates or causes a violation of the FBAR filing requirements. The maximum amount of the penalty depends on whether the violation was non-willful or willful.
The maximum penalty for a non-willful violation is $10,000. In the case of any person willfully violating, or willfully causing a violation, the maximum penalty is the greater of $100,000 or 50% of an amount determined under specific tax rules.
Per Form or Per Account?
In the 2019 case of U.S. v. Boyd, the U.S. District Court for the Central District of California held that the penalty for a non-willful violation relates to each account required to be shown on the FBAR. Thus, the IRS could impose the statutory maximum penalty of $10,000 for each of the taxpayer’s 13 accounts that should have been reported on one FBAR.
However, in the 2020 case of U.S. v. Bittner, the U.S. District Court for the Eastern District of Texas came to the opposite conclusion. It found that the $10,000 non-willful penalty applies only to the FBAR form itself, not the number of accounts required to be shown on it.
That brings us to Kaufman. In this case, the plaintiff had 17 foreign accounts in 2010, the balance of which exceeded $10,000 in aggregate. He was required to file an FBAR but didn’t do so. A court found that his failure was non-willful, and the IRS imposed a $170,000 penalty ($10,000 per account). The plaintiff argued that the penalty should be capped at $10,000 ― that is, $10,000 for failure to file one FBAR.
The U.S. District Court of Connecticut, persuaded by the Bittner court’s argument, also found the non-willful FBAR penalty applies per form, not per account as in the Kaufman case. Thus, the penalty was capped at $10,000. The court found the Boyd court’s arguments unpersuasive ― noting that its decision wasn’t binding.
Are You at Risk?
Although the finding in Kaufman limited the taxpayer’s financial exposure, it’s still better to avoid having to go to court over an FBAR filing (or lack thereof). Consult your tax advisor if you have a financial interest in, or signature or other authority over, a financial account in a foreign country.
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