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Federal Courts Clarify Standard for Proving Taxpayer’s Willful Violation of Report of Foreign Bank and Financial Accounts (FBAR)

By:  Coleman Jackson, Attorney and Certified Public Accountant
February 13, 2019

Federal Courts Clarify Standard for Proving Taxpayer’s Willful Violation of Report of Foreign Bank and Financial Accounts (FBAR)

 

United States citizens, lawful permanent residence and certain other persons that are classified under 31 U.S.C. Sec. 5311 and promulgated Regulations must file with the Financial Crimes Network annually a Report of Foreign Bank Account, Form 114.  The U.S. persons covered under the disclosure law must file the report each year for foreign bank accounts exceeding $10,000 in the prior calendar year whether it is a single account or an aggregate of accounts.  If the $10,000 threshold is met, FBAR reporting requirements are triggered.

 

Form 114 FBAR reporting

 

The amount of the FBAR penalty depends upon whether the taxpayer’s violation was willful or non-willful. What is willfulness in the FBAR context?  The general consensus developed in the courts is that the term, ‘willful’ “denotes that which is intentional, or knowing, or voluntary, as distinguished from accidental, and that it is employed to characterize conduct marked by careless disregard whether or not one has the right so to act.”            Wehr v. Burroughs Corp., 619 F.2d 276, 281 (3d Cir. 1980).  A taxpayer has willfully violated 31 U.S.C. Sec. 5314 when they knowingly or recklessly fails to file a FBAR.  A person commits a reckless violation of the FBAR statute by engaging in conduct that violates an objective standard:  action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.  The Third Circuit Court of Appeals in Bedrosian v. U.S., 2018 (3rd Cir. 2018) that

 

This holding is in line with other courts that have addressed civil FBAR penalties, see, e.g. United States v. Williams, 489 F. App’x 655, 658 (4th Cir. 2012) as well as our prior cases addressing civil penalties assessed by the IRS under the tax laws, see e.g., United States v. Carrigan, 31 F. #d 130, 134 (3d Cir. 1994). 

 

In Kimble v. U.S., 2018 (Fed, Cl. 2018), the court ruled that the taxpayer recklessly disregarded her duty to report foreign accounts because she failed to review her tax returns for accuracy and falsely represented in her tax return that she did not have any foreign bank accounts.  Note that Schedule B of Form 1040 at line 7(a) specifically asks taxpayer’s whether or not they have any foreign bank accounts. The question format is ‘yes or no’, and if it is answered ‘yes’, it leads to a series of additional inquiries with respect to the foreign bank accounts.

 

The civil penalties for a FBAR violation

 

The civil penalties for a FBAR violation are codified in 31 U.S.C. Sec. 5321(a)(5).  The maximum penalty for a non-willful violation is $10,000 per occurrence.  The maximum penalty for a willful violation of the FBAR statute is the greater of $100,000 or 50% of the balance in the unreported foreign account at the time of the violation.

 

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

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