Taxpayers who hold foreign accounts are generally required to file a FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR). If one fails to do so, the penalty can be substantial. How substantial? That depends on whether the failure was non-willful (lower penalty amount) or willful (higher penalty amount).
In the recent case of U.S. v. Hughes, a U.S. District Court in California weighed in on whether a taxpayer’s failure to file an FBAR was willful when she neglected to fill out Form 1040’s Schedule B, “Interest and Ordinary Dividends,” which asks about foreign bank accounts.
Basics of the Penalty
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 monetary 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.
Facts of the Case
In Hughes, the taxpayer was a bookkeeper who prepared tax returns for herself and some family members. It was undisputed that she was required to file FBARs for tax years 2010 through 2013.
On her 2010 and 2011 tax returns, which she prepared herself, the taxpayer failed to fill out Schedule B. This schedule asks whether the taxpayer has a foreign bank account and whether the taxpayer needs to file an FBAR.
For 2012 and 2013, she did fill out Schedule B and answered “yes” to the pertinent questions. However, the taxpayer didn’t file FBARs. The IRS sought penalties for willful violations for all four tax years.
The Court’s Decision
The district court found that her failure to file FBARs in 2012 and 2013 was willful, but her failure in 2010 and 2011 wasn’t.
The decision hinged on her completion, or lack thereof, of Schedule B. The court noted that a taxpayer signs a return “declaring under penalty of perjury that [the taxpayer] had ‘examined this return and accompanying schedules and statements.’” The court wrote:
With respect to her 2012 and 2013 returns, there is no doubt that [the taxpayer] saw the questions about filing an FBAR, because she answered them. … In 2010 and 2011, [the taxpayer’s] returns did not include Schedule B, so the certification that she “examined this return and accompanying schedules and statements” does not encompass that schedule and its admonitions about the FBAR. The [IRS] has identified nothing in Hughes’s 2010 or 2011 returns as actually filed that, if “examined” as she certified, would have put her on notice of the FBAR requirement.
The court continued:
The circumstances of [the taxpayer’s] 2010 and 2011 tax returns differ from 2012 and 2013. Unlike those later years, there is no indication that [she] reviewed Schedule B, with its instructions regarding the FBAR requirement, in preparing her 2010 and 2011 returns or any time before she did so. In the absence of any evidence that Hughes was aware of the FBAR filing requirement when she completed her returns for those years, or that she was presented with any information that should have put her on notice of that requirement, the [IRS] has not met its burden to show that her failure to file FBARs in those years was anything more than negligent.
A Key Distinction
The finding in Hughes points out the distinction between making a mistake when filing an FBAR and intentionally not filing one at all. Although the court assessed a non-willful penalty in 2010 and 2011, when the taxpayer neglected to complete Schedule B but filed an FBAR, it assessed willful penalties in 2012 and 2013 when she completed the schedule but didn’t file FBARs as required.
Contact us if you have a financial interest in, or signature or other authority over, a financial account in a foreign country. Our professionals can help you avoid FBAR penalties entirely.
U.S. v. Hughes, No. 18-cv-05931-JCS, Oct. 13, 2021 (U.S. Dist. Court, Northern Dist. of California)
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