Where There Is Willfulness, There Is a Way…to Heavy FBAR Penalties

Reporting Requirements 

Under the Bank Secrecy Act, certain U.S. taxpayers who own foreign financial accounts are required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). The requirement is triggered when they have a “financial interest in” or “signature authority over” a foreign financial account, such as a savings or investment account, and the value of their foreign accounts combined exceeds $10,000 at any time during a calendar year.1   

The Internal Revenue Code (the “IRC”) imposes civil penalties on taxpayers who fail to timely file FBARs. The amount of the penalty is determined by whether the failure is considered willful. If the failure to file an FBAR was non-willful, the penalty is $10,000 per violation.2 This penalty can be waived if the taxpayer can show they had reasonable cause.3 However, if the failure to file an FBAR was willful, the penalty is much harsher. The penalty for a willful failure to file is the greater of $100,000 or 50% of the balance in the foreign account(s) at the time of the failure.4 Additionally, there is no penalty exception for reasonable cause for a willful failure to file.5

Interpretations of “Willfulness” 

Complicating matters is the fact that the term “willfulness” is not well-defined in the IR.C. As such, courts have applied and interpreted the term by looking to other sources and case law, leading to variations in application and interpretation. Some courts have adopted the interpretation that “willfulness” indicates it is a knowing or reckless violation, which can include “willful blindness.”6 Other courts have expanded this definition of “willfulness” to include a taxpayer’s “reckless disregard of the potential consequences” of not complying with FBAR reporting requirements.7 Other courts have rejected the idea that constructive knowledge is sufficient to show recklessness that rises to willfulness for purposes of the penalty.8 

Despite these varying interpretations of willfulness, most courts have applied some form of a recklessness standard in their reasonings. Lower courts have adopted the Supreme Court’s objective standard that recklessness requires an “unjustifiably high risk of harm that is either known or so obvious that it should have been known.”9 

The Third Circuit recently applied an objective recklessness standard in Bedrosian, requiring that:

1. the taxpayer “clearly ought to have known,” that
2. “there was a grave risk the FBAR filing requirement was not being met,” and
3. the taxpayer “was in a position to find out  for certain very easily.” 10 

District courts within the First, Fifth, Sixth and Ninth Circuits have since applied the Bedrosian test in civil penalty cases related to failures to file FBARs.11 At the end of June 2023, the Bedrosian taxpayer’s writ of certiorari to the United States Supreme Court was denied. 

Non-Willfulness Defined

IRC Sec. 5321(a)(5)(B)(i) authorizes the imposition of a penalty on “any person” who fails to file a report as required under 31 USC Sec. 5314. The term “non-willful” is not actually contained in the IRC and is instead used by the IRS to differentiate from willful violations subject to harsher penalties. However, IRS guidance defines it as “conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirement of the law.”¹²

Practical Applications

It is important for taxpayers to carefully consider the facts of their past actions to determine if they truly acted non-willfully. Taxpayers who make non-willfulness statements within the context of submissions to the IRS, such as Streamlined Filing Compliance Procedures, should ensure that their actions meet the prevailing non-willfulness standard. Failure to do so may result in perjury charges or the IRS’s use of taxpayers’ admissions against them in a later proceeding. Taxpayers under audit should also use caution in discussions with the examiner related to failures to file FBARs or the omission of foreign bank accounts from timely filed FBARs. 

¹31 USC 5314; 31 CFR 1010.350
²I.R.C. Sec. 5321(a)(5)(B)(i); see Bittner v. U.S. 143 S Ct. 713 (2023) clarifying that the non-willful penalty is to be imposed per FBAR form, rather than per foreign account. 
³I.R.C. Sec. 5321(a)(5)(B)(ii)
⁴I.R.C. Sec. 5321(a)(5)(C) and (D)
⁵I.R.C. Sec. 5321(a)(5)(C)(ii)
⁶See U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012)
⁷See U.S. v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012)
⁸See U.S. v. Flume, 122 AFTR 2d 2018-5641 (SD Tex. 2018) (denying summary judgment); U.S. v. Flume, 390 F. Supp. 3d 847 (S.D. Tex. 2019)
⁹Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007)
¹⁰Bedrosian v. U.S., 42 F.4th 174 (3d Cir. 2022)
¹¹See, for example, U.S. v. Kelly, Jr., 131 AFTR 2d 2023-1560 (DC Mich. 2023)
¹²U.S. Taxpayers Residing Outside the United States | Internal Revenue Service (irs.gov)