Page 2 - An Update on Civil FBAR Penalties: Decisions Since June 2019 Citing Williams and McBride in Discussing the Willful Civil FBAR Penalty

AN UPDATE ON CIVIL FBAR PENALTIES

1. The FBAR Filing Requirement and and exceptions to those requirements.” Prior to 2013,
Notice to Taxpayers this question read, for example: “At any time during
2009, did you have an interest in or a signature or
The Secretary of the Treasury requires an FBAR, now other authority over a financial account in a foreign
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FinCEN Form 114, filed with FinCEN, to be filed country, such as a bank account, securities account,
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by April 15 (or October 15, if the FBAR is not filed in or other financial account? See instructions on back
April), by a U.S. person with a financial interest in, or for exceptions and filing requirements for Form TD F
signature authority over, one or more foreign financial 90-22.1.”; or “At any time during 2003, did you have
accounts with an aggregate value greater than $10,000 at an interest in or a signature or other authority over a
any time during the prior calendar year. Until 2013 (and financial account in a foreign country, such as a bank
cases discussed in this article involve FBARs filed before account, securities account, or other financial account?
2013), the FBAR was Form TD F 90-22.1, which was See page B-2 for exceptions and filing requirements for
very similar to FinCEN Form 114, but was filed with the Form TD F 90-22.1.”
IRS on June 30 for the previous year.
2. The Statutory Penalty Scheme

31 USC §5314 directs the Secretary of the Treasury to
While two courts have outright “require a resident or citizen of the United States … to
rejected Williams’ and McBride’s file reports … when the resident [or] citizen … maintains
constructive notice theory, most courts a relation … with a foreign financial agency.” 31 USC
§5321(a)(5)(A) authorizes the Secretary of the Treasury
cite Williams and McBride for the to “impose a civil money penalty on any person who

proposition that the question on Form violates, or causes any violation of, any provision of
section 5314.”
1040 Schedule B asking whether the The penalty scheme under 31 USC §5321 provides for
taxpayer owns a foreign bank account two distinct civil FBAR penalties. The default or baseline
may put the taxpayer on notice of penalty under 31 USC §5321(a)(5)(B)(i) is for a non-
willful violation of the requirement to file an FBAR (the
the FBAR filing requirement, but then “non-willful civil FBAR penalty”):

inquire further into the facts of a case
to determine whether a willful civil (B) Amount of penalty—
FBAR penalty is appropriate. (i) In general—

Except as provided in subparagraph (C) [which applies
to willful violations], the amount of any civil penalty
If a U.S. person owns or has control of a foreign bank imposed under subparagraph (A) shall not exceed
account or accounts, she should first report this to the $10,000 (Emphasis added).
Commissioner of Internal Revenue by checking “Yes” on
her Federal Income Tax Return, Form 1040, Schedule The IRS states that: “Although the term ‘non-willful’ is not
B, Part III, Question 7a, which asks the taxpayer to used in the statute, we use it to distinguish this penalty
check “Yes” or “No” to the question: “At any time dur- from the penalty for willful violations.” The only instance
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ing [a tax year], did you have a financial interest in or in which this baseline $10,000 civil FBAR is increased is
signature authority over a financial account (such as a for a willful violation of the reporting requirements, as
bank account, securities account, or brokerage account) set forth at 31 USC §§5321(a)(5)(C) & (D) (the “willful
located in a foreign country?” Question 7a continues: civil FBAR penalty”):
“If ‘Yes,’ are you required to file Report of Foreign
Bank and Financial Accounts (FBAR), to report that (C) Willful violations—In the case of any person
financial interest or signature authority? See FinCEN willfully violating, or willfully causing any violation
Form 114 and its instructions for filing requirements of, any provision of section 5314—

40 JOURNAL OF TAX PRACTICE & PROCEDURE FALL 2020