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Even Nonwillful FBAR Penalties Sting: Court Imposes Penalty on "Per Account" Rather Than "Per Return" Basis

By Anthony P. Daddino on April 25, 2019

How does one FBAR return filing give rise to 13 penalties? Ask the federal district court of California, which recently upheld the IRS’ imposition of separate non-willful penalties against 13 foreign accounts disclosed on a single late FBAR return.   The court’s decision raises the stakes for taxpayers looking to quietly report their foreign interests to the IRS and debunks the common notion that the non-willful FBAR penalty applies on a per-year basis.

In United States vs. Jane Boyd, Case No. 2:18-cv-00803  (CD Cal. April 23, 2019), the taxpayer had a financial interest in and/or otherwise controlled 14 financial accounts in the United Kingdom with balances collectively exceeding $10,000. Boyd was required by law to file a Foreign Bank and Financial Accounts (“FBAR”) form disclosing her interests in her U.K. bank accounts for 2010, but failed to timely do so.  Boyd participated in the IRS’ Offshore Voluntary Disclosure Program in 2012, but later opted out in 2014.  The opt-out gave rise to an IRS examination and an initial taxpayer-favorable determination by the IRS that Boyd was not willful in failing to timely file the FBAR for 2010.  Not so favorably, however, the IRS assessed 13 separate FBAR penalties against Boyd, treating each reported account as a separate non-willful violation.  [One account was not penalized based on IRS mitigation rules.]  After Boyd refused to pay the penalties, the Government filed suit in federal district court.  Both parties later filed competing motions for summary judgment.  The Government argued that the statutory maximum penalty of $10,000 under 31 U.S.C. § 5321(a)(5)(B) for non-willful violations related to each foreign financial account, whereas Boyd argued that, if there is a non-willful failure to file an FBAR, the penalty cannot exceed $10,000 regardless of the number of bank accounts required to have been listed on the FBAR.

The district court ruled in favor of the Government.   The court focused on the statutory language surrounding the reasonable-cause exception to the FBAR penalty, which provides that no penalty shall be imposed if the violation was due to reasonable cause and “the amount of the transaction or the balance in the account…was properly reported.”  The court was persuaded by the Government’s contention that Congress made clear that each violation relates to each “account” since Congress used the singular form of the word.  

The implications of the Boyd decision are far reaching.   Even unintentional taxpayers now face exposure to material FBAR penalties of up to $10,000 per account per year.   With the IRS benefiting from a 6-year statute of limitations period for FBAR penalties, a taxpayer with four accounts could be facing non-willful penalties upwards of $240,000.  This more-expansive penalty exposure changes the risk/reward ratio for taxpayers considering an opt-out of the IRS’ voluntary disclosure program, as well as those taxpayers assessing whether to quietly disclosure their foreign interests or otherwise apply for the IRS’ streamlined filing procedures and pay only a single 5% penalty.

If you have any questions about this blog post, international reporting penalties or IRS programs for taxpayers with foreign interests, please do not hesitate to contact me at (214) 749-2464 or adaddino@meadowscollier.com.