Court decision reinforces lower FBAR willfulness standard
TAX BLOG |
A recent court decision reinforces the standard for increased penalties involving the willful failure to file a Report of Foreign Bank and Financial Account (FinCEN Form 114 or FBAR). While often confused as a tax filing, FBAR reporting is actually filed with the office of Financial Crimes Enforcement Network (FinCEN), not the IRS. Therefore the legal standards that apply to the FBAR are not the same as those that apply to a taxpayer and their tax return.
U.S. persons must file the FBAR to disclose any foreign account with a balance in excess of $10,000 in which they have a financial interest. The penalty for failure to file an FBAR can have both civil and criminal repercussions and generally depend on whether the failure to file is non-willful or willful. A non-willful failure to file results in a penalty of up to $10,000 for each failure, however, if the failure is willful, the maximum penalty is increased to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. This distinction in penalties makes the determination of willfulness one of heightened importance.
The tax willfulness standard has generally been defined by the courts as a voluntary, intentional violation of a known legal duty, with a high burden of proof: the government generally must produce on clear and convincing evidence. However, the FBAR is not a tax filing and the court in United States v. Bohanec, reaffirmed that the willfulness standard for the increased FBAR penalty includes “reckless disregard of a statutory duty” stated that the government’s burden of proof is the lower “preponderance of evidence” standard. This decision, while deviating from other tax willfulness standards, is in line with several other notable FBAR cases, all of which have applied this lower standard of proof in determining willfulness as it relates to the FBAR failure to file penalty.
The Bohanec decision demonstrates that the federal courts are willing to apply the stringent penalties associated with the willful failures to file the FBAR where the government meets the lower preponderance standard standard. The penalties in the Bohanec case are significant and we expect an appeal. However, given the severity of the failure to file penalty and the low evidentiary standard needed to invoke it, U.S. persons with foreign accounts should consult with their advisors to ensure timely and complete compliance with the FBAR rules.