United States: Report Foreign Bank and Financial Accounts or face penalties

In brief

The Northern District of California recently determined that a taxpayer’s failure to timely file Reports of Foreign Bank and Financial Accounts (FBARs) was willful for two of four years at issue because the taxpayer affirmatively acknowledged the foreign accounts on the Schedules B for those years. The court found that the taxpayer’s failure to include Schedules B with the previous two years’ returns was not a willful violation, however.


On 13 October 2021, the Northern District of California issued its decision in United States v. Hughes, 128 AFTR 2d 2021-XXXX (DC CA 2021). In relevant years, the taxpayer was sole owner of and had signatory authority over bank accounts at ANZ Bank New Zealand Limited and the aggregate value of these financial accounts exceeded USD 10,000. As a result of these foreign account balances, the taxpayer was required to timely file Reports of Foreign Bank and Financial Accounts (FBARs).
The court held that the taxpayer’s failure to file FBARs in two of the years at issue was “willful” within the meaning of the statute, but that the United States had not shown “willfulness” as to her failure to file FBARs in the earlier two years at issue. While the decision in the Hughes case addressed a specific issue regarding whether a taxpayer’s failure to file FBARs were willful or not in the years in question, the case arises in a time of heightened difficulties for taxpayers with respect to international information returns.

Background

For the years at issue, the taxpayer purchased TurboTax CDs to use for preparing her own returns. The taxpayer used “forms mode” to prepare her tax returns in each of the relevant years. The taxpayer was sole owner and had signatory authority over bank accounts at ANZ Bank New Zealand Limited which had aggregate values exceeding USD 10,000 in US currency. Furthermore, the accounts earned interest income in each of the years at issue. The taxpayer failed to report any of the interest income received in the first two years at issue, as she failed to attach a Schedule B to her Forms 1040 for taxable years 2010 and 2011.

On her 2012 Schedule B, the taxpayer reported interest income and answered yes to the following question: “At any time during 2012, did you have a financial interest in or signatory authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions.” The taxpayer also affirmatively answered a question indicating that she was required to file an FBAR for the 2012 tax year. However, the taxpayer did not timely file an FBAR for the 2012 calendar year.

Then, on her 2013 Schedule B, the taxpayer answered affirmatively to indicate that she had a foreign account, but answered “no” to a question regarding requirement to file an FBAR for the 2013 reporting period.

The taxpayer filed delinquent FBARs for 2011, 2012, and 2013 on 11 September 2014 after receiving an informal document request from the Internal Revenue Service (IRS). Then, on 1 February 2015, the taxpayer filed a delinquent FBAR for 2010 after receiving an informal IRS request for the form.

Analysis and ruling

The penalty for violation of the requirement to file an FBAR varies depending on whether the violation was willful or non-willful. The maximum penalty for a non-willful violation is USD 10,000 whereas the maximum penalty for a willful violation is USD 100,000 or, if greater, half of the balance of the account at the time of the violation. There was no evidence that the taxpayer was aware of the FBAR filing requirements when she filed her 2010 and 2011 returns, and no evidence that TurboTax ever prompted the taxpayer to complete and file an FBAR.

The court stipulated that the circumstances surrounding the taxpayer’s 2010 and 2011 tax returns differed from 2012 and 2013, however.

In 2010 and 2011, there was no indication that the taxpayer reviewed Schedule B with its instructions regarding the FBAR requirement. In the absence of any evidence that the taxpayer was presented with any information that should have put her on notice of the FBAR requirement, the government did not meet its burden of showing her failure to file FBARs in those years was anything more than negligent and thereby could not assess penalties for willful failure to file.

With respect to 2012 and 2013, however, there was no doubt that the taxpayer saw the questions about filing an FBAR, because she answered them. The court concluded that the taxpayer’s failure to file FBARs for 2012 and 2013 was willful within the meaning of U.S.C. §5321(a)(5)(C)(i).

Take note

The IRS has been regularly assessing penalties on taxpayers filing late international information returns. The result is that taxpayers who owe no taxes may be subject to substantial penalties. For taxpayers who have not been contacted by the IRS about a late FBAR and are not under civil or criminal investigation by the IRS, they should consider filing late FBARs as soon as possible to keep potential penalties to a minimum.

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