FinCEN Form 114 / FBAR: Non-willful Penalty Ruling

The FinCen Form 114 (aka, FBAR) has been around for decades. On it’s surface, this important annual disclosure appears harmless enough since it generally requires U.S. citizens and resident aliens to annually report their foreign financial accounts when certain conditions are met.

But don’t be fooled.

The FinCEN Form 114 is managed by the Financial Crimes Enforcement Network; a bureau of the United States Department of the Treasury. FinCEN’s charter is to collect and analyze financial transaction information in order to combat financial crimes such as money laundering and terrorist financing. The Form 114 is one of the tools this bureau utilizes to gather information required to perform its duties.

Even though the Internal Revenue Service assist FinCEN with the collection of penalties associated with non-compliance, the FBAR Form itself is not tax assessing.

In a recent court case (U.S. vs. J. Boyd, 03.24.2021), a taxpayer had fourteen financial accounts in the United Kingdom from which she received interest and dividends. She failed to report this income on her personal income tax returns and failed to disclose her foreign financial accounts. In order to correct her mistakes, she participated in the IRS’s Offshore Voluntary Disclosure Program and submitted an FBAR listing her multiple foreign accounts. Amended income tax returns were also submitted to include the missing interest and dividend income.

Upon examination of FBARs submitted by the taxpayer, the IRS concluded that she had committed thirteen non-willful violations of the FinCEN 114/FBAR reporting requirements – one for each account not disclosed in a timely manner (i.e., it did not assess a penalty on one of her accounts). The taxpayer disagreed stating only a single violation had occurred because the penalty related to the timely filing of the FinCen Form 114/FBAR itself, not each account separately. The government then sued the taxpayer for non-willful civil penalties totaling US$47,279 plus related late-payment penalties and interest. The district court agreed with the government. The taxpayer appealed the decision.

In a case of first impression, the Ninth Circuit Court of Appeals examined the relevant statutory language and regulatory history for reporting a relationship with a foreign financial agency and concluded that it authorizes a single non-willful penalty for the failure to file a timely FBAR. When challenged by the IRS, the court noted that it found nothing in the statute or regulations to suggest that the penalty can be calculated on a per-account basis for a single non-willful failure to timely file an FBAR.

As a result, the taxpayer’s failure to timely file her FBAR resulted to one non-willful violation (not thirteen) and the maximum penalty could not exceed US$10,000.