Each year a U.S. person must report specific foreign financial accounts to the Treasury Department via Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts, more commonly called the “FBAR”. A U.S. person can include individual citizens or residents as well as partnerships, corporations, limited liability companies, trusts, and estates.
The FBAR is due by the 15 April of the following year, with an automatic extension permitted to the 15 October. There is no form required to obtain this extension. For the 2019 year specifically, the FinCEN announced on the 6 October 2020 that victims of the California Wildfires, the Iowa Derecho, Hurricane Laura, the Oregon Wildfires, and Hurricane Sally have until the 31 December 2020 to file the FBAR for the 2019 calendar year.
On the 14 October 2020 the FinCEN posted an incorrect message on its website that stated there was a new filing extension until 31 December 2020 for all filers of the 2019 FBAR. The FinCEN removed the incorrect message within 24 hours and apologized for the error and confusion this caused and advised that any 2019 FBAR filed by the 31 October 2020 would be deemed to have been timely filed. As noted above, FBAR filers impacted by the recent natural disasters continue to have until the 31 December 2020 to file their 2019 FBARs.
There is a civil penalty of up to USD 10,000 for non-willful violation of the FBAR reporting obligation. In prior rulings, the U.S. District Court for the Central District of California had determined that the non-willful penalty of USD 10,000 may be imposed on a per account basis, meaning that the total penalties for any violation could be exponentially more than USD 10,000. However, a recent ruling in the U.S. District Court for the Eastern District of Texas held that the relevant non-willful violation was the failure to file an annual FBAR.
In making this ruling, the Court noted that the relevant legislation does define a “willful” violation in terms of an account and the balance in that account. Therefore, Congress clearly had the wherewithal to assess FBAR penalties as account specific if it had so chosen. When “non-willful” provisions were later added in 2004, no such description was added, leading the Court to conclude per account penalties were not intended. Furthermore, the Court also noted that the requirement to file a FBAR refers to an aggregate value of accounts being reached, which would be regardless of the number of accounts the individual owned.
Based on this, the Court held that the taxpayer could be required to pay no more than the maximum USD 10,000 penalty for each year they non-willfully failed to timely and properly file an FBAR. Thus, the taxpayer was ordered to pay USD 50,000 in penalties instead of the USD 2,720,000 penalty figure which was originally assessed. The Court also acknowledged that this ruling contradicted the holding in the Central District of California, noted above, which is currently on appeal.