Taxpayers who fail to file a Report of Foreign Bank and Financial Accounts (FBAR) to disclose their interests in or signatory authority over foreign financial accounts in a timely fashion may be subject to civil penalties of up to $10,000. However, the relevant rules do not specify whether this penalty cap applies to each individual foreign financial account or each annual FBAR filing. The former could be significantly burdensome for taxpayers who own or control a large number of bank accounts, investment accounts, insurance policies, and/or other similar financial accounts outside of the United States.
In 2019, a California district court ruled that unintentional failures to comply with FBAR filing requirements could incur a penalty of up to $10,000 per foreign financial account. The California district court reached this conclusion by looking to the statutory language for the reasonable cause exception and the penalty for willful violations, both of which reference the "balance in the account" at the time of the violation. This case, covered by us in a prior update, is currently on appeal in the Ninth District Court of Appeals.
More recently, on June 29, 2020, a Texas district court split from the earlier California decision and ruled that a non-willful breach of the FBAR filing obligations should incur a penalty of up to $10,000 per FBAR annual return, rather than $10,000 per foreign financial account. The Texas district court expressly declined to follow the California district court's conclusion and explained that the reasonable cause and willful violation provisions have no bearing on the $10,000 failure to file penalty for non-willful violations and that Congress intentionally used different language to indicate different standards of punishment. Further, the Texas district court opinion noted that the $10,000 penalty per account would lead to "absurd outcomes that Congress could not have intended."
While the FBAR penalty cap has not yet been universally resolved, this ruling is good news for multinational organizations and individuals with interests in foreign financial investments. However, it is still important that taxpayers comply with their FBAR obligations to avoid unnecessary penalties.