US taxpayers with non-US financial accounts, where the sum of the maximum balances for each account through the year exceed $10,000, are required to file an FBAR also known as Form 114. The form is a reporting form only and does not generate any tax.
Once the reporting threshold is met, all non-US accounts must be reported regardless of their individual balance or whether they generate any taxable income. The due date for filing your FBAR is the same as the due date for filing your tax return; for US citizens living outside of the US, that is 15 June with an automatic extension through to 15 October.
Failure to file an FBAR attracts civil and criminal penalties depending on whether the failure to file was wilful or non-wilful. Criminal penalties are applied where it’s shown that the failure to file was wilful. The maximum criminal penalties for failure to file an FBAR are fines of up to $250,000 and up to five years’ imprisonment. The civil penalties for wilful failure to file can reach the greater of $100,000 or 50% of the account balance(s). The civil penalties afforded per violation to a non-wilful failure to file can reach $10,000 indexed for inflation ($15,611 for 2023).
Historically it’s not been clear what’s meant by ‘per violation’ when considering the civil penalties. The IRS preferred to argue that it should be per account unreported rather than per form, and this is what has recently been clarified by the Supreme Court as part of the ruling in the case of Bittner v. United States.
The Supreme Court confirmed that penalties should be assessed per form, rather than per account, regardless of the number of accounts held, which served to reduce the penalties in that case from $2.72million to $50,000. This will come as a relief for taxpayers who find themselves having failed to file their FBAR through non-wilful error, particularly where multiple non-US accounts are held.
While the decision initially sounds like good news, there are some concerns. With the IRS being unable to gather the same level of penalty revenue per taxpayer it seems plausible that it will pursue these penalties more regularly going forwards in an attempt to recover the deemed lost revenue. The IRS has already made certain moves to support this, announcing an initiative in September 2023 that will provide an increased focus on FBAR violations. As part of this, the IRS has confirmed the use of Artificial Intelligence (AI) technology to cross-check banking data with FBAR submissions and information reported on Federal Income Tax returns.
In summary, it’s good news in that the non-wilful penalties have been confirmed to apply per form rather than per account. However, a cautionary tale as we expect it’s possible the IRS pursue these penalties with increased frequency.
We advise additional caution with future FBAR reporting and recommend more robust reporting where previously you may have made estimated reporting. It also becomes increasingly important that the forms are given consideration early enough to ensure complete and timely filing, rather than focusing on the 15 October deadline.
What are the penalties for failing to file an FBAR?
2023 Supreme Court penalty clarification
Providing reasonable cause
Where penalties are assessed, it’s up to you as the taxpayer to prove reasonable cause for a missed filing. The reasonable cause must be circumstances out of your control and you must also show responsible behaviour before and after the circumstances occurred. Commonly reported causes include: unavailability of business records e.g. owing to a fire or similar disaster, or serious illness. The first-time penalty abatement process does not apply to FBAR penalties meaning you must prove that the penalties are not applicable to have them removed.
What should you do?