Since the publication of this alert, this case has been appealed to the Ninth Circuit Court of Appeals and a case in the District Court for the Eastern District of Texas held that the $10,000 penalty should be applied on a per return basis. Please see “Taxpayer-Friendly Annual FBAR Penalty Cap is Back on the Table” for more detail.
Based on a recent California district court decision, significantly higher financial penalties may now be the reality for United States taxpayers in connection with an unintentional failure to comply with certain foreign financial reporting requirements. Specifically, the court held that a breach of the Reports of Foreign Bank and Financial Accounts (FBAR) filing obligations could incur a penalty of up to $10,000 per foreign financial account, rather than only $10,000 per year. In light of this case, U.S. taxpayers with multiple foreign financial accounts could be at risk for substantially higher penalties if they are not in compliance with the FBAR rules.
United States taxpayers are generally required to make annual FBAR filings to disclose interests in or signature authority over foreign bank accounts, securities accounts, insurance or annuity policies with cash value, commodity futures or options accounts, mutual funds, or other, similar accounts with a value greater than $10,000.
Civil penalties for the unintentional failure to comply with the FBAR filing requirements are limited to a maximum of $10,000, but the statute does not explicitly specify whether the limitation is applicable per year or per foreign financial account. The California district court has now clarified that the IRS was reasonable in applying the limitation on a per-account basis. The case is expected to be appealed.
Given this reinterpretation of the FBAR penalty framework, multinational organizations and individual investors with interests in foreign financial investments are encouraged to reevaluate their FBAR filing obligations. Venable's international tax team can help clients understand their FBAR compliance profile and minimize their risk of significant FBAR-related penalties.