The New Willful FBAR Regulation Update Explained
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The New Willful FBAR Regulation Update Explained
Recently, the Financial Crimes Enforcement Network (FinCEN) released an update to the Civil FBAR Penalty regulations involving willful violations of Foreign Bank and Financial Account Reporting. This update refers to Section 1010.820, and the idea behind updating the regulation was due to a conflict between the statute and regulation. Specifically, the prior regulation conflicted with the FBAR statute – so that there was some ambiguity as to whether or not $100,000 per year civil willful FBAR Penalty was the maximum amount of willful penalty that could be issued for willful non-compliance with FBAR filing and reporting. Some taxpayers took the position that the regulation should take precedence over the statute and were mostly unsuccessful, with most courts taking the position that the newer statute would prevail over the prior regulation — and willful FBAR penalties are not limited to $100,000, but rather $100,000 or 50% maximum account value — whichever is higher. Let’s take a brief look at the changes to the regulation.
Current Statutory Framework
Section 5314 (FBAR Statute)
Section 5314 refers to the authority of the US Government to regulate Foreign Bank and Financial Account Reporting and requires certain annual disclosures (aka FBAR reporting).
Section 5321 (FBAR Penalty Statute)
Section 5321 refers to civil penalties for non-compliance. The statute sets the willful FBAR penalty to $100,000 or 50%, whichever is higher. The prior regulation set the maximum penalty to $100,000.
*The $100,000 adjusts for inflation.
31 CFR § 1010.820 (Revision/Update to the Regulation)
As provided by FinCEN:
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2. Section 1010.820 is amended as follows:
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a.Remove paragraph (g); and
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b.Redesignate paragraphs (h) and (i) as paragraphs (g) and (h).
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The following section was removed:
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“(g) For any willful violation committed after October 27, 1986, of any requirement of § 1010.350, § 1010.360 or § 1010.420, the Secretary may assess upon any person, a civil penalty:
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(1) In the case of a violation of § 1010.360 involving a transaction, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) of the transaction, or $25,000; and
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(2) In the case of a violation of § 1010.350 or § 1010.420 involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, a civil penalty not to exceed the greater of the amount (not to exceed $100,000).
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The following section was redesignated as (g) and (h):
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(g) For each negligent violation of any requirement of this chapter, committed after October 27, 1986, the Secretary may assess upon any financial institution a civil penalty not to exceed $500.
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(h) For penalties that are assessed after August 1, 2016, see §1010.821 for rules relating to the maximum amount of the penalty.
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Revised FBAR Regulation 1010.820 (g), (h) and (i)
The regulation was recently updated so that the portion limiting the civil willful FBAR penalties to $100,000 was removed. Section 1010.820 (h) and (i) became new 1010.820 (g) and (h) — with (h) referring to the penalty under 1010.821.
Section 1010.821 works together with 5321 and sets the civil willful FBAR penalty to $100,000 or 50% — whichever is higher (currently adjusted for inflation at $136,399).
What Does This Mean for Taxpayers?
Essentially, it means that the US government is confirming that willful FBAR penalties are not limited to a maximum of $100,000 per year (adjusted for inflation). For example, a taxpayer has a multi-million-dollar foreign bank account. Before the update, the taxpayer could have tried to take the position that the regulation should trump the statute and that FBAR civil willful penalties should be limited to $100,000 maximum per year. Now, both the statute and the updated regulation set the maximum penalty to $100,000 or 50%, whichever is higher — which means penalties may far exceed what the taxpayer had originally anticipated.
In addition, courts have been very pro-government on issues involving the burden necessary to prove willfulness. This can easily be established by merely showing reckless disregard or willful blindness, and only by a preponderance of the evidence. Thus, taxpayers need to be aware of their filing requirements and possibly consider entering one of the offshore amnesty programs if they are already non-compliant.
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