The Report of Foreign Bank and Financial Accounts (FBAR) is a critical compliance requirement for U.S. persons with foreign financial accounts. Failure to file an FBAR or filing inaccurately can result in severe penalties, ranging from civil fines to criminal charges. This guide explains the distinctions between non-willful, willful, and criminal FBAR violations, how these violations are determined, and the associated penalties, based on the Internal Revenue Code (IRC), regulations (31 CFR 1010.350 et seq.), and relevant case law.

1. Non-Willful Violations

• Definition: A non-willful violation occurs when a taxpayer fails to file an FBAR or files inaccurately, but the failure was not due to intentional disregard of the law.
• Legal Authorities:
  • 31 U.S.C. § 5321(a)(5)(A): Authorizes a civil penalty of up to $10,000 per violationfor non-willful failures to file an FBAR.
  • 31 U.S.C. § 5321(a)(5)(B)(ii): Provides that the penalty may be waived if the violation was due to reasonable causeand not willful neglect.
  • 31 CFR 1010.820(g): Confirms the $10,000 penalty cap for non-willful violations.
• Case Law:
  • S. v. Boyd (2020): The Ninth Circuit held that the $10,000 penalty applies per form, not per account, for non-willful violations.
  • S. v. Bussell (2015): The court ruled that reliance on a tax professional’s erroneous advice constituted reasonable cause for a non-willful violation.
• Penalty: Up to $10,000 per violation(per form, not per account). The penalty may be waived if the taxpayer demonstrates reasonable cause.

2. Willful Violations

• Definition: A willful violation occurs when a taxpayer knowingly or recklessly fails to file an FBAR or files inaccurately.
• Legal Authorities:
  • 31 U.S.C. § 5321(a)(5)(C): Authorizes a civil penalty of the greater of $100,000 or 50% of the account balanceat the time of the violation for willful failures to file an FBAR.
  • 31 CFR 1010.820(g): Confirms the penalty calculation for willful violations.
  • IRS Chief Counsel Advice 200603026: Clarifies that willful penalties are not capped and can exceed 50% of the account balance in cases of multiple years of non-compliance.
• Case Law:
  • S. v. Williams (2012): The court found that the taxpayer’s failure to file an FBAR and attempts to conceal accounts constituted willful violations.
  • S. v. McBride (2012): The court ruled that the taxpayer’s failure to disclose foreign accounts and hide income was willful.
• Penalty: The greater of $100,000 or 50% of the account balanceat the time of the violation, per account, per year. There is no reasonable cause exception for willful violations.

3. Criminal Violations

• Definition: A criminal violation occurs when a taxpayer willfully fails to file an FBAR or files a false FBAR, and the conduct involves tax evasion, money laundering, or other serious financial crimes.
• Legal Authorities:
  • 31 U.S.C. § 5322(a): Authorizes criminal penalties for willful FBAR violations, including fines of up to 250,000forindividuals∗∗or∗∗250,000forindividuals∗∗or∗∗500,000 for organizations, and imprisonment of up to 5 years.
  • 31 U.S.C. § 5322(b): Increases penalties if the violation involves other crimes, such as tax evasion or money laundering.
  • IRS Chief Counsel Advice 200603026: Confirms that criminal penalties are typically pursued in cases involving egregious conduct, such as tax evasion.
• Case Law:
  • S. v. Sturman (1996): The court held that the taxpayer’s willful failure to file FBARs and concealment of income constituted criminal violations.
  • S. v. Simon (2019): The taxpayer was criminally prosecuted for failing to file FBARs and hiding millions of dollars in foreign accounts.
• Penalty: Fines of up to 250,000forindividuals∗∗or∗∗250,000forindividuals∗∗or∗∗500,000 for organizations, and imprisonment of up to 5 years. Penalties may be higher if the violation involves other crimes.

4. Mitigating Factors and Defenses

• Reasonable Cause:
  • 31 U.S.C. § 5321(a)(5)(B)(ii): Allows the IRS to waive penalties if the taxpayer demonstrates that the failure was due to reasonable cause and not willful neglect.
  • S. v. Boyle (1985): The Supreme Court held that reliance on a tax professional may constitute reasonable cause.
• Voluntary Disclosure:
  • IRS Voluntary Disclosure Program: Outlined in IRS Internal Revenue Manual (IRM) 9.5.11.9, this program allows taxpayers to reduce penalties by voluntarily disclosing unreported foreign accounts.
• First-Time Offenders:
  • IRS Guidance: The IRS may exercise discretion to reduce penalties for first-time offenders, especially in cases of non-willful violations.

5. Penalty Calculation

• Non-Willful Penalties:
  • The penalty is calculated per form, not per account, up to $10,000 per violation.
  • Example: A taxpayer fails to report 3 accounts for 2 years. The maximum penalty is **20,000∗∗(2years×20,000∗∗(2years×10,000).
• Willful Penalties:
  • The penalty is calculated as 50% of the highest account balanceduring the year of the violation.
  • Example: A taxpayer knowingly fails to report an account with a maximum balance of 500,000for2years.Thepenaltyis∗∗500,000for2years.Thepenaltyis∗∗500,000** (50% of $500,000 × 2 years).

6. Practical Examples

1. Non-Willful Violation:
   • A taxpayer fails to report 3 foreign accounts for 2 years due to lack of awareness of the FBAR requirement.
   • Penalty: Up to **10,000peryear∗∗(totalof10,000peryear∗∗(totalof20,000), assuming the IRS does not waive the penalty.
2. Willful Violation:
   • A taxpayer knowingly fails to report a foreign account with a maximum balance of $500,000 for 2 years.
   • Penalty: **500,000∗∗(50500,000∗∗(50500,000 × 2 years).
3. Criminal Violation:
   • A taxpayer intentionally hides $1 million in a foreign account to evade taxes.
   • Penalty: **500,000fine∗∗(50500,000fine∗∗(501 million) and up to 5 years in prison.

7. Conclusion

The distinctions between non-willful, willful, and criminal FBAR violations are critical for understanding the potential penalties and legal consequences. The content is fully supported by the IRC, regulations, and case law, including:

• 31 U.S.C. § 5321(civil penalties);
• 31 U.S.C. § 5322(criminal penalties);
• 31 CFR 1010.350(FBAR requirements);
• S. v. Boyd (2020)(non-willful penalties);
• S. v. Williams (2012)and U.S. v. McBride (2012) (willful violations);
• S. v. Sturman (1996)and U.S. v. Simon (2019) (criminal violations).

If you have unreported foreign accounts or are unsure about your FBAR obligations, contact our law firm for expert guidance. We can help you navigate the complexities of FBAR compliance and protect your financial interests.

Disclaimer: This guide is for informational purposes only and does not constitute legal or tax advice. For specific guidance, consult a qualified attorney or tax professional.