FBAR Penalties

The penalty framework

FBAR penalties are set by 31 U.S.C. § 5321 for civil violations and 31 U.S.C. § 5322 for criminal ones. Everything turns on a single distinction:

Non-willful penalties

A non-willful violation is a failure to file that was not a voluntary, intentional disregard of a known duty — in ordinary language, an oversight, a misunderstanding, or ignorance of the rule.

• The maximum is the inflation-adjusted equivalent of $10,000.
• Since Bittner, it attaches per annual report rather than per account — see below.
• It is discretionary. The IRS may assess less than the maximum, or nothing at all, and in practice frequently does.
• A reasonable cause defence is available, and if it succeeds no penalty may be imposed.

In many first-time, small-balance cases where the taxpayer came forward, the outcome historically has been a warning letter rather than a monetary penalty. That is IRS practice rather than an entitlement, and it depends heavily on the facts and on having reported the underlying income.

Willful penalties

The willful penalty is one of the most severe in the United States Code applying to an information return: the greater of $100,000 (as adjusted) or 50 per cent of the balance in the account at the time of the violation, assessable for each account and each year.

The arithmetic is worth seeing. Take a single account holding $600,000, unreported for four years, where willfulness is established:

A penalty exceeding the value of the account is not a theoretical curiosity; it has been assessed and litigated. It is the reason the willfulness question dominates FBAR disputes.

What counts as willful

Willfulness in this civil context is not limited to deliberate concealment. Courts have generally held that it includes:

• Knowing violations — awareness of the duty and a decision not to comply;
• Reckless disregard — conduct falling substantially short of what a reasonable person would do to ascertain and meet the obligation; and
• Willful blindness — deliberately avoiding knowledge of a duty one suspects exists.

Facts courts have treated as probative of willfulness include signing a tax return that asked about foreign accounts and answering it incorrectly, instructing a foreign bank not to send mail to a U.S. address, using nominee or numbered accounts, and failing to tell a preparer about accounts the preparer specifically asked about. Conversely, facts pointing away from willfulness include full disclosure to a preparer, prompt correction on discovering the error, and modest, transparently held balances.

Bittner v. United States

In Bittner v. United States, decided by the Supreme Court in 2023, the question was whether the non-willful penalty applies to each unfiled report or to each unreported account. The taxpayer had dozens of foreign accounts across several years. On the government’s per-account reading, the exposure ran into millions; on the per-report reading, it was a small fraction of that.

The Court held that the non-willful penalty accrues per report. The Bank Secrecy Act requires the filing of a report; the failure being penalised is the failure to file that report, not the omission of individual accounts from it.

Why it matters:

• For non-willful filers with many accounts, the decision reduced potential exposure dramatically — a year with thirty unreported accounts is one violation, not thirty.
• It resolved a conflict between the federal circuits, one of which had adopted the per-account reading while another had rejected it.
• It did not disturb the willful penalty, which the statute expressly ties to the balance in the account and which continues to operate per account, per year.

The practical effect is to widen the gap between the two regimes still further, and to raise the stakes of the willfulness determination.

The reasonable cause defence

No non-willful penalty may be imposed where the violation was due to reasonable cause and the balance in the account was properly reported. Both limbs must be satisfied.

There is no statutory list of qualifying circumstances. What matters is whether you exercised ordinary business care and prudence. Factors that have helped taxpayers include:

• Reliance on a qualified professional to whom all the relevant facts were disclosed — the disclosure being the essential part.
• Serious illness, incapacity or a death in the immediate family at the relevant time.
• A genuine and documented inability to obtain account information from a foreign institution.
• Prompt voluntary correction as soon as the obligation was discovered.
• Reliance on specific written professional advice that the account was not reportable.

Factors that generally do not succeed:

• Not knowing the rule existed, standing alone.
• The accounts having generated little or no income.
• Having paid all tax due.
• The foreign bank already reporting the account under FATCA.
• A preparer’s failure where the preparer was never told about the accounts.

Note the second limb. Reasonable cause is unavailable where the income from the account was not properly reported — which is why the FBAR problem and the income tax problem generally have to be solved together.

Criminal exposure

Criminal liability requires willfulness and is reserved for serious cases, typically involving concealment, substantial sums or other offences alongside the reporting failure.

• Willful failure to file or willfully filing a false report: a fine of up to $250,000, imprisonment for up to five years, or both.
• Aggravated circumstances — a violation committed while violating another U.S. law, or as part of a pattern of illegal activity involving more than $100,000 in any twelve-month period: a fine of up to $500,000, imprisonment for up to ten years, or both.
• False statements on the form may be charged separately under general federal false-statement provisions.
• Civil and criminal penalties are not alternatives. Both may be pursued in respect of the same conduct.

The overwhelming majority of FBAR matters are resolved civilly. But the existence of the criminal tier is why a filer who suspects their own conduct may have been willful should speak to a tax attorney — not only an accountant — before making any submission. The choice of correction route can affect criminal exposure.

How long the government has

A civil FBAR penalty must generally be assessed within six years of the transaction to which it relates — for a failure to file, measured from the report’s due date. Two consequences follow:

• The window is longer than the ordinary three-year income tax assessment period, so an FBAR exposure can remain live after the related tax years have closed.
• Never filing does not start a clock running in your favour in any practical sense. Each year’s unfiled report has its own six-year window, and doing nothing simply leaves a rolling series of them open.

Different and longer periods apply to criminal matters and to collection of an assessed penalty once made.

Mitigation and IRS practice

Statutory maximums are ceilings, not tariffs. The IRS operates internal mitigation guidelines that constrain what examiners may assess, generally graduating the penalty by the size of the aggregate balances and reserving the highest amounts for the most serious cases. Its published procedures also allow examiners to issue a warning letter instead of a penalty where the circumstances justify it.

What demonstrably improves outcomes, in the order that matters:

1. Coming forward before the IRS contacts you. Almost every favourable procedure is closed once an examination has begun.
2. Having reported the income. This is the difference between a filing problem and a tax problem, and it is decisive for several procedures and for the reasonable cause defence.
3. A documented, coherent explanation of how the failure happened, supported by contemporaneous records.
4. Full correction — all years, all accounts, at once, rather than piecemeal.
5. Professional representation where balances are significant or willfulness could be argued.

Where to go next

• Late, delinquent and amended FBARs — the procedures for fixing past years.
• Recordkeeping — the evidence a reasonable cause argument depends on.
• Deadlines — avoiding the problem in the first place.
• Official sources — the statutes and IRS materials cited above.