As a follow-up on several cases regarding penalties on Foreign Bank and Financial Accounts (FBAR) reporting, the U.S. government was finally victorious in its latest case. On August 6, 2024, the U.S. District Court for the Eastern District of Virginia found in favor of the government against Richard Rund regarding a $2.9 million reporting penalty for failure to report foreign bank accounts in Hong Kong and Switzerland. The court found the failure to file was willful and the issued penalties did not violate the Eighth Amendment.
Background
As noted in a previous FORsights™ article, “U.S. Supreme Court FBAR Penalties Case: What Happened & Why It Matters,” FBAR reporting is required to report a financial interest in or signature authority over a foreign financial instrument. Richard Rund is a U.S. citizen and international businessperson currently residing in Hong Kong. For numerous years he held interest in several foreign accounts located in Hong Kong and Switzerland. During the calendar years 2003 to 2008, 2013, and 2014 these accounts held substantial balances, often over $10,000. Further, his Form 1040, Schedule B, indicated he had financial interests in foreign bank accounts, yet he failed to follow through with filing Form FinCEN Form 114.
In December 2019, the IRS issued a letter to Rund seeking penalties against him under 31 U.S.C. 5321(a)(5)(C) for his willful failure to file FBARs in the amount of $2,915,663. Rund claimed his failure to file was due to reasonable cause, should be subject to non-willful penalty provisions, and the penalty was excessive and in violation of the Eighth Amendment. He also claimed the statute of limitations had closed on some of the periods.
To address the willfulness argument, the courts pointed out Rund had filed FBARs in 2001 and 2002, and then in 2010 he joined the offshore voluntary disclosure program through 2016, yet still did not disclose all his accounts. In 2021, the IRS found Rund had willfully violated his FBAR reporting requirements at least 43 times during the years 2003 to 2008, 2013, and 2014.
With regards to Rund’s claim the penalties violated the Eighth Amendment, which provides excessive fines shall not be imposed, the court ruled the fines clause limits the government's power to extract payments, whether in cash or in kind, as a punishment for some offenses, citing United States v. Bajakjian, 524 U.S. 321. However, the court found the willful FBAR penalty is not a “fine” within the meaning of the Eighth Amendment’s prohibition of excessive fines. Further, the court also found the penalty was not “excessive” as it was based only on his highest aggregate balance of $5,831,235 in 2014. He was only fined for one year, rather than each year in which filings were not made. The penalty was, therefore, well below the statutory maximum.
Takeaway
The Treasury is not backing down from applying FBAR penalties and fighting to enforce its ability to collect penalties for non-reporting. The fact Rund had previously filed FBARs and joined the offshore voluntary disclosure program only strengthened the case that he was aware of his filing obligations and chose not to report. It is important that U.S. taxpayers report all their required foreign bank accounts to avoid the assessment of potentially significant penalties.
Contact a professional with Forvis Mazars for help assessing how this court decision may apply to you, your organization, or company.