A U.S. citizen or resident alien who has a financial interest in or signature authority over foreign financial accounts may be required to file a Foreign Bank Account Report (FBAR) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. This requirement is designed in part to combat tax evasion by having U.S. persons report their financial assets in non-U.S. financial accounts on the FBAR, and any income related to such accounts on their U.S. Individual Income Tax Returns.
The FBAR filing requirement outlined above might seem straightforward, but there is increasing scrutiny by tax authorities to ascertain whether taxpayers with a filing requirement are in fact filing their FBARs, and in cases where they are not, whether the intent is willful or non-willful.
Non-willful failure to file an FBAR may result in a civil penalty of $10,000. The U.S. Supreme Court has recently ruled that the $10,000 would apply per form, and not on a per account basis. In the case of willful failure to file the FBAR, the penalties can get much heftier. The civil penalty associated with willful failure to file an FBAR is the greater of $100,000 or 50% of the account balance. The question then is how willful versus non-willful intent is determined.
A person is subject to a penalty for willful failure to file an FBAR if the following elements are met:
- the taxpayer is a U.S. person;
- the person had an interest in or authority over a foreign (non-U.S.) financial account(s);
- the financial account(s) had an aggregate balance that exceeded $10,000 at some point during the tax year in question;
- the person willfully failed to disclose and file an FBAR form for the account(s).
In the case of the United States v. Vettel, tax authorities used the above criteria to make their case that the taxpayer had willfully decided not to file an FBAR, with a specific focus on how the taxpayer answered the questions on Schedule B Part III of his tax returns. The relevant question from Schedule B Part III is shown below. Note that Form TD F 90-22.1 is the old form number for the FBAR as the case covered tax years 2006 to 2011:
At any point during the tax year, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?
See page B-2 for exceptions and filing requirements for Form TD F 90-22.1.
The taxpayer in the case answered “No” to the above question when in fact they did have an interest in a financial account in Switzerland. Importantly, the taxpayer answered “No” to the question each year from tax year 2006 to 2011, during which he had ownership of the non-U.S. account. Had the taxpayer answered the question correctly, he would have had to review the exceptions and filing requirements for the FBAR. The U.S. argued that the question on Schedule B is how the taxpayer would have been alerted to the filing requirement and took the position that even a cursory review of the form would have been sufficient to get the taxpayer’s attention regarding the issue of reporting the foreign financial account. Based on this information and combined with other circumstantial evidence, the U.S. indicated that it was more likely than not that the taxpayer’s failure to file FBARs for all years mentioned was willful.
It is important to note that the plaintiff in the above case argued that willful intent includes knowing or reckless disregard of a statutory duty. The latter would also include willful blindness. The standard for recklessness would be not taking the necessary action when the taxpayer: (1) ought to have known the required action; (2) there was a significant risk that the filing requirement was not being met; and if (3) they were able to find out for certain very easily. Willful blindness would include the taxpayer making a conscious effort to avoid learning about the reporting requirements.
As illustrated above, there is a reasonable expectation that a taxpayer should review in detail their tax return information, including the questions and responses in Schedule B Part III, before signing their tax returns under the penalty of perjury. Doing so will help ensure that an FBAR is prepared if they have a filing requirement, avoiding costly examinations that may otherwise result from failure to file the form.
If you have any questions or need assistance regarding issues addressed above, please reach out to a professional at Forvis Mazars.