An ounce of FBAR compliance is worth pounds in penalties

The Report of Foreign Bank and Financial Account, or FBAR, is an annual informational tax report that must be filed by certain U.S. individuals and legal entities to report their foreign bank accounts and other financial interests to the U.S. Treasury Department. 

In recent years, the Treasury has employed both a carrot and a stick approach regarding FBAR compliance, increasing enforcement of FBAR filing requirements while also taking steps to make the FBAR more accessible and user-friendly.

Despite these efforts, FBAR compliance is generally presumed to be fairly low. For example, the Treasury Department's Financial Crimes Enforcement Network, also known as FinCEN, reported that FBAR filings passed 1 million for the first time in 2014. At the same time, the State Department reported that approximately 7 million U.S. citizens live permanently abroad. Many of these U.S. citizens are likely required to file, which would place FBAR compliance quite low before even considering domestic individuals and entities.

Current filing requirements and penalties

Individuals and entities with foreign bank accounts, brokerage accounts, mutual funds and certain types of insurance policies must file an FBAR if the aggregate value of any of these accounts exceeds $10,000 at any time during the calendar year. This filing requirement applies to both U.S. citizens and U.S. residents as well as foreign entities in which a U.S. person has a financial interest.

The penalties for failing to file an FBAR can be severe. While the Supreme Court recently ruled that the maximum civil penalty for non-willful violations is limited to $10,000 per annual FBAR filing (rather than per violation), penalties for willful violations start at $100,000 and can rise to 50% of each individual account balance. As will be discussed, in the recent court case of Monica Toth v. United States, these penalties, plus interest, can compound quickly.

The IRS has expanded its enforcement efforts, including cross-checking foreign accounts reported on FBARs with information reported on tax returns. If discrepancies are found, the IRS may assess additional taxes, interest, and penalties.

In addition to civil penalties, willfully failing to file or filing false FBARs can even result in imprisonment. 

Recent rulings

While it appears that many taxpayers remain either blissfully or intentionally ignorant of their FBAR filing requirements, the Treasury's increased enforcement in recent years has many of those who were skirting the rules now pulling their heads out of the sand. 

Take the tale of Monica Toth, who was given a Swiss bank account from her father. She alleged that she was unaware of any FBAR filing requirements until 2011, at which point she retroactively filed all required FBARs. Or so she thought. The IRS nonetheless determined that she willfully did not file her 2007 FBAR and assessed her the higher penalty, equal to half of the highest balance of the account for that year. The penalty? Just shy of $2.2 million. Now that's a pretty penny. 

Toth's counsel argued that this penalty should be protected under the Eighth Amendment's excessive-fines clause. The initial ruling was upheld in both the U.S. District Court for the District of Massachusetts and the First Circuit Court of Appeals, both determining that the civil penalty assessed was not protected by the excessive-fine clause of the Constitution.

Determined not to open her wallet to the Treasury, Toth petitioned her case to the Supreme Court in September 2022. However, the court denied her request for certiorari on Jan. 23, 2023, leaving Toth with little recourse other than to pay the full amount, which had grown to $3.1 million due to additional interest. 

The future of the FBAR

As enforcement of FBAR filing requirements increases, it is becoming increasingly more important for taxpayers to stay abreast of their ever-changing obligations under current and future tax law reforms. How FBAR requirements will interplay with new developments in financial markets, such as cryptocurrency, has yet to be seen. At least for now, FBAR reporting of cryptocurrency is not yet required. As noted in FinCEN Notice 2020-2, it is likely that the Treasury will soon amend the related regulations to include virtual currency as a reportable asset.

Even with gaps in compliance and definitions of reportable assets, the FBAR still allows prosecutors to gain enforcement leverage when money launderers neglect to file the forms, even without proof of other specified financial crimes. After all, it seems unlikely that those using foreign bank accounts for criminal purposes are among the minority of voluntary FBAR filers.

As we have seen from the unfortunate tale of Monica Toth, failing to file an FBAR can have material financial consequences, proving the old adage: An ounce of compliance is worth a pound of penalty.