Foreign Bank Reporting Penalties are Reeled In

By Stanley Rose March 7, 2023

Last week, the U.S. Supreme Court delivered a reprieve from a long-standing interpretation by the Treasury Department that has led in the past to some exorbitant penalties for U.S. persons holding foreign bank and other financial accounts. The result of the court’s ruling? Penalties for inadvertently failing to report foreign holdings will be limited to one penalty per overlooked or erroneous report, rather than one penalty for each unreported account.

Background

For many years, U.S. persons (including entities) have been required to annually report the balances and other account information for each of their foreign accounts (certain financial accounts held outside of the U.S.) if the combined balances during a year exceed $10,000. This information is reported on Form FinCEN 114. “FinCEN” stands for “Financial Crimes Enforcement Network” – our first clue that these requirements are taken seriously. No tax is due with FinCEN 114; it is merely an informational filing. These requirements come from an attempt to trace funds used for illicit purposes (including terrorism), and also to identify unreported income.

Note: The rules regarding who must file FinCEN 114s, and exactly what must be reported, are long, detailed, and complex; and this article makes no attempt to elaborate. While the court’s decision impacts all types of filers and various accounts, for ease of reading, this article’s examples reference a common scenario of an individual holding foreign bank accounts.

Penalties for not filing or incomplete reporting are divided into two categories: (1) willful and (2) non-willful.

The penalties for willful violations are designed to hurt. They can reach as high as (1) 50% of the missing or misreported account balances or (2) $100,000, if greater, for each year of mishap. For a large account with a relatively unchanged balance, this means that two years’ worth of penalties could wipe out the entire balance, and if the penalty applies to three or more years, the penalty can easily exceed the holdings – potentially by multiples. Willful penalties were not impacted by last week’s court decision.

The penalty for a non-willful violation can be as much as $10,000. Like its toothier counterpart, it can apply each year a violation occurs. However, the Treasury Department interpreted the rule to not only apply for each year of violation, but to apply separately for each and every account omitted or misrepresented. Some filers, meanwhile, have argued that the cap should be assessed once per annual report (no more than $10,000 per year regardless of how many accounts were omitted or misreported).

2023 decision

In the court’s ruling last week (Bittner v. United States), the justices determined that the non-willful penalty applies only once per noncompliant report (one assessment per year), regardless of the number of accounts involved.

Observation/conclusion

As noted above, the very potent penalty for willful violations of the FinCEN 114 reporting requirements remains unchanged. As is the case with nearly all Treasury/IRS matters (but unlike nearly every other area of law), any person accused of violating Treasury rules is presumed to be guilty, rather than presumed to be innocent until proven guilty. In other words, the burden of proof is on the filer, rather than the government. The distinction between willful vs. non-willful can be pretty subjective and hard to prove, and if Treasury asserts that you dodged the rules on purpose, it may be incredibly difficult to overcome that assertion. Treasury, meanwhile, doesn’t have to prove that its assertion is correct – it wins automatically unless you can definitively refute it. Refuting it will be far more difficult than it was in the past, because most people who should be filing a Form FinCEN 114 also file a Form 1040, and Schedule B of form 1040 specifically asks whether foreign accounts exist, and whether the FinCEN 114 form has been filed. It also points out that failure to file FinCEN 114 may result in “substantial penalties.” Treasury pointed out not long ago that they plan to begin pursuing violators, and will not have much patience with anyone claiming ignorance – especially in light of the Schedule B language.

In our experience, Treasury rarely imposes penalties on those who step forward and file tardy FinCEN 114 forms or correct former mistakes by refiling – especially if they have consistently reported any income generated by those accounts on their income tax returns, as appropriate. Instead, Treasury seems to reserve the draconian penalties for true scofflaws. But that could change, and this court case could mean that Treasury will be more inclined than in the past to pursue the willful designation, now that the non-willful penalties have been somewhat defanged. However, for most who made simple mistakes and can establish that it was an oversight, last week’s ruling means that the cost of the penalties just became much less formidable.

For more information, please contact Stanley Rose or your BNN tax advisor at 800.244.7444.