Willful Violations of FBAR Include Both Knowing and Reckless Violations

(Parker Tax Publishing September 2024)

A panel of the Ninth Circuit affirmed in part a district court and held that a taxpayer willfully failed to report foreign bank accounts in violation of 31 U.S.C. Secs. 5314 and 5321 after finding that for purposes of calculating civil penalties, willful violations of the FBAR statute include both knowing and reckless violations. However, the panel also reversed the district court's holding that the government was required to prove the applicable rates for determining prejudgment interest and late payment penalties because both rates are prescribed by statute and are not questions of fact that must be proven at trial. U.S. v. Hughes, 2024 PTC 292 (9th Cir. 2024); U.S. v. Hughes, 2024 PTC 293 (9th Cir. 2024).

Background

Since 2001, Timberly Hughes, a U.S. citizen, has owned a New Zealand limited company, which she uses to operate a winery in New Zealand. In 2013, she formed another limited company to operate a wine bar, also in New Zealand. Hughes was the sole owner of both companies and therefore had a financial interest in, and signature authority over, the companies' accounts at ANZ Bank New Zealand Limited.

Under 31 U.S.C. Section 5314, a U.S. person who possesses foreign accounts with an aggregate balance of more than $10,000 is required to file an annual Report of Foreign Bank and Financial Accounts (FBAR). Under 31 U.S.C. Section 5321(a)(5), a civil penalty of up to $10,000 may be imposed for any violation of Section 5314. Under the Bank Secrecy Act (BSA), U.S. citizens face a civil monetary penalty for violating the FBAR requirements, but the amount of the penalty varies depending on whether the violation was willful or not willful. Under Section 5321(a)(5)(B)(i), the penalty for a non-willful violation is not more than $10,000, but there is a higher penalty for willful violations involving misreporting or non-reporting of account information. That penalty is the greater of 50 percent of the account balance, or $100,000.

Hughes failed to file FBARs for 2010 through 2013. The government determined that Hughes's failure to file was "willful" and assessed penalties totaling $678,899. When Hughes did not pay the penalties, the government filed suit in federal court to collect the amounts owed. In U.S. v. Hughes, 2021 PTC 332 (N.D. Calif. 2021), a district court concluded that Hughes's failure to file FBARs in 2012 and 2013 was "willful" for purposes of the FBAR statute. The court found that, for purposes of civil FBAR penalties, "willfulness" can be shown through "recklessness or willful blindness." The court noted that several Appellate Courts and district courts, citing the Supreme Court's decision in Safeco Insurance Company of America v. Burr, 551 U.S. 47 (S. Ct. 2007), had reached similar conclusions. In Safeco, a case concerning the Fair Credit Reporting Act (FCRA), the Supreme Court concluded that where willfulness is a statutory condition of civil liability, it encompasses not only knowing violations of a standard, but reckless ones as well.

Legal standards aside, the district court explained that, in 2012 and 2013, Hughes "plainly saw at least the basic instructions" that she was required to file an FBAR because on her 2012 return she checked the accompanying box indicating that she was required to file an FBAR - yet failed to do so - and in her 2013 return she answered the same question, albeit "differently (and inaccurately)." As to 2010 and 2011, however, the court found no evidence that Hughes was aware of the FBAR filing requirement or was presented with information that would have put her on notice of such a requirement. Accordingly, the district court held that Hughes's failure to file was willful in 2012 and 2013 but not in 2010 or 2011. Subsequently, in U.S. v. Hughes, 2023 PTC 53 (N.D. Calif. 2023), the district court held that the government was entitled to collect $238,125 in FBAR penalties from Hughes for years 2012 and 2013.

Hughes appealed to the Ninth Circuit and argued that the district court should have been required to find that she subjectively intended not to file her 2012 and 2013 FBARs before concluding that the government could assess willful civil penalties against her. She asked the Ninth Circuit to break with other circuit courts and hold that the Supreme Court's reasoning in the Safeco decision does not apply to the FBAR statute. Hughes also contended that the FBAR statute is inherently punitive, unlike the merely compensatory FCRA. She suggested that, under a recklessness standard, nearly every FBAR violation could be deemed a willful one, rendering the non-willful provisions of the statute superfluous.

Analysis

The Ninth Circuit affirmed the district court and held that the Supreme Court's reasoning in Safeco applies to civil FBAR penalties. The court observed that, like the FCRA, the BSA contains civil and criminal penalties, both of which apply a willfulness standard. In holding that the usual civil standard of willfulness applies in assessing civil penalties under the FBAR statute, the Ninth Circuit joined every other circuit court that has considered this question in agreeing with the government that an objective recklessness standard is appropriate.

The court then addressed Hughes' argument that the FBAR statute is inherently punitive, unlike the allegedly merely compensatory FCRA. The court observed that Hughes failed to show any evidence that other courts have conflated mere negligence with recklessness. On the contrary, the court said, fellow circuits have expressly stated that "civil recklessness requires proof of something more than mere negligence."

Citing the Third Circuit's decision in Bedrosian v. U.S., 2022 PTC 214 (3d Cir. 2022), the panel noted that all other circuit courts have correctly insisted that a determination of a willful failure to file an FBAR requires a finding that (1) the filer "clearly ought to have known that there was a grave risk that" the filing requirement was not being met, and (2) the filer "was in a position to find out for certain very easily."

The panel also pointed out that nothing in the record suggested that the district court in this case conflated negligence and recklessness. The district court, the panel said, did not simply conclude that Hughes had failed to file but rather explained that Hughes had, on her 2012 tax returns, specifically noted that she held a foreign account and was required to file an FBAR, and that her explanations for her failure to file in 2012 and 2013 were "inconsistent" and "not credible." In short, the court concluded that Hughes offered no persuasive reason to distinguish Safeco and buck the consensus of other circuit courts.

Observation: In a concurrently filed memorandum disposition, the panel held, in part, that the government was entitled to collect prejudgment interest and late payment penalties and therefore reversed the district court with respect to its holding that the government was required to prove the applicable Treasury rates for assessing interest or late payment penalties. The panel found that both rates are prescribed by the Treasury and are not questions of fact that must be proven at trial.

For a discussion of the FBAR penalty and "willfulness" standard used in imposing the penalty, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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