U.S. Courts Divide on Penalty For Failing to Report Foreign Accts

Aug 07 2018
Published in: Public Policy
| Updated Apr 27 2023

Two recent U.S. District Court opinions, Colliot v United States, and United States v. Wahdan, have cast doubt on the maximum penalty for willfully failing to file reports of foreign bank accounts, holding that an old regulation limits the penalty to $100,000 despite subsequent legislation allowing a penalty of 50% of the account value.

The government has routinely relied on the later legislation to collect penalties that can run into the millions of dollars based on 50% of the value of the accounts not reported.

Subsequent to the Colliot and Wahdan cases, the United States Court of Claims held in Norman v. United States, that the later legislation had superseded the regulation relied upon in those cases, upholding a penalty of over $800,000. Consequently, there is now a split of authority. 

Schedule B of the U.S. Form 1040 tax return includes an often-overlooked question as to whether the taxpayer had signature authority over any foreign financial account, such as a bank or securities account. Many U.S. expatriates working in foreign countries undoubtedly have such accounts, as do numerous foreign nationals residing and working in this country. 

Indeed, the relevant accounts include even accounts in foreign branches of U.S. banks, if the account is held by a U.S. person. If the aggregate amount of such accounts exceeds $10,000 at any time during the year, the taxpayer is required to file a separate Treasury Department Report of Foreign Bank and Financial Accounts (usually referred to as the “FBAR”) by 15 April of the following year.

The penalty for failing to file is severe; even a non-intentional failure is subject to a penalty of up to $10,000, while the penalty for a willful failure can be the greater of $100,000 or 50% of the amount in the account.  

The current issue results from a 2004 change to the statute. Up to that time, the penalty for willful failure to report was limited to the greater of $25,000 or the account balance at the time of the violation up to a maximum of $100,000. That number was reflected in the Treasury Department’s implementing regulation. In 2004 Congress amended the Bank Secrecy Act to provide that the penalty for willful failure to report is the greater of $100,000 or 50% of the account value. However, Treasury never repealed or revised the earlier regulation limiting the penalty to $100,000.

In Colliot and Wahdan, the U.S. District Courts held that the new law did not automatically supersede the old regulation, which was still applicable. In Norman, the U.S. Claims Court disagreed. The IRS has rushed to assert the Claims Court rationale in a number of pending cases. However, the ultimate outcome is uncertain, and many observers think it will eventually have to be decided by the U.S. Supreme Court.

Related: U.S. Senate Holds Hearing on CFPB and Ex-Im Bank Nominees

How This Impacts Mobility 

In recent years, the U.S. IRS has vigorously pursued tax avoidance caused by maintenance of unreported foreign bank accounts, and aggressively asserted penalties for failure to report. Worldwide ERC® has advised members that it is important that employees posted overseas understand their reporting obligations. The penalties for failure to report can be huge, as noted, and the IRS will continue to assert the larger penalties as long as the litigation reported here is ongoing. It remains important for U.S. expats to understand and comply with their reporting obligations.