Reasonable Cause and FBAR Penalties: What the Law Requires

The statutory exception

Under 31 U.S.C. § 5321(a)(5), the civil penalty for a non-willful failure to file a required FBAR may not exceed $10,000 (adjusted for inflation). The statute also provides that no penalty may be imposed if the violation was due to reasonable cause and the balance in the account was properly reported.

In practice, that means correcting the reporting: the IRS’s internal guidance for FBAR examinations (Internal Revenue Manual 4.26.16) states that the penalty should not be imposed where the violation was due to reasonable cause and accurate delinquent or amended FBARs are filed.

What “reasonable cause” means

Courts and the IRS have described reasonable cause in terms of ordinary business care and prudence: whether the person failed to comply despite exercising the care that a reasonably prudent person would have exercised in the same situation. The analysis is fact-specific.

Facts that commonly matter include:

• whether the income from the foreign accounts was reported on the person’s tax returns;
• whether the person knew about the FBAR requirement, and how they learned of it;
• whether the person relied on a qualified tax professional who had been given complete and accurate information;
• the person’s background, including education and experience with financial matters;
• how the accounts came about, for example through inheritance or a family arrangement; and
• how promptly the person corrected the reporting once the requirement became known.

No single fact decides the question, and the explanation should be supported by documents rather than assertions alone.

Non-willful versus willful

The reasonable cause exception applies only to non-willful violations. For a willful violation, the maximum civil penalty is the greater of $100,000 (adjusted for inflation) or 50% of the balance in the account at the time of the violation.

Several federal appeals courts have held that willfulness for the civil FBAR penalty includes reckless disregard of a known or obvious risk, not only a knowing violation. In United States v. Rum, 995 F.3d 882 (11th Cir. 2021), for example, the court rejected the argument that not reading one’s own tax returns defeated a finding of willfulness.

How much is at stake for non-willful violations

In Bittner v. United States, 598 U.S. 85 (2023), the Supreme Court held that the non-willful penalty accrues per report, not per account. A person who missed several years of FBARs faces a maximum of one non-willful penalty for each late or inaccurate report, regardless of how many accounts each report should have listed.

Time limits

The IRS may assess a civil FBAR penalty within six years from the date of the violation. If an assessed penalty is not paid, the government may sue to collect it within two years after assessment (or after a related criminal judgment becomes final, if later). FBAR penalties arise under Title 31, not the Internal Revenue Code, which affects how they are contested and collected.

Correcting past reporting

Where the conduct was non-willful and the IRS has not opened an examination, the Streamlined Filing Compliance Procedures may also be available. See Streamlined Filing Compliance Procedures. The right path depends on the facts and the stage of any IRS contact.