Americans Helping Americans Abroad

Public Law 91 508

Many American expats still don’t know what an FBAR (“Foreign Bank Account Report”) is. Others only know because they, or someone they know, were told that they’d failed to correctly file one or more of them, and consequently have been hit with a penalty fine of $10,000 or more.

Below, we look at the bank data reporting regulation that’s been called “the tax equivalent of a local police force speed trap” – and what many feel are compelling arguments for fixing its most glaring problems…

In the state of New Hampshire, it’s illegal to carry away or collect seaweed at night, a Business Insider article on “the most ridiculous law” still on the books in every U.S. state noted, in 2020.

In Florida, meanwhile, those “who own bars, restaurants and other places where liquor is sold” could face fines of “up to $1,000” if they participate or permit any contest of “dwarf tossing” on their premises; while liquor stores in Indiana are prohibited from selling water or other non-alcoholic drinks unless they’re at room temperature, the article notes.

Outside of the U.S., though, many Americans living abroad would argue that the “most ridiculous law” they’re struggling to get U.S. regulators or lawmakers to address – thus far with no apparent success – is the one that obliges them to file FBARs.

Some expats, in fact, would maintain that the word “ridiculous” was inadequate to describe the degree of awfulness that “Foreign Bank Account Reports” can introduce into the lives of unsuspecting Americans resident overseas, who didn’t know that they were obliged to file them.

For those who don’t yet know, Americans are obliged to file FBARs (or “Foreign Bank and Financial Account Reporting” forms, or FinCEN Form 114s, as they’re officially known) with the U.S. Financial Crimes Enforcement Network (FinCEN) for every year that “the aggregate value” of all their non-U.S. “financial accounts” exceeds $10,000.

Even if it does so for less than a day during the year in question.

FBARs Now in Their 52nd Year

Though “FBARs” may still not yet be well known, they actually date back to 1970, when they were created by an early anti-tax evasion/money laundering/crime bill known as the Bank Secrecy Act.

It was only after globalization began to become truly global, however, and concerns about organized, cross-border crime and terrorism also began to mount, that the U.S. began ramping up enforcement of the FBAR legislation, beginning in 2001 with the post-9/11 Patriot Act.

The FBAR penalty regime was then further enhanced in 2004, with the introduction of a potential penalty of up to $10,000 for “non-willful” violators. This legislative fix also increased the willful penalty from $100,000 to “the greater of either $100,000 or 50% of the taxpayer’s account in question on the date it was meant to have been reported.”

Awareness of the need to file FBARs, though, remained low for years – and even now could be better, some say, with just 1,404,395 FBARs having been filed in 2020, according to FinCEN data.

This is seen as unimpressive, since as many as 5 million to 9 million Americans are estimated to live abroad.

What’s more, the data on filed FBARs includes that of some (but, say experts, probably only a fraction of) Stateside Americans who happen to have had overseas accounts that exceeded the $10,000 minimum amount at some point during the past twenty years.

‘Duplicates FATCA Reporting, Penalties are Disproportionate’

Among the reasons many American expats would argue that FBARs represent the “most ridiculous law” they’re struggling to get regulators or lawmakers to address – thus far with no apparent success – is the fact that, they say, the same information is already being collected elsewhere, such as along with their annual tax return, by what’s known as a Form 8938.

Another reason they’d cite would almost certainly be what they would argue is the FBAR’s wildly disproportionate and unfair penalty regime, which has resulted in many seemingly-innocent individuals having been hit with “non-willful” penalties of $10,000 or more.

The non-willful FBAR penalty provides relief for “reasonable cause” if the taxpayer files at least by the time of the examination a correct FBAR, which reports all of their accounts.

However, given how narrowly courts have interpreted this relief, some relatively innocent individuals have, FBAR experts say, found themselves nevertheless subject to significant non-willful penalties.

In addition, the costs involved in retaining a tax professional to handle the work involved in a typical expat’s FBAR audit – even if the only penalties at issue are non-willful – can be both expensive as well as stressful to the American expat taxpayer involved, these tax experts point out.

At least, though, FBARs aren’t subject to what’s known as the Section 7345 provision (IRC § 7345), which enables the authorities to revoke U.S. taxpayers’ passports for “seriously delinquent tax debts,” as FBAR obligations aren’t “tax” debts.

Unchanged FBAR Minimum Trigger Amount

Meanwhile, thanks to inflation, the chances of getting hit with these penalties have been getting greater every year, since the minimum $10,000 amount necessary to trigger the need to file an FBAR has been unchanged since 1970. Had it been adjusted for inflation, that minimum amount would today be closer to $65,400, FBAR experts point out.

But FBAR Max Penalties Are Now Adjusted For Inflation

This failure to raise the FBAR-filing minimum for more than 50 years, FBAR critics say, is even harder to justify now that, as a result of a change that was quietly introduced around 2015, the maximum penalties for all FBAR violations assessed after August 1, 2016, “whose associated violations occurred after Nov. 2, 2015,” are inflation-adjusted, whereas previously they weren’t.

The FBAR regime is also receiving growing calls for change because so many FBAR cases seem to be ending up in court lately, as a result of an apparent rise in the numbers of multi-million-dollar willful penalty assessments that are being given out.

Critics of the non-willful FBAR regulations as they currently stand argue that at the very least, those bank and investment accounts held by expats in banks located in the foreign countries in which those expats are currently legally resident should be exempt from FBAR filing requirements.

(“Yet another reason why the U.S. should move to residence-based taxation,” one expat tweeted recently, in reference to this point.)

More Court Challenges to Non-willful?

Meanwhile, some believe there could be more court challenges going forward in the non-willful penalty area, if nothing is done to formally address the continuing lack of clarity in this space.

This is because a surprise decision last November by a U.S. appellate court in New Orleans, went against what many thought had begun to be a long-awaited but seemingly consistent trend by U.S. courts to apply non-willful penalties on a per-year/form basis, rather than the often-far-more persecutory per-account basis.

Jack Townsend, a Charlottesville, Virginia-based tax expert, says, however, that talk of a move towards a consistent approach by the U.S. courts was always premature.

“Not only are taxpayers not [in fact] winning the per-account issue, but the courts also don’t seem to be overly generous with respect to the ‘reasonable cause’ defense – particularly if the taxpayer in question had answered ‘no’ to the question, on their annual income tax return, about whether they held any non-U.S. accounts,” he explains.

Townsend adds that to the courts, “someone who answered ‘no’ to that question, who in fact did have one or more such account, is seen as potentially deserving of a willful, rather than non-willful, penalty.”

(For the record, the largest FBAR penalty ever is thought to have been the one for a “willful” failure to file FBARs that was assessed in 2016 against a former University of Rochester, New York professor named Dan Horsky, for $100 million.)

What Are FBARs For?

As if all of this weren’t enough to convince U.S. expats that the FBAR-filing regulations are the most “ridiculous” law affecting them that’s on the books, there is yet another argument some would point to: the fact that the U.S. government doesn’t seem to have a use for the FBAR data it collects – other than to enable it to prosecute those whom it discovers have failed to file FBARs when they should have, or to have failed to file them correctly.

One American expat, in fact, refers to the FBAR legislation as “the tax equivalent of a local police force speed trap,” as he sees the ability to capture and fine FBAR violators as the FBAR’s only reason to exist.

A lack of readily-accessible data on FBARs doesn’t help to explain what, if any, use they serve, beyond enabling the government to go after FBAR non-filers. When asked for data, FinCEN officials have been known to give the number of FBARs filed in a couple of years – but never more than a few at a time, as our table Individual FBARs Filed by Year [link to separate page] suggests.

What’s more, as far as anyone knows, neither FinCEN, the IRS nor the Treasury Department publish such data as, for example, the average amount of money found to be unreported in a given year by willful or non-willful FBAR violators; the numbers of willful and non-willful violators awarded penalties, per year; nor has any profile of who the “average” FBAR violator is, based on the data, been published.

Last January (2021), the Association of Americans Resident Overseas (AARO) noted, in a submission it made in response to a FinCEN request for public comment, that although the FBAR data-collecting regime “consum[es] resources needed for serious financial measures,” it believed that the fact that that U.S. officials appear not to actually use the FBAR data it collects in any way – other than to entrap those who had failed to file, or who did so incorrectly – was a sufficient reason to argue that the FBAR was “unnecessary, even counterproductive.”

(FinCEN had said it was seeking comments "on the proposed renewal, without change, of existing [FBAR] information collection requirements” in connection with certain other legislation aimed at reducing the paperwork burden on U.S. citizens and companies.)

AARO also argued that renewing the FBAR obligations of Americans who are resident abroad without making any changes “would ignore national and international developments, especially since 9/11, that make FBAR increasingly irrelevant and redundant.”

FinCEN received more than 90 comments by the close of the comment period in January, then quietly renewed its FBAR data collection regime without making any changes. “FinCEN continues to review and consider the comments received,” a spokesperson said.

GAO, NTA Say FBARs are Duplicative

As it happens, AARO’s argument that the FBAR data is redundant – given that so much other data is now being collected by other U.S. government agencies, and that it is therefore an expensive and wasteful exercise – is one of the most often-cited criticisms of FBARs by those who are knowledgeable about them.

The “duplicative information collecting” argument was, for example, included in a major, April 2019 Government Accountability Office (GAO) report, “Foreign Asset Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad.”

Noting that individuals likely to be obliged to file FBARs were also potentially likely to be subject to such other significant asset reporting obligations as FATCA, the GAO report said the “overlapping requirements” for financial data “increase the compliance burden on U.S. persons and add complexity that can create confusion, potentially resulting in inaccurate or unnecessary reporting.”

Another critic of this overlap in data collection by the U.S. Treasury has been the Treasury’s own current National Taxpayer Advocate (NTA), Erin M. Collins, (echoing her predecessor, Nina Olson, who had made the same observation more than once during her 18 years as NTA).

In her first annual report to Congress as NTA in January of 2021, Collins noted that “many U.S. taxpayers, particularly those living abroad, face increased compliance burdens and costs because the FATCA reporting obligations significantly overlap with [those of] the FBAR.”

Collins reiterated the point in her 2022 report, with a Legislative Recommendation that called for the “harmoniz[ing of] reporting requirements for taxpayers subject to both the report of Foreign Bank and Financial Accounts [FBARs] and the Foreign Account Tax Compliance Act [FATCA] by eliminating duplication and excluding amounts maintained by U.S. persons in the countries where they are bona fide residents.”

IRS: Form 8938 and FBAR Filing Requirements Not the Same

Even the IRS has weighed in on the extent to which FBARs duplicate what “FATCA” Form 8938, filed with a taxpayer’s tax return if required, already does. But it defends the two data collection requirements, on the basis that they’re actually quite different.

“The form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file FinCEN Form 114 (Report of Foreign Bank and Financial Accounts),” the IRS explains, in an explanation on its website that may be found by clicking here.

“Unlike Form 8938, the FBAR (FinCEN 114) is not filed with the IRS. It must be filed directly with the office of Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, separate from the IRS.”

The IRS then goes on to compare when a taxpayer should file which, or potentially both, of these documents.

IRS’s Rettig: Call for Fairer Treatment

Perhaps one of the most interesting expert commentators on the FBAR to emerge in recent years was the current Internal Revenue Service Commissioner, Charles P. Rettig, although his published observations on FBAR compliance pre-date by two years his appointment to the IRS by President Donald Trump in 2018.

Rettig’s seven-page article, “Why the Ongoing Problem with FBAR Compliance?” was published in the August/September 2016 issue of the Journal of Tax Practice & Procedure, and is of interest not only for its extensive background into the way FBARs emerged out of the Bank Secrecy Act, and have been enforced ever since, but also for his critical observations.

A recurring theme in Rettig’s piece is his view that American taxpayers shouldn’t be “taught” – as he suggests that many inadvertently have been in recent years – that their efforts at voluntary tax compliance, in expectation of lenient treatment, under such regimes as the (now ended) Offshore Voluntary Disclosure Program, could in fact put them at risk of “an effort to ferret out any potential discrepancies for the imposition of more significant penalties or criminal sanctions.”

While acknowledging that the one-million-plus FBARs filed in 2015 was unimpressive, considering “the [size of] the pool of those who may potentially have an FBAR reporting obligation of some sort,” Rettig noted that recent studies had revealed that “a high degree of trust in government” is what serves to “increase voluntary compliance,” just as a lack of trust in government “seems to actually lower voluntary compliance.”

Summarized Rettig, who at the time of writing the article was a principal with Hochman, Salkin, Rettig, Toscher & Perez PC, Beverly Hills, California: “The perception of fairness associated with ongoing enforcement efforts will have a significant impact on the future of both domestic and international U.S. tax compliance.”

Christians: Paperwork and Punishment

Yet another heavyweight expert to weigh in with deeply-considered suggestions for addressing the FBAR’s problems was Allison Christians, a law professor, associate dean of research, and current holder of the H. Heward Stikeman Chair in Tax Law at McGill University in Montreal, Canada.

Although her paper was published in 2014, FBAR experts today say its observations are still as relevant as they were back then.

Christians began “Paperwork and Punishment: It’s Time to Fix FBAR,” by noting that the requirement to file these annual reports had originally been introduced as “part of a regime to stop terrorists, money-launderers and tax evaders.”

But “unfortunately, its increasingly-draconian requirements and consequences now apply to millions of innocent bystanders, who are collateral damage in the ongoing battle against financial crime,” Christians added.

“Their inclusion in the FBAR regime is a massive waste of both government and taxpayer resources, effectively criminalizing activities that are wholly unconnected to financial crime, and perversely discouraging compliance.”

Christians then went on to detail how the FBAR penalty structure “is harsh at best and tremendously unfair at worst,” attracting a “one-size-fits-all punishment” that rapidly escalates “according to a formula that is known only to the IRS.

“The instructions claim that a taxpayer can avoid penalties by showing a ‘reasonable cause’ [an escape that only applies to the non-willful penalty], but they also state that a ‘non-willful’ mistake or failure carries a $10,000 penalty, regardless of the amount of money actually at stake,” she continued.

“Accidentally failing to timely and accurately report an account with just fifty dollars in it ostensibly earns the exact same punishment as accidentally failing to timely and accurately report an account with $500 million.”

ACTC Amicus Brief on Penalty Amounts

Finally, an interesting addition to the chorus of those calling for changes in the FBAR regime came little more than two years ago, in the form of a “friend of the court” brief by the American College of Tax Counsel, in connection with a closely-watched FBAR case then taking place in a U.S. district court in California (U.S. v. Jane Boyd).

The ACTC is a non-profit organization of tax lawyers in private practice, law school-teaching positions and in government.

In its amicus brief, filed on Nov. 15, 2019, the ACTC said the $10,000 “non-willful” FBAR penalty should be applied “per year” (and/or “per FBAR”) – and not per account.

In a statement accompanying the announcement of the ACTC’s brief, which she and a Kostelanetz & Fink LLP colleague submitted on the ACTC’s behalf, Washington, D.C.-based attorney Caroline Ciraolo said that while civil penalties “play an important role in tax enforcement,” they “should not be greater than necessary to encourage voluntary compliance.”

“We have seen a steady and sometimes alarming increase in the number and amount of civil tax penalties assessed for negligence or mistakes,” Ciraolo went on.

“The imposition of multiple non-willful penalties for a single failure to timely file an accurate FBAR is the latest in this trend.”

What FinCEN Has Done, Is Doing to Fix the FBAR

FinCEN rarely makes public announcements, and its responses to queries from the press tend to be brief. Some observers say this is because it’s a relatively small office within the Treasury, and also because other bureaus within the Treasury, such as the IRS, are in a better position to answer the types of questions journalists tend to ask.

The result is that little is known about what, if anything, FinCEN specifically has done or plans to do with respect to some of the issues most-often mentioned by FBAR critics.

In response to a question about some of the FBAR penalties recently in the news, for example, a FinCEN spokesperson said: “As FinCEN has stated previously, any questions on penalties should be addressed to the IRS, as FinCEN delegates FBAR enforcement authority to it.

“FinCEN declines to comment further.”

Editor’s note: FBARs are technically due on April 15, but FinCEN grants filers automatic six-month extension, to Oct.15, which taxpayers aren’t required to specifically request.

The Association of Americans Resident Overseas thanks Jack Townsend, a Charlottesville, Virginia-based offshore tax expert, for his help in ensuring the accuracy of this article. Townsend is well known for his insight on complex cross-border tax litigation matters, including but not limited to FBAR cases.

This is one of four articles that comprise this AARO special report on FBARs.
To access the other three articles, see below: