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  • Writer's pictureJoel Luber

FBAR [Fire, Brimstone, And Regret]

by Joel S. Luber, Esq., Reger Rizzo Darnall LLP

The United States Supreme Court has some weighty cases to consider this term. One of the cases involved the interpretation of how foreign bank account penalties are calculated for failure to file the Report of Foreign Bank and Financial Accounts (known as “FBAR”). The Supreme Court on November 2, 2022 heard oral arguments in this case, Bittner v. United States, and published their decision on February 28, 2023.  The Court ruled in the taxpayer’s favor.

IRS and FBAR penalties and rules

For Mr. Bittner, the difference was between a penalty of $50,000 or $2.72M. No small consequence. For purposes of this article, I am not going to go into any significant detail about the arguments that were made by both sides (Taxpayer and Treasury Department) advancing their interpretation of the applicable statute,  31 U.S.C. §5321(a)(5)(B)(i). Rather, the purpose here, after a brief description of the statute, is to (i) alert you to the magnitude of the penalties; (ii) warn you where these penalties may lurk and who may be exposed, particularly in the context of trusts; and (iii) help you determine what to do if you find yourself on the receiving end of an assessment for these penalties.

Background of FBAR

In 1970, in response to concerns regarding the unavailability of foreign account records of persons thought to be engaged in illegal activities, Congress enacted the Bank Records and Foreign Transactions Act, commonly known as the Bank Secrecy Act (“BSA”), codified in 31 U.S.C. §5311 et. seq. Although the original focus of the BSA was on reporting by financial institutions, it also required residents or citizens of the United States, and persons in, and doing business in, the United States, to keep records of and report their relationships or transactions with foreign financial agencies. This reporting requirement was implemented through regulations issued by the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”) that provided for the reporting of foreign bank, securities, or other financial accounts through the filing of an FBAR.  Each United States person with an interest in, or signatory authority over, a foreign account is required to file an FBAR with FinCEN if the aggregate value of all such foreign accounts is over $10,000.

Beware of Questions on Common IRS Forms

On IRS Form 1040, Schedule B, on which Interest and Ordinary Dividends are reported, there is a Part III, titled Foreign Accounts and Trusts. Questions 7a, 7b, and 8 have to be answered Yes or No. Do not overlook these questions, and certainly do not answer “No” in 7a when the answer is “Yes.” Your foreign account will be discovered.  A “Yes” answer to 7a alerts you to file a FBAR.  On IRS Form 1041, Page 3, Other Information, Questions 3 and 4 ask the same question, with admonition to file a FBAR if you answer Yes. On IRS Form 1065, Schedule B, Questions 8 and 9 ask the same questions. And, on Form 706, in Part 4, there is a Question 15 that asks whether the decedent had “an interest in or a signature or other authority” over a financial account in a foreign country.  If you’re the responsible person completing a 706 for a decedent, you best ask that question to all persons who may have knowledge of the decedent’s connection with anything foreign. In addition to the FBAR penalty that can be assessed against the Estate, the IRS can impose tax preparer penalties for inaccurate or incomplete tax return preparation. See §6694 of the Internal Revenue Code of 1986, as amended (“IRC”).

Draconian Penalties

Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. Non-willful means you didn’t intend any harm, you were just ignorant. And that $10,000 is each year, and the statute of limitations on FBAR violations is six years.

So is that $60,000 per account? What if you have 10 accounts? The Supreme Court’s decision in Bittner ruled that the number of accounts is immaterial for a non-willful violation and the $10,000 penalty is applied on a per-person per-year basis.  It can get worse. FinCEN adjusts FBAR penalties for inflation each year. For 2022 the non-willful penalty is $14,489, not $10,000.

If your violation is found to be willful, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation—and each year you didn’t file is a separate violation. Criminal penalties for FBAR violations are even more frightening, including a fine of up to $250,000 and five years of imprisonment.

Application of FBAR Penalties to Fiduciary Parties.1

Any U.S. person who has either a “financial interest in” or “signature or other authority over” a foreign financial account is required to file an FBAR. 31 C.F.R. §1010.350(a). The persons subject to a reporting obligation include account owners and fiduciary parties in relationships established under common estate planning documents such as financial powers of attorney, trust agreements and wills, as well as entities held by trusts or estates. See also 31 C.F.R. §§ 1010.350(b)(3), 1010.350(e)(2).

Regulations treat a U.S. person as having a reportable financial interest in a foreign account held in a trust if he or she is the grantor of the trust and is, under the grantor trust income tax rules (IRC §§671-679), taxed as the deemed owner of any of the trust assets. 31 C.F.R. §1010.350(e)(2)(iii). The regulations also treat a U.S. person as having a reportable financial interest in a foreign account held by a trust in which the U.S. person has a present beneficial interest in more than 50 percent of the trust assets or from which he or she receives more than 50 percent of the trust income. 31 C.F.R. §1010.350(e)(2)(iv).

Regulations also state that a person has signature or other authority over a foreign account if that person, either alone or in conjunction with another person, controls the disposition of the assets of the account by direct communication with the person maintaining the account. 31 C.F.R. §1010.350(f)(1). The result of all the foregoing is this:   Multiple persons may have reporting obligations for the same account, and the non-willful failure to satisfy these obligations can result in multiple penalties being imposed with respect to those accounts.

A common estate planning relationship in which these rules present a substantial risk of multiple non- willful FBAR penalties is the relationship created between an individual and the person to whom he or she grants a power of attorney. A financial power of attorney names an agent with authority to act on behalf of the principal with respect to property and financial transactions. The agent typically has the authority to open, close, continue and control accounts, whether foreign or domestic. Granting this authority to the agent does not relieve the principal of the authority to control the same accounts. In most cases, the principal is not required to notify the agent of all of the principal’s accounts or whether the principal maintains foreign accounts, and typically does not.

The agent’s signatory authority over foreign accounts may make the agent holding the power of attorney a “person” subject to FBAR reporting requirements. Thus, the relationship between the principal and the agent may double the persons responsible for filing FBAR reports and whose non-willful errors can be subjected to an FBAR penalty.

Example 1: Assume that Principal established two foreign financial accounts in Country A to facilitate the payment of expenses associated with real properties owned by Principal in Country A. In Years 1-6 each account balance is $6,000. Principal names Agent under a power of attorney with power to act with respect to all of Principal’s real property and accounts. Principal does not inform Agent that Principal has foreign accounts in Country A, and Agent does not inquire as to the existence of foreign accounts. Agent non-willfully and without reasonable cause fails to file an FBAR in years 1-6. There can be a $10,000 penalty imposed upon Agent in each year, creating a $60,000 total penalty for the 6-year period, which is equal to five times the balance of the accounts.2

There also can be a similar penalty imposed upon the Principal, creating in the aggregate a penalty ten times the total account balances. (If the Supreme Court in Bittner had decided differently, the penalty would have been computed per account rather than per return and there would have been an aggregate penalty of $240,000, twenty times the total account balances.3)

The potential for multiplier effects of various $10,000 penalties is increased even further in the context of trusts. Trusts are immensely varied in type, structure, and duration. Trusts may be either revocable or irrevocable, either grantor trusts or nongrantor trusts for income tax purposes, and either domestic or foreign trusts for income tax purposes.

A trust also may have an investment advisor or trust protector with specific powers with respect to the trust. These powers may include the power to open, close, continue, and control financial accounts. The beneficiaries of a trust have the economic benefit of the trust assets, but usually have no power to administer those assets.

A beneficiary may have an interest in trust income, principal or both, and that interest may be mandatory or discretionary. The interest may be either present or future, vested or non-vested.  Trusts often continue for multiple generations, with beneficiaries and their interests possibly changing during the trust term.

Example 2:  Assume that Grantor, a U.S. person, creates a revocable trust to hold Grantor’s assets. Grantor names three U.S. citizens as trustees, requiring that all decisions be made by majority vote. The trustees have authority to make distributions during Grantor’s lifetime only to Grantor and Grantor’s spouse. Grantor transfers to the trust two foreign financial accounts in Country A, which Grantor established to facilitate the payment of expenses associated with real properties owned by the trust in Country A. In Years 1-6 each account balance is $10,000. Each of the trustees is obligated to file an FBAR reporting the foreign financial accounts. 31 C.F.R. §1010.350(f)(1). The trustees’ non-willful failure to file a timely and correct FBAR could subject the trust or trustees to up to $180,000 of FBAR penalties – nine times the size of the account balances.4

FBAR Collection Procedures

FBAR penalty procedures under Title 31 are similar to federal tax penalty procedures under Title 26.  Under both Title 31 and Title 26, the IRS must make a timely assessment of the penalty prior to initiating a collection action.  However, the two procedures diverge somewhat with respect to collection remedies available to the government. The IRS has six years to make a timely FBAR assessment.  This six-year period begins on the date the FBAR should have been filed and runs regardless of whether an FBAR has been filed at all.

Because FBAR penalties are located in Title 31, provisions therein govern collection.  Under Title 31, the government may collect FBAR penalty assessments through various means including: (i) administrative (or tax refund) offset (collectively, “administrative offset”); (ii) wage garnishment; and/or (iii) litigation.5

The government’s right of administrative offset permits the government to administratively reduce amounts that are already owed by the government to the taxpayer to satisfy all or part of an unpaid FBAR penalty assessment.6 For example, the government may use its right of administrative offset to reduce a federal income tax refund7 or reduce benefits already owed to the taxpayer under government programs such as Social Security.8

Title 31 also permits the government to garnish up to 15% of the taxpayer’s “disposable pay”—i.e., the taxpayer’s compensation (salary, bonus, commission, etc.) from an employer minus health insurance premium deductions and amounts otherwise required by law to be withheld (e.g., federal employment taxes).9 Perhaps the strongest of its collection methods, the government also has the authority to initiate a civil lawsuit against the taxpayer to reduce the FBAR penalty assessment to judgment.10 After a judgment is entered against the taxpayer, the government may: (i) file a judgment lien against the taxpayer’s property11; (ii) foreclose on the taxpayer’s property12; or (iii) obtain a post-judgment Writ of Garnishment.13

Title 26 permits the IRS 10 years from the date of an assessment (tax, penalty, or otherwise) to collect the assessment through administrative means. But there is no statute of limitations if the government seeks to collect an FBAR penalty assessment through administrative offset. In other words, the government may continue collection via administrative offset until the FBAR penalty assessment is paid in full. If the government chooses to file a civil lawsuit against a taxpayer to reduce the FBAR penalty assessments to judgment, the government must initiate the lawsuit within two years from the assessment date, unless the government obtains a criminal judgment, which extends the statute of limitations to file a civil action another two years from the criminal judgment date.  If the government is successful in obtaining a judgment against the taxpayer, the government can file a judgment lien for 20 years after the judgment date and may extend the judgment lien for an additional 20 years if it so chooses.14

If the government files suit against the taxpayer within the required two-year period, DOJ has the authority to settle the lawsuit on terms agreeable to the DOJ.  However, taxpayers are not required to take a wait-and-see approach to determine whether a suit will be filed against them—rather, taxpayers are permitted to pay all or part of the FBAR penalty and file a refund suit against the government.15 This option may make sense if the taxpayer wants a jury trial, as government-initiated lawsuits do not permit jury trials.16 However, any advantages to filing suit first should be weighed against the very real risk that the government will file a counterclaim to reduce all of the FBAR penalty assessments to judgment, resulting in the additional collection measures available to it (discussed above).


FBAR penalties are no joke.  If you have a client who has any connection at all with anything foreign, and in today’s worldwide globalized economy it’s almost rare one does not, there is absolutely no reason to believe that a conscious decision not to report a foreign account will not end up in a disaster. And, for those persons who may have exposure simply by virtue of a financial relationship with another person who owns a foreign account, whether as trustee, trust protector, investment manager, distribution advisor, or beneficiary, not to ask the question is, in this author’s humble opinion, tantamount to negligence. Query, whether negligence will be considered the equivalent as the absence of willful neglect. It’s not as if a taxpayer owning a foreign account that produces income is not otherwise required to report the income from the account. There is a plethora of tax penalties for failure to report the income. But if the reason not to report the foreign income is because you don’t want to report the existence of the account, then when the hammer does fall, you have already crossed the line from non-willful to willful. Good night, Irene.

Joel S. Luber, Esquire, is chair of the Estates & Trusts Group at Reger Rizzo Darnall LLP. Joel concentrates his practice in sophisticated estate planning for high-net-worth individuals, asset protection planning, estate administration, Orphans’ Court practice, and general corporate and income tax planning.

1 This portion largely derived from Brief of The American College of Trust and Estate Counsel [ACTEC] as Amicus Curiae in Support of Neither Party filed in the Bittner case.

2 $10,000 statutory penalty x 6 years = $60,000.

3 ($10,000 x 2 accounts x 6 years) x 2 persons (Principal and Agent) = $240,000.

4 [$10,000 x 6 years] x 3 trustees = $180,000

5 31 U.S.C. § 3711(g)(9).

6 Id.; see also 31 U.S.C. § 3716.

7 31 U.S.C. § 3720A.

8 31 U.S.C. § 3716(c)(3)(A).

9 31 C.F.R. § 285.11(c).

10 31 U.S.C. § 5321(b).

11 28 U.S.C. § 3201.

12 28 U.S.C. § 3201(f), § 3202(e).

13 28 U.S.C. § 3205.

14 28 U.S.C. § 3201(c).

15 Norman v. U.S., No. 15-872T, 2016 WL 1408582 (Fed. Cl. Apr. 11, 2016) (jurisdiction under the Tucker Act); see also Landa v. U.S., 153 Fed. Cl. 585, 592 (Fed. Cl. 2021); Jarnagin v. U.S., 134 Fed. Cl. 368 (Fed. Cl. 2017); Jones v. U.S., No. SACV 19-00173 JVS, 2020 WL 4390390 (C.D. Cal. May 11, 2020).

16 See 28 U.S.C. § 2402.



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