From the Tax Law Offices of David W. Klasing - 9th Circuit's Recent Ruling Incorporates "Recklessness" into Willful FBAR Penalties

IRVINE, Calif., Oct. 8, 2024 /PRNewswire/ -- One area of the law that our International Tax Attorneys & CPAs keep a constant eye on is the assessment of FBAR penalties. These penalties can either be assessed as "willful" or "non-willful" penalties depending on your alleged actions, or inactions, but until recently, the question of what counts as "willful" has been somewhat up in the air in California and the rest of the 9th Circuit.

While many federal appeals courts nationwide have held that "willful" penalties for FBAR violations can be dealt out for reckless acts, not just intentional ones, these rulings have not yet touched California – until now. The 9th Circuit – responsible for California and many other Western states – ruled that "willful" can include merely "reckless" acts. The only place left for a contrary decision on this matter is the U.S. Supreme Court, though that is unlikely.

Call the Tax Law Offices of David W. Klasing at (800) 681-1295 to arrange a reduced rate initial consultation with our Dual Licensed International Tax Attorneys and CPAs about your case or click here

9th Circuit Decision on FBAR Willful Penalties Includes "Recklessness"

As recently reported, the 9th Circuit Court of Appeals recently decided U.S. v. Hughes in August 2024. This case dealt with a taxpayer who was convicted of FBAR violations and ordered to pay willful penalties. Rather than showing actual intent to avoid FBAR filings, the prosecution showed in her trial that she saw the instructions and did not file an FBAR. This, the court held, was enough to be seen as "recklessness or willful blindness," if not intentional action.

In making this decision, the 9th Circuit found persuasive the fact that the penalties were civil penalties brought for "willfulness," which is similar to the penalties in Safeco Ins. Co v. Burr, a 2007 case decided by the U.S. Supreme Court that dealt with civil willfulness penalties under a different act – the Fair Credit Reporting Act (FRCA). Although the willful penalties for FBAR violations come under the Bank Secrecy Act of 1970 instead of the FRCA, the 9th Circuit found the ruling in Safeco and its parallel to the FRCA instructive.

As such, it is now clear that the law within the 9th Circuit is that "willful" penalties for FBAR violations can encompass intentional and reckless violations. This still prevents it from being applied to negligent violations, which would use "non-willful" penalties instead.

How the 9th Circuit's Decision Compares to Other Circuits' Decisions on FBAR Penalties

Our Dual Licensed International Tax Attorneys and CPAs have watched FBAR penalty decisions closely as various courts make rulings and court precedent. As the Court notes in the Hughes opinion, this new ruling puts the 9th Circuit in line with the analogous Safeco decision from the U.S. Supreme Court as well as the rulings of every other U.S. Circuit Court of Appeals that has decided a case on recklessness for FBAR willful penalties. The case notes that the 3rd Circuit was the first to decide a case like this in Bedrosian v. U.S. (2018), but that the Federal Circuit, 4th Circuit, 11th Circuit, and 6th Circuit have also universally agreed that "willful" includes "reckless."

While we had no confirmation from the 9th Circuit until now, it was likely that they would rule the way they did, given how the other circuits to hear this kind of case have ruled in those appeals. As such, this puts California and the rest of the 9th Circuit's rules in line with the rest of the country.

Can the Supreme Court Cut "Recklessness" Out of FBAR Willful Penalties?

The U.S. Supreme Court has the power to overrule this decision if they get a petition to hear a case on the matter and think that it was wrongly decided. However, given that it is based on a Supreme Court opinion from 2007 (Safeco), the Supreme Court might not distinguish this case or reverse its previous ruling. Additionally, the Court already denied several petitions for certiorari, as noted in the Hughes ruling. This effectively gives the rulings a rubber stamp from the Supreme Court and indicates that they have nothing further to say on the matter that might overrule what the circuits have said.

Additionally, the Supreme Court only tends to take up cases where there is a constitutional question or a "circuit split," i.e., where different circuits have come out with contradicting rulings on the matter. Because every circuit that has heard this case so far has agreed that willfulness includes recklessness, there is no "split" to "resolve" by the high court taking up a case. Unless another circuit rules differently and creates a split, there likely never will be a split for the Supreme Court to resolve.

What to Do If You Are Facing Willful Penalties for an FBAR Violation

If you are being audited and have the potential to face penalties for an FBAR violation, you should seek help from a lawyer right away. Our attorneys may be able to take up your case and negotiate a better outcome, potentially by helping you to belatedly fulfill your FBAR filing requirements and potentially avoid additional penalties. We can also represent you in various court matters.

Call Our Dual Licensed Tax Attorneys and CPAs for a Case Evaluation

Call the Tax Law Offices of David W. Klasing at (800) 681-1295 to arrange a reduced rate initial consultation with our Dual Licensed International Tax Attorneys and CPAs about your case or click here

See our FBAR Compliance and Disclosure Q and A Library 

See our Foreign Audit Q and A Library

Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC