Understanding United States v. Hughes: Establishing a Precedent in FBAR Violations
Published on by Lauren Huster in International Business
A crucial decision in the landmark case of United States v. Hughes has broad implications for foreign bank account holders. The Ninth U.S. Circuit Court of Appeals has determined that recklessness is included in the definition of willfulness for civil penalties concerning Foreign Bank Account Records (FBAR) reporting violations.
If you’ve been accurately reporting your foreign account activity, this likely won’t change your process, but it pays to take a closer look to avoid financial consequences. With this ruling clearing up grey areas and perceived loopholes regarding what is considered “willful” negligence, all business owners operating across borders can expect to be held to a tighter standard.
The background behind FBAR
The Bank Secrecy Act of 1970 mandates that U.S. citizens, like defendant Timberly Hughes, file an annual FBAR report if the total balance in these foreign accounts exceeds $10,000. The report must include all relationships with international financial agencies. Failure to do so can result in substantial penalties, especially for willful violations, which can be as high as the greater of 50% of the account balance or $100,000. The severity of the penalty hinges on whether the violation is deemed willful or non-willful.
Diving into the Hughes case
Timberly Hughes, owner of two New Zealand businesses and holder of accounts at ANZ Bank New Zealand Limited, failed to file FBARs for the years 2010 to 2013. Following a bench trial in 2021, the district court found that Hughes’ failure to file in 2012 and 2013 was “willful” under the FBAR statute, resulting in hefty penalties.
The court established that “willfulness” for civil FBAR penalties can be demonstrated through “recklessness or willful blindness.” This decision was based on the Supreme Court’s reasoning in Safeco Insurance Co. of America v. Burr, which stated that “willfulness can be shown by proof of objective recklessness as well as subjective intent.” The district court found Hughes “plainly saw at least the basic instructions” that she was required to file an FBAR but failed to do so as Hughes indicated on Schedule B of her personal return that she had a foreign bank account and was required to file a FBAR.
Schedule B is the Interest and Ordinary Dividends Statement that is attached to an individual return, but it asks the question about having interest or signature authority over financial accounts in a foreign country and if the individual is required to file an FBAR. Since she filed the 2012 and 2013 returns with this schedule and indicated yes, the IRS deems, she was aware of the FBAR filing requirements which results in a willful non-filing.
Schedule B was not attached to her personal return in 2010 and 2011 so there was no willful non-filing.
Hughes appealed this decision, claiming the district court should have found proof she “subjectively intended not to file her 2012 and 2013 FBARs before concluding that the United States could assess willful civil penalties against her.”
However, on August 24, 2024, the Ninth Circuit Court of Appeals affirmed the district court’s decision, setting a precedent that willful violations of the FBAR statute include both knowing and reckless violations. For her failure to comply, the court ordered Hughes to pay $238,125.19 in penalties.
What the ruling means for you
The court’s decision reinforces the importance of taking FBAR filing obligations seriously and ensuring you are reviewing your personal return. Hughes indicated she was not aware of the filing requirements, but her returns for 2012 and 2013 indicated otherwise. This refined interpretation of “willfulness” to include “recklessness” implies that ignorance of the law will not be seen as an excuse for failing to meet FBAR reporting requirements.
The ruling sends a strong message to all U.S. taxpayers with foreign bank accounts, underscoring the legal requirement to accurately report all foreign financial activity. Failure to do so, whether through negligence or intentional evasion, can lead to severe financial consequences.
Ultimately, the United States v. Hughes case serves as a stark reminder of the seriousness of FBAR violations. The ruling reaffirms that a taxpayer’s recklessness in failing to disclose foreign bank account records will be closely investigated and penalized, and that authorities will not take ignorance as an excuse. Moving forward, it’s even more crucial for U.S. taxpayers to understand their obligations under the Bank Secrecy Act and take all necessary steps to comply.
When navigating the ins and outs of foreign financial reporting and tax requirements, it’s easy to get turned around. But with this ruling reinforcing taxpayers’ responsibility to learn and follow all guidelines, it’s more important than ever to never miss a step.
Luckily, our international tax pros are here to guide you down the path to success wherever you operate across the globe. Contact us today for a free consultation about your path to ensuring compliance. As always, we’re here to help!
Additional Resources
For a more in-depth look at foreign financial reporting responsibilities, check out this video on FBAR filing requirements or access the international business knowledge on our blog. You can also learn more about strategies for international business with our quick 4-episodes series on YouTube.
