Second Circuit: Reckless Conduct Satisfies Willfulness Standard for FBAR Penalty

(Parker Tax Publishing January 2026)

The Second Circuit held that a district court did not err in (1) holding that the term "willful," as used in the statute requiring the reporting of foreign bank accounts, encompasses reckless conduct, and (2) in applying that standard in granting summary judgment to the United States. The district court similarly did not err in imposing on the taxpayers a six percent late payment penalty pursuant to controlling Treasury Department regulations. U.S. v. Reyes, 2026 PTC 2 (2d Cir. 2026).

Facts

Juan Reyes and his wife, Catherine, are the holders of a foreign bank account with Lloyds Bank in Switzerland that was opened for Juan in the early 1970s. The Bank Secrecy Act (BSA), codified in 31 U.S.C. Section 5314, requires U.S. citizens to report interests in foreign bank and financial accounts with a value exceeding $10,000 on a Report of Foreign Bank and Financial Accounts (FBAR). The maximum FBAR penalty for the willful failure to report a foreign bank account is the greater of $100,000 or 50 percent of the account balance at the time of the violation.

By 2010, the Reyeses' foreign bank account comprised the majority of their wealth and a major source of their income. They never filed an FBAR. In 2018, the IRS notified the Reyeses that they were liable for penalties under 31 U.S.C. Sec. 5321(a)(5)(C) for willfully failing to file FBARs in 2010, 2011, and 2012. The Reyeses failed to pay those penalties and in 2021, the government brought suit to convert the penalties to a money judgment.

In U.S. v. Reyes, 2024 PTC 174 (E.D. N.Y. 2024), a district court granted the government's motion for summary judgment, agreeing with the government that the husband and wife each owed approximately $518,000 in FBAR penalties, late payment penalties, and interest. The court accepted the IRS's calculation of penalty amounts to be assessed under 31 U.S.C. Sec. 5321(a)(5)(C)(i) and entered judgment in the amount of $420,051 plus interest and a 6 percent late payment penalty of $84,102 under 31 U.S.C. Sec. 3717(e)(2).

Before the district court entered its final judgment, the Reyeses challenged the court's calculation of a 6 percent late payment interest penalty assessed under 31 U.S.C. Sec. 3717(e)(2) and 31 C.F.R. Sec. 5.5. They argued that the statute leaves the calculation to the court's discretion, and that a lower percentage should be applied because they were "already to be drastically penalized" by the court's grant of summary judgment, due to the amount of the FBAR penalty, their ages, and their financial circumstances. The court rejected that argument and held that because the Department of Treasury set the minimum rate to be applied at 6 percent per year, the court did not have discretion to reduce the amount of the penalty.

The Reyeses appealed to the Second Circuit. On appeal, they argued that the district court's grant of summary judgment was improper because it could not have determined that they acted willfully as a matter of law, and that the district court misunderstood the 6 percent late payment penalty as mandatory.

Analysis

The Second Circuit affirmed the district court and held that the lower court did not err in holding that the term "willful," as used in the statute, encompasses reckless conduct, nor did it err in applying that standard in granting summary judgment to the government. Nor, the Second Circuit said, did the district court err in imposing the 6 percent late penalty on the Reyeses.

The Second Circuit had not previously addressed the proof necessary to satisfy the willfulness requirement under Section 5321. But the court now held, in line with the uniform decisions of the circuit courts that have addressed the issue, that "willfully" as used in 31 U.S.C. Sec. 5321(a)(5)(C) encompasses both intentional and reckless conduct. That is, a person who recklessly fails to report a foreign account as required is liable for the heightened civil penalties for "willful" violations of the statute.

Having concluded that the district court applied the proper legal standard, the Second Circuit further held that the district court did not err in ruling that the standard was met. The Second Circuit explained that the standard for recklessness in the civil context is an objective one, which imposes civil liability for conduct entailing "an unjustifiably high risk of harm that is either known or so obvious that it should be known." Applying this standard to the Reyeses' conduct, the court noted that during the years in question the taxpayers had over $2 million in their Swiss bank account, which made up 75-90 percent of their wealth. The court found that the Reyeses were aware of the wealth they kept abroad in Switzerland, as they regularly drew on the funds using credit cards linked to the foreign account.

According to the court, the Reyeses took several steps that ensured the foreign bank account, and their domestic use of its funds, would not be reported to the IRS. First, the Reyeses had the credit cards they used to spend the foreign money registered and picked up in Spain, despite never having lived there and visiting only occasionally. They also set up payments for those cards to be automatically deducted from the foreign account. Second, the Reyeses specifically instructed Lloyds Bank not to send mail related to the account to their address in the United States, a service for which they paid a fee. Third, they directed the bank not to invest in any U.S. securities. The court concluded that the amount of funds, particularly relative to the rest of the Reyes' wealth, and the fact that they used the money to cover domestic expenses using foreign cards, show that it was "obvious and "should have been known" that such income needed to be reported to the United States.

Observation: It was also important, the court noted, that the Reyeses were presented with multiple documents - including the bank form instructing Lloyds to divest from U.S. securities and the tax forms submitted by the Reyeses to the IRS - all making explicit that U.S. reporting obligations might attach to foreign bank accounts. In the court's view, it was not reasonable for the Reyeses to ignore these indicators of potential liability.

Regarding the 6 percent late payment penalty, the court noted that, under 31 C.F.R. Sec. 1010.810(g), the IRS is responsible for collecting any civil penalties assessed for violations of the FBAR reporting requirement and the Federal Claims Collection Act (FCCA) governs the interest rates and penalties that attach to debts owed by persons to the federal government. Further, 31 U.S.C. Sec. 3717(e)(2) clarifies that as to penalties for late payment, the "head of an executive, judicial, or legislative agency shall assess on a claim owed by a person . . . a penalty charge of not more than 6 percent a year for failure to pay a part of a debt more than 90 days past due." Thus, the court stated, the Treasury Department, which houses the IRS, is tasked with assessing and collecting FBAR penalties and 31 C.F.R. Sec. 5.5(a) has set the penalty rate at 6 percent per year.

For a discussion of the requirement to file an FBAR and the penalties for not doing so, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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