In a decision solidifying the judicial consensus regarding civil penalties under the Bank Secrecy Act (BSA), the United States Court of Appeals for the Second Circuit recently affirmed a summary judgment ruling in United States v. Reyes. The court held that the statutory term "willfully" encompasses reckless conduct for purposes of imposing enhanced civil penalties for failing to file a Report of Foreign Bank and Financial Accounts (FBAR). Furthermore, the court confirmed that the six percent late payment penalty assessed by the Treasury Department is mandatory, leaving district courts with no discretion to reduce it.

This article details the factual background of the Reyeses’ noncompliance, the court’s statutory analysis regarding willfulness and recklessness, and the rigid application of late payment penalties under federal debt collection laws.

Factual Background

The defendants, Dr. Juan Reyes and Catherine Reyes, held a financial interest in a foreign bank account that ultimately led to the litigation. Dr. Reyes, a surgeon, and his wife held a joint account that originated in Nicaragua in 1972 and was eventually transferred to Lloyds TSB Bank in Switzerland-. By the years at issue—2010 through 2012—the account balance exceeded $2 million, constituting between 75% and 90% of the couple’s total liquid assets.

Despite the significance of these assets, the Reyeses failed to file FBARs for the years in question. The record established several specific acts and omissions regarding the account:

Use of Funds: The couple utilized the foreign funds for personal expenses in the U.S. via credit cards linked to the Swiss account, yet they arranged for the credit card statements to be mailed to a friend in Spain rather than their U.S. address.
Hold Mail Service: The taxpayers paid a fee to the foreign bank to "retain in future all my/our correspondence," preventing bank mail from reaching the United States.
Non-Disclosure Instructions: In 2000, the Reyeses signed a specific declaration prohibiting the bank from making disclosures connected to U.S. withholding tax. They selected an option stating, "I do not authorize you to make any disclosure in connection with the US Withholding Tax," explicitly rejecting an alternative option to submit a Form W-9,.
Tax Returns: For the relevant years, the Reyeses’ tax returns checked "No" in response to the Schedule B question regarding interest in foreign financial accounts,. Their accountant, Sidney Yoskowitz, testified that his practice was to send a "Client Organizer" inquiring about foreign accounts, but the Reyeses failed to return it or otherwise inform him of the Swiss account.

In 2018, the IRS assessed civil penalties for willful violations of 31 U.S.C. § 5321. The penalty was mitigated from the statutory maximum of 50% of the account balance to approximately $420,051 per spouse. When the Reyeses failed to pay the agreed-upon mitigated penalties, the government brought suit to reduce the penalties to judgment.

Taxpayers’ Arguments for Relief

The Reyeses challenged the district court’s grant of summary judgment on two primary fronts. First, they argued that "willfulness" under 31 U.S.C. § 5321(a)(5)(C) creates a subjective standard requiring intentional conduct, asserting that "recklessness is insufficient to establish willfulness". They contended that genuine issues of material fact existed regarding their intent, citing their lack of business sophistication and a subjective belief—based on a newspaper article—that Dr. Reyes’s status as a Nicaraguan citizen exempted him from reporting.

Second, regarding the collection of the debt, the Reyeses argued that the district court possessed the discretion to reduce the six percent late payment penalty imposed by the Treasury Department regulations.

Legal Analysis: Willfulness Includes Recklessness

The Second Circuit rejected the taxpayers’ argument that civil willfulness requires actual knowledge or intent. The court relied heavily on the Supreme Court’s decision in Safeco Insurance Co. of America v. Burr, which held that when willfulness is a "condition of civil liability," it generally covers "not only knowing violations of a standard, but reckless ones as well". The court noted that this construction "reflects common law usage, which treated actions in ‘reckless disregard’ of the laws as ‘willful’ violations".

The court distinguished this from the criminal context, where willfulness is typically "limiting liability to knowing violations". The Second Circuit emphasized that in the civil context, there are "neither the textual nor substantive reasons for pegging the threshold of liability at knowledge of wrongdoing".

By holding that "willfully" in § 5321(a)(5)(C) encompasses recklessness, the Second Circuit joined a "general consensus among courts" including the Third, Fourth, Sixth, Ninth, Eleventh, and Federal Circuits. The court concluded: "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".

Application of Law to Facts

Having established the legal standard, the court applied the objective test for recklessness: conduct entailing "an unjustifiably high risk of harm that is either known or so obvious that it should be known". The court found that the Reyeses’ conduct satisfied this standard as a matter of law, precluding any need for a trial.

The court identified three categories of evidence establishing recklessness:

Concealment Efforts: The court highlighted the "hold mail" instructions and the routing of credit card statements to Spain. The court observed that the Reyeses "took several steps that ensured the foreign bank account...would not be reported to U.S. tax authorities".
Explicit Documentation: The court placed significant weight on the bank form where the Reyeses refused to authorize W-9 disclosure. The court noted that even a "cursory glance" at such a document would have "brought the [requirement] to [their] attention".
Tax Filings: The court held that the question on Schedule B regarding foreign accounts is a "sign of fraud" or risk that cannot be ignored. The court reiterated the principle that a taxpayer "cannot escape the requirements of the law by failing to review their tax returns".

The court dismissed the Reyeses’ defense regarding their lack of sophistication or subjective beliefs. The court clarified that the standard is objective: "The inquiry turns on whether a ‘reasonable man’ would have realized...that his conduct creates an unreasonable risk". Consequently, Dr. Reyes’s testimony regarding his subjective misunderstanding of the law was irrelevant because a reasonable person in his position—possessing a $2 million account and signing forms regarding U.S. withholding—"would have thought it necessary to investigate".

The court also distinguished United States v. Bittner, noting that while Bittner discussed sophistication, it did so in the context of a "reasonable cause" defense, not the "recklessness" standard for willfulness.

Mandatory Late Payment Penalties

The final issue concerned the "penalty charge of not more than 6 percent a year" on debts past due for more than 90 days under the Federal Claims Collection Act (FCCA), 31 U.S.C. § 3717(e)(2). The Reyeses argued that the statutory language allowed the court to use its discretion to apply a lower rate.

The Second Circuit disagreed, affirming that the authority to set the penalty lies with the agency owed the debt, not the court. The IRS, as part of the Treasury Department, is governed by regulations stating that "[p]enalties shall accrue at the rate of 6% per year". The court reasoned that the FCCA "does not permit a court to override the considered judgment of an executive agency regarding the penalty rate". Because the Reyeses failed to pay the penalty within 90 days of the assessment agreement, the court held the imposition of the full 6% penalty was mandatory.

Conclusion

The Reyes decision serves as a critical reminder to tax professionals regarding the low threshold for "willfulness" in the context of FBAR penalties. The Second Circuit has explicitly held that "an egregious refusal to see the obvious, or to investigate the doubtful, may in some cases give rise to an inference of recklessness" sufficient to trigger maximum civil penalties. Furthermore, the court’s ruling on interest penalties underscores that delaying payment on agreed-upon assessments can result in mandatory, non-negotiable statutory penalties.

Prepared with assistance from NotebookLM.