For a client with assets or family abroad, the most dangerous part of the U.S. tax system is often not the tax — it is the reporting. The United States taxes its citizens and residents on worldwide income and demands an unusually detailed accounting of foreign accounts, entities, trusts, and gifts. The penalties for getting that reporting wrong are among the steepest in the Code, and they apply even when no tax was ever owed. Two parallel regimes drive the exposure: the FBAR, a Bank Secrecy Act report filed with FinCEN, and a family of Title 26 information returns filed with the IRS. They overlap, but they are not the same, and a taxpayer can satisfy one and still violate the other.
The FBAR — who files, and what it is
The FBAR — the Report of Foreign Bank and Financial Accounts, filed electronically on FinCEN Form 114 — is required under 31 U.S.C. § 5314 of every U.S. person whose foreign financial accounts exceed $10,000 in the aggregate at any point during the calendar year. The threshold is low and the definition is broad: it counts not only accounts you own but accounts over which you have signature authority, and it aggregates across every account, so a handful of modest balances can trip it. It is a disclosure form — there is no tax due on it — which is exactly why so many otherwise-compliant taxpayers overlook it.
FBAR penalties — non-willful, willful, criminal
The civil exposure is governed by § 5321(a)(5) and turns entirely on one question: was the failure willful? A non-willful violation — negligence, a mistake, ignorance of the rule — carries a penalty capped at an inflation-adjusted amount, roughly $16,536 per report for 2026, subject to a reasonable-cause defense. A willful violation is in a different universe: the penalty is the greater of an inflation-adjusted figure (about $165,353 for 2026) or 50% of the account balance at the time of the violation — and it applies per year. Willfulness does not require a confession; most courts treat reckless disregard or willful blindness as enough. The most extreme cases can also draw criminal charges under § 5322.
Bittner — why “per report” matters
For years the government argued that the non-willful penalty applied per account, so a single late FBAR listing dozens of accounts could generate a penalty in the millions. In Bittner v. United States (598 U.S. 250 (2023)), the Supreme Court rejected that reading: the non-willful penalty accrues per annual report, not per account. The stakes were vivid in Bittner’s own case — the government’s per-account theory produced a $2.72 million penalty across 272 accounts, while the per-report rule capped it near $50,000. The relief is real, but bounded: Bittner addressed only non-willful penalties. The willful penalty’s 50%-of-balance computation remains brutal, and the willful/non-willful line is where the money is.
The Title 26 side — Form 8938 and the information returns
The FBAR is only half the picture. The Code imposes its own foreign-reporting duties, each with its own penalty. Form 8938, required under § 6038D as part of FATCA, reports specified foreign financial assets with the income tax return and carries a $10,000 penalty (rising to $50,000 for continued failure), plus a 40% accuracy penalty under § 6662(j) on related understatements. Forms 5471 and 5472 report interests in foreign corporations and foreign-owned U.S. corporations under § 6038 and § 6038A. And Forms 3520 and 3520-A report foreign trusts and large foreign gifts under § 6677 and § 6039F, where the penalty can reach the greater of $10,000 or 35% of the amount involved. Critically, Form 8938 does not replace the FBAR — the thresholds, the agencies, and the definitions differ, and many taxpayers must file both.
| Form | What it reports | Regime | Penalty for failure |
|---|---|---|---|
| FBAR (FinCEN 114) | Foreign financial accounts over $10,000 in the aggregate | Title 31 (BSA) | Non-willful ~$16,536 per report; willful the greater of ~$165,353 or 50% of the balance |
| Form 8938 | Specified foreign financial assets (FATCA) | § 6038D | $10,000, up to $50,000 after notice; plus § 6662(j) 40% accuracy penalty |
| Form 5471 / 5472 | Interests in foreign corporations; foreign-owned U.S. corporations | § 6038 / § 6038A | $10,000 per form per year, up to $50,000, plus foreign-tax-credit reduction |
| Form 3520 / 3520-A | Foreign trusts; large foreign gifts and bequests | § 6677 / § 6039F | The greater of $10,000 or 35% of the amount (trusts); 5% per month for gifts |
Can the IRS even assess these? The Farhy / Mukhi fight
A live and shifting question is whether the IRS may assess the international information-return penalties at all — or whether it must sue to collect them. In Farhy v. Commissioner (160 T.C. No. 6 (2023)), the Tax Court held the IRS had no authority to assess the § 6038(b) Form 5471 penalty. The D.C. Circuit reversed in May 2024, holding the penalty assessable, and denied rehearing. The Tax Court then reaffirmed its original position in Mukhi v. Commissioner (2024) for cases appealable outside the D.C. Circuit — even as it sustained roughly $10.9 million in § 6677 penalties against the same taxpayer. In February 2026 the Second Circuit also sided with the IRS. The upshot in 2026: the IRS is actively assessing these penalties and has appellate backing in the D.C. and Second Circuits, while the assessability defense survives in other circuits — so the answer can depend on where the taxpayer would appeal. The sheer size of the § 6677 penalties has also drawn Eighth Amendment excessive-fines challenges.
Coming into compliance
The IRS offers structured paths back, and choosing the right one is the heart of the engagement. The Streamlined Filing Compliance Procedures let non-willful taxpayers certify non-willfulness and resolve past failures with a reduced penalty (or none, for many foreign residents). The Delinquent FBAR and Delinquent International Information Return submission procedures address isolated reporting gaps where income was otherwise reported. And for conduct that may have been willful, the IRS Criminal Investigation Voluntary Disclosure Practice trades a higher civil penalty for protection from prosecution. Each door has different costs and different eligibility — and walking through the wrong one can make things worse.
The practical takeaway
Offshore exposure is reporting-driven, it is large, and it hinges on a single fact — willfulness — that determines both the size of the penalty and the right way back into compliance. Bittner has tamed the non-willful side; the willful side, and the live Farhy/Mukhi assessability question, have not been tamed at all. For anyone with foreign accounts, entities, trusts, or substantial foreign gifts, the right sequence is to assess willfulness candidly with counsel, choose the correct program, and file once — not to react form by form.