Recklessness is enough: U.S. court confirms broad standard for foreign account reporting penalties

The U.S. Court of Appeals for the Second Circuit has reaffirmed a broad interpretation of “willfulness” under the Bank Secrecy Act (BSA), holding that reckless conduct is sufficient to trigger civil penalties for failure to file a Report of Foreign Bank and Financial Accounts (FBAR). In United States v. Reyes (Jan. 7, 2026), the court aligned with several other U.S. appellate courts and confirmed that taxpayers cannot avoid FBAR penalties simply by claiming a lack of intent.

This decision has important implications for internationally connected clients and the advisors who work with them.

Case overview
The case involved a married couple who held a foreign bank account with a balance of approximately $2 million, representing a substantial portion of their overall assets. The account originated decades earlier and was later transferred across jurisdictions, ultimately being held in Switzerland.

During the years at issue, the taxpayers used the account to fund U.S. expenses but took deliberate steps to keep it out of sight, including redirecting account correspondence to third parties outside the U.S. and paying additional fees to prevent mail from being sent to their U.S. address. They did not disclose the account to their accountant, answered “no” to the foreign account question on their U.S. tax returns, and relied on the belief that foreign citizenship eliminated any U.S. reporting obligation.

Following an audit by the Internal Revenue Service (IRS), the government assessed FBAR penalties of approximately $420,000 per taxpayer, along with late-payment penalties. When no payments were made, the IRS initiated litigation.

The court’s analysis
Both the district court and the Second Circuit concluded that the taxpayers’ conduct met the BSA’s willfulness standard. The appellate court emphasized that willfulness includes reckless disregard of known or obvious reporting obligations.
Key factors supporting a finding of recklessness included:

• Failure to inform their tax advisor of the foreign account, despite explicit prompts on tax organizers
• False responses on U.S. tax returns regarding foreign account ownership
• The size of the account relative to the taxpayers’ total assets
• Routine use of the account to pay domestic expenses
• No effort to investigate U.S. reporting requirements

The court noted that a reasonable person in similar circumstances would have at least sought clarification. The failure to do so was sufficient to establish willfulness under the BSA.

Why this matters for international advisors
The Reyes decision reinforces a consistent judicial message: misunderstanding the rules, relying on assumptions, or avoiding inquiry does not protect taxpayers from FBAR penalties. Courts continue to treat inaction, selective disclosure, and incomplete responses as high-risk behavior, particularly where foreign assets are significant.

For advisors working with cross-border clients, this case highlights the importance of proactively addressing foreign asset reporting obligations, treating incomplete disclosures as red flags, documenting client communications, and reinforcing that dual citizenship or legacy foreign accounts do not eliminate U.S. reporting requirements.

Practical takeaway
FBAR enforcement remains an active area for U.S. tax authorities, and the threshold for “willful” violations continues to include reckless conduct. Advisors should ensure that foreign asset discussions are explicit, documented, and revisited regularly to help clients avoid significant penalties and litigation exposure.