We investigate the θ-vacuum structure and the 't Hooft anomaly at θ=π in a simple quantum mechanical system on S1 to scrutinize the applicability of the functional renormalization group (fRG) approach. Even though the fRG is an exact formulation, a naive application of the fRG equation would miss contributions from the θ term due to the differential nature of the formulation. We first review this quantum mechanical system on S1 that is solvable with both the path integral and the canonical quantization. We discuss how to construct the quantum effective action including the θ dependence. Such an explicit calculation poses a subtle question of whether a Legendre transform is well defined or not for general systems with the sign problem. We then consider a deformed theory to relax the integral winding by introducing a wine-bottle potential with the finite depth ∝g, so that the original S1 theory is recovered in the g→∞ limit. We numerically solve the energy spectrum in the deformed theory as a function of g and θ in the canonical quantization. We test the efficacy of the simplest local potential approximation (LPA) in the fRG approach and find that the correct behavior of the ground state energy is well reproduced for small θ. When the energy level crossing is approached, the LPA flow breaks down and fails in describing the ground state degeneracy expected from the 't Hooft anomaly. We finally turn back to the original theory and discuss an alternative formulation using the Villain lattice action. The analysis with the Villain lattice at θ=π indicates that the nonlocality of the effective action is crucial to capture the level crossing behavior of the ground states.