Assessment of FBAR Penalty to be Determined by the United States Supreme Court
While there is no doubt that foreign or international tax obligations and reporting requirements are complex, recent cases and the US Supreme Court’s review of an FBAR ruling show that even US Federal Circuit Courts, the Internal Revenue Service and taxpayers are unable to agree upon the calculation of FBAR penalties.
The United States Supreme Court, in the current term is set to review the calculation of the penalty relating to a non-willful failure to file an FBAR (Report of Foreign Bank and Financial Accounts) as oral arguments were scheduled for November 2, 2022. United States citizens and residents must file an FBAR (FinCEN Form 114) on an annual basis when they have financial interests in or signatory authority over foreign bank accounts or other applicable foreign assets with a total value of $10,000 or more in any given year. Federal law imposes substantial financial penalties of $10,000 when an individual (or entity, trust or estate) fails to timely (or properly) file an FBAR under non-willful circumstances. The current issue before the United States Supreme Court is whether an FBAR violation and thus penalty for a non-willful failure to file the FBAR should be determined per FBAR form that was not filed or per foreign account or asset that was not filed or reported on the FBAR. For example, if an individual had five foreign accounts that should have been reported on an FBAR and failed to file the FBAR, should the penalty be $10,000 for failing to file one form, of $50,000 for failing to report five accounts on the form. As seen per the example above and the current case discussed below, the difference in penalty can be drastic.
In recent years the Internal Revenue Service and Department of Justice have pursued the assessment and collection of FBAR penalties quite aggressively in federal courts. The varying outcomes and determinations in separate federal courts has only resulted in conflicting case law and judicial decisions regarding whether the FBAR penalty should be calculated for each FBAR form or per foreign financial account or asset. Come now, the Supreme Court is set to hear United States v. Alexandru Bittner arising out of the United States Court of Appeals for the Fifth Circuit and hopefully provide clarity as to the calculation of the FBAR penalty!
In, US v. Bittner, Alexandru Bittner as a dual United States and Romanian citizen had multiple foreign bank accounts that necessitated the filing of the FBAR but, Bittner failed to file FBARs. Although, the Internal Revenue Service determined Bittner’s failure to file the FBARs was non-willful, the IRS determined Bittner failed to file the FBAR 272 times, which equaled one failure for each foreign account during each applicable year. This led to a total penalty assessment of $2,720,000!
When the Justice Department sued Bittner to reduce the penalty assessment to judgment, the trial court found the $2,720,000 penalty was unlawful and rather the correct penalty should be $50,000, or $10,000 for each of the 5 applicable years the FBAR was not filed. Thus, the trial court was applying the FBAR penalty on a per form basis. On appeal, the trial court’s decision was reversed, agreeing with the IRS that the penalty should be applied on a per account basis as opposed to a per form basis.
While the Bittner case shows disagreements between the trial courts and federal courts, there is a problem with the Bittner decisions given the determinations from other federal appeals courts. The Ninth Circuit in United States v. Boyd, has held that the non-willful penalty should only apply on a per form basis regardless of the number of foreign accounts that were not reported on the FBAR. In the Boyd case, Boyd had 13 foreign accounts. The Internal Revenue Service based the Boyd penalty on 13 violations from the failure to file one form. Although, the trial court in Boyd agreed with the IRS, the Ninth Circuit reversed the trial court’s decision finding that the statute for assessment of the penalty only authorized a single non-willful penalty for failing to file an FBAR.
So what is a violation after these conflicting court decisions and why is the US Supreme Court’s review of Bittner important. While what constitutes a “violation” has yet to be determined, the Supreme Court’s review is important to ensure taxpayers will be treated with consistency regarding non-willful FBAR penalties and prevent further uncertainty as to the treatment solely because a taxpayer lives in a different circuit. Furthermore, given the large number of US citizens and residents (including corporations, partnerships, estates and trusts), many of whom or which may be living abroad that have FBAR filing requirements, the Supreme Court’s decision will lay more certainty as to how future non-willful penalties will be calculated. Additionally, because many of the FBAR penalty cases are settled at the agency level with the Internal Revenue Service, clearer guidance from the highest court should make such settlements easier for the IRS and taxpayers to enter into and avoid additional costly litigation.
You can contact The McGuire Law Firm to speak with an international tax attorney regarding foreign income, assets and compliance requirements.