Taxpayers have lost and the US Internal Revenue Service has scored a victory over the taxpayer…
New Court Ruling: FBAR penalties applied per form and not per account
The FBAR rules require the filing of a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR) to report for accounts of U.S. persons aggregating $10,000 or more. For a non-willful failure to disclose, the maximum penalty imposed is $10,000. Since one FBAR is used to report multiple accounts, a basic question is whether the non-willful failure to report several accounts results in only one $10,000 penalty (based on one form), or $10,000 multiplied by the number of unreported accounts. This can result in a big difference for taxpayers with multiple unreported accounts.
U.S. residents and citizens who non-willfully failed to file a Report of Foreign Bank and Financial Accounts (FBAR) may now have some hope of substantially diminished penalties following a recent ruling from a federal trial court, where the taxpayer’s number of unreported accounts ranged from 41 to 51 for 4 different tax years.
Alexandru Bittner, a dual Romanian-American citizen, after belatedly consulting a CPA, discovered he owed penalties for not reporting his foreign accounts. (Bittner v. United States, No. 4:19-cv-0415 (E.D. Tex. 6/29/20))
From 1996-2011, Bittner was a U.S. citizen and maintained an aggregate balance of more than $10,000 in foreign financial accounts. But he did not timely file FBARs for any of those years until May 2012. In June 2017, the IRS assessed penalties against Bittner for “non-willful” FBAR violations. The government filed a motion for partial summary judgment seeking $1.77 million in penalties computed on the basis of the number of foreign accounts Bittner admitted to maintaining from 2007-2010. Bittner argued that the non-willful civil penalty provided under Section 5321(a)(5)(A) and (B)(i) applied per annual FBAR report not properly or timely filed, not per foreign financial account maintained. The government argued that the penalty applied per foreign financial account maintained but not properly or timely reported on an annual FBAR.
Congress enacted the Bank Secrecy Act (BSA) as 31 U.S.C. Section 5314, which provides that the Secretary of the Treasury shall require a resident or citizen to keep records, file reports when the resident or citizen makes a transaction or maintains a relation for any person with a foreign financial agency, the court said. In other words, Section 5314 directs Treasury to require residents or citizens to file reports when they maintain foreign bank accounts.
The Secretary promulgated regulations implementing Section 5314: “Each United States person having a financial interest in…a…financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed is the [FBAR], or any successor form.” U.S. residents or citizens maintaining foreign bank accounts with an aggregate balance exceeding $10,000 must file an FBAR form by June 30 of the year following the year to be reported. 31 U.S.C. Section 5321 authorizes Treasury to penalize U.S. residents or citizens who violate the regulations.
But what defined as a Violation? Subparagraph (A) of the statute begins by providing that “the Secretary may impose a civil monetary penalty on any person who violates…any provision” of Section 5314. The following subsection then provides that ”the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.“ See Section 5321(a)(5)(B)(i). Thus, the statute provides for a singular penalty, capped at $10,000, that attaches to each violation of Section 5314. The question then becomes: What constitutes a ”violation“ within the meaning of the statute? It is violations of Treasury’s implementing regulations to which Section 5321(a)(5)’s civil penalties attach. Those regulations provide that ”the form prescribed under Section 5314 is the FBAR…and that such form must be filed…with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.“ So it is the failure to file an annual FBAR that is ”the violation“ contemplated and that triggers the civil penalty provisions of Section 5321.
The U.S. District Court for the Eastern District of Texas was not convinced that Bittner had reasonable cause for failing to report his accounts more than 16 years after he should have first filed an FBAR. However, the court also did not agree with the government’s argument that he should be subject to the $10,000 penalty for every account that he failed to report for a total of $1.77 million.
The court relied on the plain language that appears in the statute; because the penalty for willful violations includes explicit reference to the balance in the account while the penalty for non-willful violations does not, the court can infer that Congress intended the penalty for willful violations to relate to specific accounts and the penalty for non-willful violations not to. Non-willful FBAR reporting deficiencies constitute a single violation and carry a maximum annual $10,000 civil money penalty, irrespective of the number of foreign financial accounts maintained, the court said.
This ruling is in contrast, in United States v. Boyd, the IRS assessed the defendant 13 separate FBAR penalties after it determined that she had non-willfully failed to report her financial interest in 14 foreign financial accounts. The court, without any explanation, held that the government “has advanced the more reasonable explanation.” The court here disagreed with the reasoning and outcome in Boyd. Congress knew how to make the non-willful FBAR penalty vary with the number of foreign financial accounts maintained, but it did not do so. Hence the non-willful FBAR penalties are on a “per-form,” rather than “per-account,” basis.
Bittner was therefore obligated to pay a maximum $10,000 penalty for each year he non-willfully failed to timely or properly file an FBAR.
The Bittner decision is a win for the taxpayer. However, it remains to be seen whether the government will appeal the decision. Both Boyd and this case are only District Court cases, which limits their precedential authority. Moreover, the Bittner decision now results in differing decisions on the non-willful FBAR penalty in different circuits. So the issue is unsettled. As a result, any taxpayers who are currently contemplating coming into compliance should get expert advice with respect to their foreign bank accounts.