Court Rules Non-Willful FBAR Penalty is Per Form

Per Year (Form) vs Per Account FBAR Penalty

It is not often that the United States Supreme Court hears matters involving taxes or tax-related issues. In addition, the Supreme Court has not issued any recent rulings on matters involving FBAR, so the fact that the Supreme Court granted the Petition for Writ of Certiorari in the case of US v Bittner is a big deal in the world of international tax law.  The key issue involves the definition of the term FBAR violation when it involves civil non-willful Foreign Bank and Financial Account Penalties. The lower court ruled that penalty should be limited to $10,000 per form ($10,000 adjusts for inflation). The Court of Appeals for the Fifth Circuit ruled that FBAR penalties should not be limited to $10,000 per year, but rather, penalties could be issued on a per account, per year basis for the six-year statute of limitations. This ruling conflicts with a Court of Appeals ruling in the Ninth Circuit in the case of Boyd –- which limits FBAR penalties to a per form, per year.  Without delving too far into the technicalities, let’s look at the basics of the FBAR, FBAR Penalties, and the case of Bittner.

The FBAR

The FBAR refers to Foreign Bank and Financial Account Reporting.  When a US person meets the threshold for having to report their foreign bank and financial accounts, they are required to (electronically) file a FinCEN Form 114 each year to report the maximum account balances. Whether the taxpayer has one account or 20 accounts, they file a single FBAR for each year to report all their accounts. Noting, if a taxpayer has at least 25 accounts, then there are different filing rules and requirements. While technically the FBAR is not an IRS form and is not covered under the tax code (it falls under Title 31, Finance and Money), the Internal Revenue Service is tasked with FBAR penalty assessment and enforcement.

FBAR Penalties

When a person violates the FBAR statute, they may become subject to fines and penalties. When it comes to civil penalties, the civil FBAR penalties can be broken down into two main categories: willfulness penalties and non-willfulness penalties. The focus of this ruling is on the issue of non-willfulness penalties and specifically — what is the definition of an FBAR Violation?

Definition of an FBAR Violation

Is an FBAR violation defined as failing to report either the entire FBAR form or is it for missing each foreign account on the form?

Depending on which circuit the taxpayer’s FBAR case is being heard will impact the potential penalties for non-willful FBAR violations (FBAR matters are not heard in Tax Court, since FBAR is not a tax violation). The problem with the competing circuits is the drastic disparity in penalties. For example, if a person has 50+ accounts (as in the case of Mr. Bittner), they could be staring down the barrel of a multi-million dollar penalty. Conversely, in a situation in which the court limits penalties to a per form, per year penalty (as in US v. Boyd), the FBAR violation penalty could be limited to $60,000.

Potential FBAR Penalty Issues to Consider in Bittner

In the current case, there are some additional issues to be aware of:

• • • Bittner was a successful businessman with millions of dollars held in multiple different bank accounts (50+ accounts).

    • While he was living abroad, Bittner was aware that there was a tax return filing requirement, but he only filed the returns in certain years  — and he never filed the FBAR during that time (he claimed he was unaware of the FBAR requirement until he returned to the United States).

    • Even when he did return to the United States and began filing his FBARs, they were inaccurate and incomplete – noting, he did report the highest balance account even in his incorrect FBARs.

    • Bittner had entered the IRS Voluntary Disclosure Program several years ago, but then removed himself from the program (noting, that the standalone Streamline Procedures were not yet available).

There Is a Lot at Stake for Future FBAR Matters

The outcome of this case is very important, as it will help determine whether taxpayers will become subject to a per form, per year FBAR penalty, a per account, per year violation, or a hybrid approach. On the one hand, limiting the penalties serves more as a warning to taxpayers — as opposed to a potential financially-fatal outcome in which a person can lose up to 50% of the value of the foreign accounts.

On the other hand, by not limiting the penalties then high-net-worth taxpayers might become tempted to hide their foreign accounts and then present the IRS with non-willful FBAR submissions (Streamlined or Delinquency Procedures), because their penalties will be limited to only $60,000 over the six-year compliance period as opposed to a potential multi-million dollar penalty.  

No matter what the decision, it will have a big impact on FBAR matters for many years to come.

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