In its upcoming term, the Supreme Court will decide a case that has vexed taxpayers, the IRS and a number of federal courts: how to calculate the penalty for an accidental failure to file a report of foreign bank and financial accounts, or FBAR. The statute in question authorizes the IRS to assess a non-willful penalty of up to $10,000 for each violation, and judges will interpret whether the violation is determined on a per-FBAR form (a single $10,000 penalty per year) or on a per account basis (a penalty of $10,000 for each unreported foreign account).
US citizens and residents are required to file the FBAR form annually if they have a financial interest in, or signature or other authority over, a foreign financial account if the aggregate value of all such accounts exceeds $10,000 at any time during of the calendar year. The FBAR filing requirement is mandated as part of the federal Bank Secrecy Act, and that law imposes significant financial penalties for not filing the form on time each year.
Over the past several years, the Department of Justice has aggressively pursued the collection of FBAR penalties by filing lawsuits in federal courts across the country. These cases have resulted in a patchwork of conflicting legal decisions regarding whether the accidental penalty provision is calculated per FBAR form or per account. This difference in methodology can result in widely divergent penalty calculations, especially for taxpayers with multiple unreported accounts.
The Supreme Court has agreed to hear an FBAR case from the US Court of Appeals for the Fifth Circuit, United States v. Bittner. Alexandru Bittner, a dual citizen of Romania and the United States, had several bank accounts outside the United States. He failed to file FBARs to report these foreign accounts, and the IRS determined that he was liable for inadvertent penalties for the years 2007 through 2011. In each of those years, Bittner had more than 25 offshore accounts. The IRS concluded that Bittner violated FBAR requirements a whopping 272 times — one for each foreign account that went unreported each year — amounting to a total penalty assessment of $2.72 million.
After the IRS assessed this penalty, the Justice Department sued Bittner to reduce the sentence to a conviction. On cross-motion for summary judgment, the district court held that the IRS penalty assessment of $2.72 million was illegal and that the proper penalty amount was $50,000 ($10,000 per form per year). The Fifth Circuit reversed on appeal, holding that each failure to report a foreign bank account constituted a violation under the Penal Code, and that the penalty therefore applied on a per account rather than a per form basis.
The Fifth Circuit’s ruling in Bittner directly conflicts with the decision of another federal appeals court in United States v. Boyd, where the Ninth Circuit held that the inadvertent FBAR penalty applies only per form and does not depend on the number of foreign accounts. In that case, which was settled last year, Jane Boyd had 13 foreign accounts, and the IRS calculated the penalty based on 13 violations resulting from a one-time failure to file the FBAR form. After the district court ruled in favor of the IRS, the Ninth Circuit reversed, concluding that the Penal Code allows for a single non-willful penalty for failing to file an FBAR.
The Supreme Court’s decision to hear Bittner to resolve the conflict that has arisen from the conflicting interpretations of the meaning of “violation” in the FBAR Penal Code is significant for several reasons. First, the conflicting views of the Courts of Appeal in Bittner and Boyd mean that taxpayers are subject to different criminal treatment depending on where they reside. Taxpayers residing in the states comprising the Ninth Circuit will face significantly lower FBAR penalties than taxpayers residing in the states comprising the Fifth Circuit. Taxpayers in all other states face widespread uncertainty about which sentencing approach will be adopted by courts in those jurisdictions. By resolving this conflict, the Supreme Court will ensure that taxpayers subject to inadvertent FBAR penalties will be treated consistently—an important feature of our tax system.
Second, the judges’ decision to hear Bittner is significant because of the large number of cases that could be affected. The FBAR requirements apply to a significant number of US citizens and residents, as well as a variety of entities, including corporations, partnerships, estates and trusts. In addition, millions of US citizens live abroad and presumably have bank accounts in their country of residence. Until relatively recently, the vast majority of individuals—and a large portion of the tax practitioner community—had not heard of the FBAR requirement. It is widely estimated that millions of taxpayers are required to file the FBAR form but do not. Under these circumstances, it is critical that taxpayers and the tax practitioner community have a clear understanding of how unintended FBAR penalties will be calculated.
Third, many taxpayers with FBAR filing obligations have multiple accounts, especially those residing outside the United States. The FBAR form itself provides a streamlined reporting option for taxpayers with more than 25 accounts. As both Bittner and Boyd demonstrate, taxpayers with multiple accounts can face staggering FBAR penalties if calculated per account.
Finally, the Supreme Court must provide clarity because of the unique nature of the FBAR sentencing framework. The IRS has the authority to assess FBAR penalties against taxpayers, but such penalties cannot actually be collected until the Justice Department sues to reduce an assessment to a judgment. This system tends to encourage settlement of FBAR cases at the IRS level to avoid protracted and potentially uncertain litigation. Because so many FBAR cases are decided at the agency level, clear guidance from the Supreme Court is critical to both the IRS and taxpayers.
The Supreme Court’s decision to hear Bittner should be welcomed by the entire tax community. The environment of uncertainty about whether the unintentional FBAR penalty is calculated on a per-form or per-account basis is unfair to taxpayers, critical to tax administration, and must be resolved. The oral argument is scheduled for November 2, 2022, and all interested stakeholders should pay close attention to any indication of which way the nine justices will ultimately rule.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Matthew D. Lee is a partner in the Philadelphia office of Fox Rothschild LLP. He co-chairs the firm’s White-Collar Criminal Defense and Regulatory Compliance practice group.
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There are five types of accounts that are exempt from FBAR reporting requirements: US government accounts. International Financial Institution Accounts. US Military Bank Accounts.
How do you avoid a 6 figure tax penalty on foreign bank accounts?
Whether you’re an expat or US-based, you may need to report your foreign accounts to the US Treasury by April 15. You must disclose if the total balance exceeds $10,000 at any time during the year, do you have “financial interest” or “signatory authority” over accounts.
Do the tax authorities know about foreign bank accounts? Yes, eventually the IRS will find your foreign bank account. See the article : US-Australia-Japan Trilateral Strategic Dialogue – US Department of State. When they do, hopefully your foreign bank accounts with balances over $10,000 have been reported annually to the IRS on an FBAR âforeign bank account reportâ (Form 114).
Do I need to report a foreign bank account under $10000?
An account with a balance under $10,000 MAY need to be reported on an FBAR. On the same subject : Secretary Blinken’s trip to Bali and Bangkok – United States Department of State. An individual required to file an FBAR must report all of his or her foreign financial accounts, including all accounts with balances under $10,000.
Do you have to pay tax on foreign bank account?
Since foreign accounts are taxable, the IRS and U.S. Treasury a very rigid process for declaring foreign assets. Any US citizen with foreign bank accounts totaling more than $10,000, or at any time during the calendar year, is required to report such accounts to the Treasury Department.
Do I need to file FBAR every year?
FBAR is an annual filing, and if you want to avoid penalties, be sure to file FinCEN Form 114 by the due date. The FBAR deadline is the same as your tax return due date, usually April 15 (with an automatic extension to October).
What happens if you don’t report FBAR? Failure to file an FBAR can result in a civil penalty of $10,000 for each non-willful violation. However, if your violation is found to be willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation—and each year you fail to report is a separate violation.
Do I need to file FBAR if less than 10000?
Who must file an FBAR? A US person who has a financial interest in or signatory authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
What year is FBAR mandated?
US citizens, resident aliens, and any domestic legal entity with foreign financial accounts have a deadline to file their Annual Report of Foreign Bank and Financial Accounts (FBAR) by April 15, 2022. Filers who miss the April deadline will receive an automatic extension until October 15, 2022, to file the FBAR.
How can I avoid FBAR penalties?
Filing the Return to Avoid FBAR Penalties When filing the FBAR for a given tax year is a requirement, you must complete and file the return by April 15 of the following year to avoid FBAR penalties. The IRS requires these reports to be filed electronically through the BSA E-filing system.
Can FBAR penalties be waived? In recent years, tax authorities have turned their focus to compliance with foreign accounts and unreported foreign income. And even though FBAR penalty enforcement is increasing, the IRS can still issue FBAR Penalty Waiver Letter 3800 in lieu of penalties.
What is reasonable cause for not filing FBAR?
The tax authorities can also find reasonable cause if a failure to file is due to “events beyond the filer’s control”. Such events include (i) unavailability of relevant business records due to an oversight event and (ii) certain actions by the IRS or IRS agents.
How common are FBAR penalties?
Criminal penalties are rare but can be severe. Often, when a person violates the criminal FBAR statute, it is in conjunction with other criminal violations such as structuring, smurfing, tax evasion, and money laundering.
When did FBAR filing requirement start?
While FBAR filing has been a requirement for Americans since 1970, it is only since a law called the Foreign Account Tax Compliance Act (commonly referred to as FATCA) went into effect in recent years that the US government has been able to to enforce FBAR filing worldwide.
When did the FBAR filing date change? Specifically, section 2006(b)(11) of the Act changes the FBAR due date to April 15 to coincide with the federal income tax filing season. The law also mandates a maximum six-month extension of the submission deadline.
When was the FBAR first required?
You must file the FBAR (otherwise referred to as the FinCEN 114) online with the Financial Crimes Enforcement Network (FinCEN). The FBAR dates back to 1970 when it was created as part of the Bank Secrecy Act.
Is it mandatory to file FBAR?
Who must file an FBAR? A US person who has a financial interest in or signatory authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
