Several recent cases winding their way through the courts have addressed what has become a contentious question. That is, does the $10,000 nonwillful penalty for failure to file a FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR) apply per form or per the number of financial accounts required to be reported on that form?
The latest episode of the saga is the return of U.S. v. Bittner. This time the case was heard by the U.S. Court of Appeals for the Fifth Circuit, which came to a different conclusion than the Ninth Circuit did in a similar case, U.S. v. Boyd.
Under the Internal Revenue Code, every U.S. person who has a financial interest in or signature or other authority over a financial account or accounts in a foreign country must report the account(s) annually using an FBAR if the aggregate value of the foreign financial account(s) exceeds $10,000 at any time during the calendar year. One FBAR is used to report multiple accounts.
The U.S. Secretary of the Treasury may impose a civil monetary penalty on any person who violates or causes a violation of the FBAR filing requirements. The maximum amount of the penalty depends on whether the violation was nonwillful or willful.
The maximum penalty for a nonwillful violation is $10,000. In the case of any person willfully violating, or willfully causing a violation, the maximum penalty is the greater of $100,000 or 50% of an amount determined under specific tax rules.
The Case in Question
The defendant in Bittner, a naturalized U.S. citizen, returned to his native Romania in 1990. He was unaware that, as a U.S. citizen, he had to report his interests in certain foreign financial accounts, so he never filed FBARs while he lived in Romania.
When the defendant returned to the United States in 2011, he hired a CPA to prepare his outstanding FBARs. These original FBARs were deficient: They failed to report 25 or more foreign financial accounts that should have been reported. So, he hired a new CPA who filed corrected FBARs.
In 2017, the IRS assessed $2.72 million in nonwillful FBAR penalties — $10,000 for each unreported account.
District and Appellate Decisions
When the IRS sued to collect the FBAR penalties, the defendant argued that he had reasonable cause for his failure to report his accounts. He also argued that, even if the penalty applied, the maximum penalty allowed for a nonwillful reporting failure is $10,000 per annual FBAR. The IRS argued that:
- The defendant didn’t qualify for the reasonable cause defense, and
- The FBAR penalty applied to each reportable account he’d failed to report, which included at least 41 for each year.
In 2020, a Texas district court rejected the defendant’s reasonable cause defense but held that the maximum penalty applied per annual FBAR, not per reportable account. However, on appeal, the Fifth Circuit reversed the district court, finding that the FBAR penalty applies per reportable foreign financial account, not per annual FBAR.
The court said that properly assessing the FBAR penalty hinged on what constitutes a “violation” of Section 5314 of the U.S. Code. According to the Fifth Circuit, the “text, structure, history and purposes of the statutory and regulatory provisions” show that the “violation” of Sec. 5314 that’s subject to the FBAR penalty is the failure to report a reportable account — not the failure to file an FBAR.
The Fifth Circuit found that Sec. 5314 doesn’t create the obligation to file an FBAR. Rather, it gives the Treasury Secretary the authority to regulate how to comply with the requirement to report reportable accounts. However, according to the court, such regulation doesn’t change the statutory requirement to report all reportable accounts.
And so the Saga Continues
The Fifth Circuit’s decision in Bittner stands in stark contrast to the Ninth Circuit’s decision in Boyd. In the latter case, the Ninth Circuit argued against “stacking” nonwillful penalties against taxpayers who fail to disclose multiple foreign financial accounts on a single FBAR. The Fifth Circuit didn’t see it that way.
If you’re responsible for a foreign account, your optimal move is to handle the annual filing of an FBAR carefully and properly. Don’t risk going to court to defend yourself against the IRS and an onerous penalty. Contact our International team to see how we can help.
U.S. v. Bittner, No. 20-40597, Nov. 30, 2021 (U.S. Fifth Circuit)
U.S. v Boyd, No. 19-55585, March 24, 2021 (U.S. Ninth Circuit)
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