The Hidden Side of the FBAR Penalties Supreme Court Win
A recent U.S. Supreme Court decision that reduced a taxpayer’s penalties in an FBAR case might seem like a win for taxpayers. However, the decision is likely to open the door to more stringent FBAR reporting enforcement as this little-known financial reporting requirement comes into the limelight.
In Bittner v. U.S., the U.S. Supreme Court held that the penalty for a taxpayer’s non-willful failure to file a Report of Foreign Bank and Financial Accounts (“FBAR”) should be calculated per FBAR form rather than per foreign financial account.
In simple terms, the impact of that distinction is massive, especially for the taxpayer in the case, Alexandru Bittner. Mr. Bittner, who is both a U.S. and a Romanian citizen, did not file the required FBARs from 2007 through 2011 to report his 272 foreign financial accounts to the IRS.
What Exactly Is An FBAR And Who Has To File One?
Essentially, every year, a U.S. citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report the following:
- Their financial interest in or signature or other authority over at least one financial account located outside the United States if
- the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.
The rule applies even if the account didn’t produce any taxable income.
Under federal law, the Bank Secrecy Act (“BSA”) says that the federal government may impose a civil penalty for any non-willful failure to file FBARs “not to exceed $10,000.” (31 U.S.C. § 5321(a)(5)(B).)
Taxpayer’s Failure To File FBAR Yields Big Penalties
With that in mind, let’s look more closely at Mr. Bittner’s case. Consider that he had 272 foreign financial accounts?! It’s a lot to fathom — and a lot of FBARs to miss reporting.
After learning about FBAR, Mr. Bittner hired an accountant to file his missing forms. But it turns out, he was too late, according to the IRS, which proceeded to slap him with a non-willful penalty of $2.72 million, equating to $10,000 for each account he failed to report in a timely manner.
The federal courts had been split on this issue. The U.S. Court of Appeals for the 9th Circuit in California decided that the penalty was $10,000 per untimely filed FBAR form, but the U.S. Court of Appeals for the 5th Circuit in New Orleans — in Mr. Bittner’s case — concluded that the penalty was $10,000 per account on each untimely filed FBAR.
That’s when the U.S. Supreme Court stepped in and decided to hear the case, which eventually became a boon for Mr. Bittner. In the end, the Court’s decision came down to deciding what the language of the federal statute means.
The Court decided that, given that a taxpayer’s responsibility is to file reports — that is, FBAR forms — Mr. Bittner’s misstep took place when he didn’t file the forms, and therefore the penalties should be assessed per form.
By ruling that the non-willful FBAR penalty applies per form and not per account, the Supreme Court left Mr. Bittner in a much better position, effectively reducing his penalty from $2.72 million to $50,000.
The Court’s decision applies in all pending and future cases of non-willful penalties. However, it is not clear whether taxpayers that were already hit with penalties for failing to file FBARs will receive refunds if they were assessed on a per account basis.
If you need advice from an IRS tax lawyer related to FBAR penalties and refunds, contact Attorney Sammy Kim now.
Is The U.S. Supreme Court FBAR Decision Actually Good For Taxpayers?
Many people are celebrating the outcome as a win for taxpayers, but there’s more going on inside this FBAR decision that might not be readily apparent — and isn’t so good for taxpayers when it comes down to it.
Here’s what taxpayers need to know about the Supreme Court’s decision in Bittner v. U.S. related to FBAR penalties:
- This case will raise the profile of FBAR reporting requirements, making it harder for a taxpayer to argue that they didn’t know the rules applied to them. First of all, the Bittner case has been widely publicized in the news. That’s going to make it more challenging for an IRS tax lawyer to argue that their taxpayer client didn’t know about the FBAR form reporting requirement. It stands to reason that FBAR enforcement is likely to get tougher for taxpayers as a result.
- The IRS might argue that more failures to file FBAR are “willful” instead of “non-willful” — making penalties worse. In response to the Bittner decision, the IRS might argue more often that failures to file FBAR are actually willful, or intentional, on the part of taxpayers. Whether that will fly depends on how courts end up viewing the IRS position in a given case, but it has the potential to leave unaware taxpayers with even higher penalties for not filing FBAR. If a taxpayer’s violation is found to be “willful,” penalties can be assessed up to $100,000 or 50% of the account balance per year, whichever is greater. And some courts across the country have already said that a taxpayer can be found to have committed a “willful” violation of FBAR rules even if they had no idea that the FBAR reporting requirement exists.
- FBAR applies to a lot of accounts and many potential taxpayers who don’t even know it. FBAR applies to all non-U.S. based financial accounts and the interpretation of what qualifies is broad. That includes bank accounts, brokerage accounts, and even certain insurance-related accounts. Then, if we look back at the requirement, FBAR also applies to taxpayers who must report their “signature or other authority” over a foreign financial account. So, what does that mean? It means that the employee of a business with a foreign financial account is responsible for filing FBAR forms for the accounts they manage for their boss, employer, client or anyone else.
The same penalties would apply to that employee, even though in most cases, they would have no idea about FBAR.
For example, imagine a foreign company with a U.S.-based employee who serves as the signatory for the foreign account.
Or consider an American taxpayer living overseas who has authorization to sign checks for their foreign company.
In cases like those, especially if the company doesn’t have foreign shareholders, it is pretty unlikely that the taxpayer would even know to ask about FBAR filings.
If this is a situation that applies to you, it’s a good idea to find a qualified IRS tax attorney to make sure you’re complying with all IRS tax rules for FBAR.
The Bottom Line: Taxpayers Must Be Aware & Contact An IRS Tax Lawyer If They Need Help
As a taxpayer, you’re required to understand all income reporting obligations that apply to you. Additionally, you should also know that there are some information return filing obligations for certain transactions during a given tax year even if there is no income tax consequences. If you have any uncertainty about whether FBAR applies to you, speak to Attorney Sammy Kim now.
Attorney Sammy Kim is an IRS tax audit attorney with substantial experience helping clients with FBAR reporting requirements, delayed or missed FBAR reporting and all other foreign tax reporting rules. Get the help you need to solve your IRS tax problems for good.
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