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Non-Willful FBAR Penalties Capped Per Year, Not Account, Court Says

Gavel and Themis statue in the court library.

Could the way you do your banking affect how much you pay in IRS filing penalties? Until recently, the answer was universally yes. Now a federal district court judge in Texas has said that for non-willful FBAR penalties, Congress set the cap per yearly report, not per account. The ruling saved one taxpayer approximately $1.7 million.

Naturalized Citizen Living Overseas Skips Filing FBARs for 16 Years

Alexandru Bittner was born and raised in Romania. He immigrated to the U.S. in 1982 and became a naturalized citizen in 1988. Bittner was trained as an engineer in Bucharest, but in the U.S. he was only able to work as a dishwasher and a plumber. He moved back to Romania in 1990 and lived there until 2011.

Mr. Bittner did very well for himself in Romania. Over the years he purchased hotels and apartments, negotiated contracts with the Romanian government, and generated over $70 million in income. He held that money in more than 50 foreign financial accounts, maintaining an aggregate balance of far more than $10,000 from 1996 through 2011.

But Mr. Bittner did not regularly communicate his income to the IRS. A U.S. citizen living abroad, Bittner was required to file annual income tax returns and disclose any foreign assets worth at least a combined $10,000 in annual Reports of Foreign Bank and Financial Accounts (FBARs). He didn’t.

When Mr. Bittner returned to the U.S. in 2012, his CPA corrected the omission and the IRS determined his failure to file FBARs to be “non-willful”. It assessed the maximum non-willful FBAR penalties of $10,000 for each unreported account for each of the five years they were not reported. This resulted in 272 non-willful FBAR penalties for a total of $2,720,000. (Ironically, had Mr. Bittner returned to the U.S. two years later and learned of his omission at that time, he probably could have benefitted from the Streamlined Foreign Offshore Procedures announced by the IRS in July 2014 and paid no penalty at all. Although the OVDP existed at the time of Mr. Bittner’s filing, the district court does not indicate why Mr. Bittner did not file under that program, which could have limited Mr. Bittner’s FBAR penalty to 27.5% of the highest aggregate amount in all foreign accounts of the years being delinquently reported.)

One Penalty Per Year, or Per Account? One Court Decides

The Treasury Department sued Mr. Bittner in the United States District Court for the Eastern District of Texas, Sherman Division, to reduce that assessment to a judgment and collect the unpaid FBAR penalty. The case centered on one question: were non-willful FBAR penalties capped per year or per account?

Does the Penalty Attach to the Missing Report or the Unreported Account?

Judge Mazzant reviewed the Bank Secrecy Act (BSA) and the regulations promulgated by the Secretary of the Treasury to find an answer. The BSA directs the Secretary of Treasury to require US taxpayers to report foreign bank accounts. The Court summarized those Secretary of Treasury’s regulations:

“That is, United States residents or citizens maintaining offshore and/or 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.”

Next, the Court looked at the penalties authorized in the statute. Originally, the Bank Secrecy Act only allowed penalties for willful FBAR violations. However, in 2004, Congress amended the law to add non-willful penalties and an exception where the taxpayer had reasonable cause for failing to file. The language authorizing non-willful FBAR penalties says:

“The Secretary of Treasury may impose a civil money penalty on any person who violates [the filing requirement]. . . . Except [where a person willfully violates the law], the amount of any civil penalty imposed . . . shall not exceed $10,000.”

The Court said the statute allowed for “a singular civil money penalty, capped at $10,000, that attaches to each violation.”

What Counts as a Violation?

Then it asked “What constitutes a ‘violation’ within the meaning of the statute?” The Court found that the violation the penalty was attached to was the failure to file the annual FBAR. Therefore, the Court held that the IRS could only impose one $10,000 penalty for each missed FBAR report, no matter how many foreign financial accounts should have been disclosed on each one.

This made sense, according to the Court, because both section authorizing willful FBAR penalties that came before and the reasonable cause exception added along with the non-willful FBAR penalties made reference to “the balance of the account.” Since the non-willful FBAR penalty didn’t have that language, it must have been connected to the violation, not the account. The Court also said the ruling would avoid two “absurd outcomes” that the Government’s interpretation would cause:

  1. Two taxpayers with the same reporting history being charged substantially different non-willful FBAR penalties because they held their funds in different numbers of accounts. The Court said “$1 million in taxable income is $1 million in taxable income, no matter how you slice it.”
  2. A non-willful violator being penalized more than his willful violator counterpart because he held his assets in several smaller accounts.

Bittner versus Boyd: Decision Creates Conflict in the Courts

The Court compared its decision to the outcome in last year’s United States v Boyd. There, the taxpayer was assessed 13 non-willful FBAR penalties for failing to report 14 foreign financial accounts. Without explaining its reasoning, the Boyd court determined that the Government’s “per account” reading of the statute was “the more reasonable explanation.” The Bittner court disagreed and refused to follow the Boyd court’s example.

This sets up a conflict between different federal district courts. While taxpayers in California can be charged non-willful FBAR penalties per account, in Texas they must be assessed per year. These kinds of conflicts often create more lawsuits and appeals, and are the type of issues the U.S. Supreme Court often agrees to hear. Both district court opinions will need to be appealed to their respective Circuit Court first. But this disagreement could signal a future Supreme Court battle over an IRS practice that costs US taxpayers thousands, and even millions of dollars in non-willful FBAR penalties every year.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are facing FBAR penalties across multiple foreign financial accounts, contact Joe Viola to schedule a free consultation.

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