Fifth Circuit Widens Split Over Non-Willful FBAR Penalties
Is mistakenly failing to file a Report of Foreign Financial Accounts (FBAR) one violation of the Bank Secrecy Act, or several? Whether non-willful FBAR penalties apply per form or per account has become the next big debate among tax attorneys and federal judges. Now, the Fifth Circuit Court of Appeals’ decision in United States v Bittner has widened the split over the issue, setting it up for review by the United States Supreme Court.
Naturalized Citizen Fails to Report More Than 50 Overseas Accounts
Once an immigrant becomes a naturalized citizen, they remain a U.S. taxpayer for life, even if they later move back to their home country. That was what happened to Alexandru Bittner, originally from Romania. He immigrated to the U.S. in 1982 and became a U.S. citizen in 1988. However, two years later, he moved back to Romania, where he stayed until 2011.
When Bittner returned to the US in 2012, he and his accountant realized that he had failed to file his U.S. tax returns while in Romania, or file the mandatory FBAR reports disclosing his foreign bank accounts. Bittner had done very well for himself in Romania, and after he submitted the missing reports, the IRS identified 272 FBAR violations between 2007 and 2011. It imposed $2.72 million in non-willful FBAR penalties against him -- $10,000 for each unreported account for each year covered in its audit.
Fifth Circuit Takes Per-Account View of Non-Willful FBAR Penalties
When the IRS took Bittner to court to recover those penalties, one main issue in the case was whether the IRS could assess penalties per account not reported, or whether it was limited to one $10,000 penalty per missing FBAR report. The District Court opinion, which this blog covered previously, took the “per year” position. It reduced the amount Bittner owed from $2.72 million to $50,000, one penalty for each missing report.
The IRS appealed that decision. The Fifth Circuit said:
“We hold that each failure to report a qualifying foreign account constitutes a separate reporting violation subject to penalty. The penalty therefore applies on a per-account, not a per-form, basis. On this point, we part ways with a recent Ninth Circuit panel, which split on this issue.”
It held that the Bank Secrecy Act authorized “a penalty for ‘any violation of section 5314’ as opposed to the regulations prescribed under 5314.” That meant that the penalty referred to the statutory requirement that a taxpayer report each account, not the regulatory requirement that he use the FBAR form to do so. The Court said:
“The district court’s reading would lead to a result unmoored from the text of section 5314: it would give the Secretary discretion not only to define the reporting mechanism, but also to define the number of violations subject to penalty.”
Bittner Versus Boyd: Decision Sets Up Split for Supreme Court Review
The Fifth Circuit, which covers Texas, Louisiana, and Mississippi, acknowledged that its decision was contrary to another Circuit Court’s ruling on the issue. In U.S. v Boyd, the Ninth Circuit found that non-willful FBAR penalties attached to the filing of FBARs on time, and including the prescribed information. Since there was only one form due each year, there could only be one violation, as long as the FBAR was correct once it was actually filed. The Fifth Circuit said Congress could have attached the non-willful FBAR penalties directly to the regulations, but chose not to.
Based on this ruling, the Fifth Circuit “part[ed] ways” with the Ninth Circuit, creating a jurisdictional split that requires the IRS to treat taxpayers in different ways depending on where they live and file taxes. On the West Coast, Boyd controls, and the IRS can only impose one non-willful FBAR penalty per year. In the South, Bittner allows the IRS to assess a separate penalty for each account not disclosed. If either Boyd or Bittner are appealed, it could result in a United States Supreme Court decision on the issue.
The Fifth Circuit found support from a lower-court decision in United States v Solomon, out of the Southern District of Florida. That decision also took the per-account perspective on non-willful FBAR penalties. While Solomon has not yet made its way to the Eleventh Circuit, if it does, that could further widen the split, making the issue ripe for the Supreme Court to grant certiorari and resolve the differences between the courts.
Whether the IRS can assess non-willful FBAR penalties on a per-year or per-account basis can mean differences of tens of thousands of dollars to U.S. taxpayers with significant holdings overseas. Any Supreme Court decision on the issue will have a substantial effect on immigrants, naturalized citizens, and taxpayers with international connections. However which way the current Supreme Court will go remains to be seen.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are facing non-willful FBAR penalties on your overseas portfolio, contact Joe Viola to schedule a free consultation.