The Largest Non-Willful FBAR Penalty Case Ever?

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The Largest Non-Willful FBAR Penalty Case Ever?

It is not uncommon for the IRS to impose penalties for a taxpayer’s failure to timely file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (referred to as an “FBAR”).  Generally, the amount of the penalty is determined based on whether the failure to file was willful or non-willful.  Predictably, penalties for willful conduct are more severe than those for non-willful conduct.

Generally, the maximum penalty for willful failure to file an FBAR, at least under the applicable statute and without adjustments for inflation,[1]  is $100,000 or 50% of the account balance at the time of the violation.  However, the penalty for a non-willful failure to file an FBAR is generally $10,000 (again, before adjustments for inflation).[2]

But, an interesting federal district court case percolating in the Eastern District of Texas indicates that even the non-willful penalties can add up, particularly if there are multiple tax years at issue.  Specifically, in U.S. v. Bittner, Case No. 4:19-cv-00415, the government is seeking to reduce to judgment approximately $2.7 million in non-willful FBAR penalties related to only 4 tax years:  2007 through 2011.  Under the government’s theory, the non-willful FBAR penalties imposed against Mr. Bittner for non-willful conduct should relate to each and every foreign bank account Mr. Bittner had (of which he had many) for the years at issue.  In light of the government’s imposition of severe penalties for seemingly non-willful conduct, Mr. Bittner’s counsel has made the following representation to the court in a court filing:  “The Defendant believes this case involves the largest aggregate non-willful penalty ever imposed by the government against an individual for filing delinquent . . . [FBARSs].”

Judge Mazzant held a telephonic hearing on the cross motions for summary judgment on June 4, 2020.  His decision could be rendered any day now.  This Insight discusses the Bittner case and its significance to FBAR jurisprudence.

FBARs

FBAR reporting obligations are not found in Title 26 of the Code (i.e., the Internal Revenue Code).  Rather, these reporting obligations were added as part of the Bank Secrecy Act to Title 31 of the Code.  However, since 2004, the IRS has been tasked with enforcing these reporting obligations.  See 31 C.F.R. § 1010.810.

31 U.S.C. § 5314 permits the Treasury Secretary to require United States persons to report certain transactions with foreign financial agencies.  Thus, United States persons who have a financial interest in, or signature authority over, a bank, securities, or other financial account in a foreign country that exceeds $10,000 (for the years at issue in this case) in aggregate value must file an FBAR (formerly, the TD F 90-22.1, Report of Foreign Bank and Financial Accounts).  31 C.F.R. § 1010.350(a); § 1010.306(c).

If a U.S. person fails to file an FBAR, the IRS may impose a civil monetary penalty on such person.  31 U.S.C. § 5321(a)(5)(A).  The amount of the penalty depends on whether the conduct at issue is willful or non-willful.  If the failure to file is non-willful, “the amount of any civil penalty imposed . . . . shall not exceed $10,000.”  31 U.S.C. § 5321(a)(5)(B)(i).  Conversely, if the conduct at issue is willful, the IRS may impose a maximum penalty equal to the greater of $100,000 or 50% percent of the amount of “the balance in the account at the time of the violation.”  31 U.S.C. § 5321(a)(5)(C), (D).  For non-willful violations, the taxpayer can escape the penalty by showing, among other things, the failure to report was due to reasonable cause.  31 U.S.C. § 5321(a)(5)(B)(ii).

U.S. v. Bittner

As discussed above, the United States filed a Complaint against Mr. Bittner, seeking to reduce to judgment approximately $2.7 million of non-willful FBAR penalties.  According to court filings, Mr. Bitter was born and grew up in Romania until he became a naturalized citizen of the United States at age 30.  However, he returned to Romania shortly thereafter where he lived for more than 20 years.

During the years he resided in Romania, Mr. Bittner was a successful businessman and investor.  Accordingly, he had various interests in Romanian bank accounts.

Mr. Bittner eventually returned to the United States and sought tax advice from a CPA.  However, according to the court filings, the CPA filed erroneous returns and FBARs, which resulted in Mr. Bittner having to file amended returns. Presumably due to the errors and amended returns, the IRS initiated an audit with respect to those returns and imposed additional taxes.  In addition, the IRS proposed non-willful FBAR penalties for all of Mr. Bittner’s accounts that he held in Romania from 2007 through 2011.  The fact that Mr. Bittner did not live in the United States was of no consequence—FBAR penalties apply to U.S. citizens and residents alike, regardless of their domicile.

Non-Willful Penalty Computation.

Although the parties have raised various arguments in their respective cross motions for partial summary judgment, the argument that stood out most was the proper computation of the non-willful penalty.  Specifically, the government contends in Bittner that a non-willful failure to file an FBAR is subject to a $10,000 penalty per unreported account.  Conversely, Mr. Bittner contends that the non-willful failure to file penalty is subject to a $10,000 penalty per year or required FBAR form.

The government has made a similar argument in U.S. v. Boyd, 2019 WL 1976472 (C.D. Cal. April 23, 2019).  In that case, the government argued that the reasonable cause exception under 31 U.S.C. § 5321(a)(B)(ii) provided support for its interpretation of the non-willful penalty computation.  Under that provision:  “No penalty shall be imposed . . . with respect to any violation if . . . (i) such violation was due to reasonable cause, and (ii) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”  Thus, under this provision, the government contended that Congress made clear that each violation related to each “account,” since Congress used the singular form of the word.  In addition, the government posited that , with respect to willful violations, an FBAR penalty can be the greater of $100,000 or 50% of the “balance in the account at the time of the violation.”  Read together, the government contended, Congress selected the singular forms of “account” and “balance,” indicating that a violation relates to one, and only one account.

The court in Boyd found in favor of the government and concluded that the non-willful penalty applied on a per account basis.  However, the case is not over yet—the taxpayer has filed an appeal of the decision with the Ninth Circuit Court of Appeals.

With a win at the district court in California, one could predict that the government would make similar arguments in Bittner.  However, Mr. Bittner’s counsel has made several arguments as to why the non-willful penalty should be applied per year or FBAR report.  More specifically, Mr. Bittner has argued, among other things, that the plain meaning of the statute does not support the government’s interpretation and neither does the relevant legislative history.  In addition, Mr. Bittner’s has argued that the non-willful FBAR penalties imposed against him violate the Eighth Amendment.

Whether these arguments carry the day will be the subject of another future Insight.  In the meantime, stay tuned and seek professional tax help for unreported foreign accounts.

 

 

[1] Under the most recent inflation adjustments, and for penalties assessed after February 19, 2020, the maximum FBAR penalty for willful conduct is $134,806.

[2] Under the most recent inflation adjustments, and for penalties assessed after February 19, 2020, the maximum FBAR penalty for non-willful conduct is $13,481.

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