Supreme Court Expected to Settle FBAR Penalty Circuit Split
- Jun 6, 2022
Following a split between the Fifth and Ninth Circuit Courts of Appeal, the Supreme Court has been asked to weigh-in regarding the amount of penalties that can be assessed by the IRS per year for a non-willful failure to report offshore accounts.
The Bank Secrecy Act of 1970 requires that any U.S. person who has a “financial interest in” or “signature authority over” a foreign financial account must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts, if the aggregate value of these accounts exceeds $10,000 at any time during a calendar year.1 This form is commonly referred to as an FBAR. The failure to file an FBAR can result in steep civil penalties.2 Willful failures can additionally result in criminal prosecution.3
Single Penalty vs. Multiple Penalties
The maximum penalty for a non-willful FBAR violation is $10,000.4 However, the IRS has argued that each bank account that a taxpayer fails to report on the FBAR constitutes a separate failure, and that a separate of penalty of up to $10,000 can therefore be assessed for each account. In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the Ninth Circuit Court of Appeals sided with the taxpayer after the IRS assessed multiple non-willful penalties for a single year totaling $47,279. The court reasoned that since the taxpayer was only required to file a single FBAR (listing all the various accounts), she only committed one violation, and the maximum penalty for that violation was $10,000.
In a separate case decided later in 2021, United States. v. Bittner, No. 20-40597 (5th Cir. 2021), the Fifth Circuit Court of Appeals agreed with the IRS’s position that each offshore account not properly disclosed on the FBAR constituted a separate failure. During the 2007-2011 tax years, the taxpayer held a financial interest in more than 50 offshore bank accounts, with the aggregate high balance ranging from $3,053,884 to $15,137,405 during those years. Although the IRS agreed that the taxpayer’s failure to file FBARs was non-willful, rather than assessing a single $10,000 penalty per year, the IRS assessed a separate penalty for each bank account for each year. The total assessed penalty was $2,720,000.
The taxpayer in Bittner has appealed the Fifth Circuit’s ruling to the United States Supreme Court, arguing that the IRS should only be allowed to assess a single penalty of up to $10,000 per year ($50,000 total). In May, the government filed a brief agreeing that the Supreme Court should review the case, arguing that the prior Ninth Circuit ruling “threatens to significantly weaken the deterrent effect of the penalty provisions within the Ninth Circuit.”5
Since 2008, the U.S. government has engaged in a crackdown on undisclosed offshore accounts.6 This effort has included passage of the Foreign Account Tax Compliance Act (FATCA), which was signed into law in 2010. FATCA requires foreign financial institutions to identify U.S. account holders and imposes a 30% withholding tax on all U.S.-source payments to foreign banks that do not comply with the provisions.7
Starting in 2009, the IRS also offered various voluntary compliance initiatives to allow those with undisclosed offshore accounts to come forward voluntarily and avoid criminal prosecution. While the Offshore Voluntary Disclosure Program ended in 2018, there are still options available for those who have undisclosed offshore accounts. Those who face the risk of criminal prosecution due to willful noncompliance can utilize the longstanding IRS Criminal Investigation Voluntary Disclosure Practice, which can be used by taxpayers to disclose both foreign and domestic noncompliance. For those whose conduct was non-willful, the IRS Streamlined Filing Compliance Procedures offer the opportunity to voluntarily come into compliance and pay taxes that are due, with significantly reduced penalties.8
Separate procedures are available for taxpayers who do not have any unreported foreign income, but simply failed to file either an FBAR or one of the required international information returns (e.g., Form 8938, 5471, 3520, etc.).9 These taxpayers may be eligible to use the Delinquent FBAR Submission Procedures10 or Delinquent International Information Return Procedures.11
131 U.S.C. §5314; 31 C.F.R. §1010.350
231 U.S.C. §5321(a)(5)(A).
331 U.S.C. §5322(a).
431 U.S.C. §5321(a)(5)(B).
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