The Dispute Over Non-Willful FBAR Violation Calculations
Eli Noff, Esq., Partner
Taxpayers must use FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) to report their foreign accounts if the aggregate value of the accounts exceeds $10,000 anytime during the calendar year.[1] Before 2004, non—willful FBAR violators were not subject to a penalty. However, for non—willful violations on or after October 22, 2004, there is a penalty capped at $10,000.[2] Unfortunately, authority for the penalty is ambiguous as to whether the maximum penalty applies per year or per account.
Just this past Spring, the United States District Court for the Central District of California in United States v. Boyd held that non—willful violations of FBAR reporting are subject to maximum penalties on a per account basis[3] Now, the United States District Court for the Eastern District of Texas is considering this issue in United States v. Bittner—and the potential, unusually high penalty amount at stake in this particular case has all eyes focused on its outcome.[4]
Facts
Earlier this summer, on June 6, 2019, the government filed a complaint[5] against Taxpayer to collect $3 million in civil, non—willful FBAR penalties. Remarkably, Taxpayer’s amended returns for the relevant periods only resulted in a total of $625 unpaid tax—leaving Taxpayer, and many others, questioning the appropriateness of the punishment sought. Taxpayer asserts in his Answer to the Complaint, filed July 30, 2019, that the “astronomical penalties of nearly $3 million against [Taxpayer] for not timely filing 5 FBAR forms is far in excess of any appropriate punishment for his non—willful conduct with respect to those statutory violations.”
Taxpayer was born in Romania. He moved the U.S. in the early 1980’s and became a naturalized U.S. citizen in 1987. In 1990, Taxpayer returned to Romania and resided there until returning to the U.S. in 2011. During that time, Taxpayer was a successful businessman and investor—maintaining signature authority or control over multiple accounts.[6]
Taxpayer asserts that while he lived in Romania, he had no knowledge of FBAR requirements. He emphasizes that after returning to the U.S. and learning about the requirements, he acted promptly to comply, and that any mistakes made were the result of his CPA’s gross negligence.
The government contends that from 2007 through 2011, Taxpayer failed to report more than 50 accounts. The government assessed $10,000 per account per violation—arriving at almost $3 million in penalties and accruals.
On the other hand, Taxpayer argues that the statutory penalty applies per year and clarifies in his answer that:
The applicable FBAR forms and accompanying instructions state that persons who have financial interests in 25 or more bank accounts are to file a single FBAR form stating that fact and stating the number of accounts, but are specifically not to complete Parts II or III of the form. Bittner thus was required only to file one FBAR annually with limited information, and his innocent failure to timely file that annual FBAR constitutes only a single violation of the statute, punishable at most by $10,000.
Law
The Bank Secrecy Act (BSA)[7] requires the Secretary of the Treasury to create the reporting requirements, via regulations, applicable to U.S. persons maintaining offshore financial accounts.[8] Per 31 U.S.C. §5321(a)(5)(A), “the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” The penalty for such non—willful violations “shall not exceed $10,000.”[9]
While the Bank Secrecy Act (BSA) requires the Treasury secretary to issue regulations that implement reporting requirements, only three regulations have been issued which, absent a showing of reasonable cause, can trigger penalties for:
(1) Failure to file the FBAR,[10]
(2) Failure to timely file the FBAR,[11] and
(3) Failure to provide complete and accurate information in the FBAR.[12]
Per the reasonable cause exception in 31 U.S.C. § 5321(a)(B)(ii): “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.”
Discussion
Again, the United States District Court for the Central District of California, in United States v. Boyd,[13] held that the IRS correctly assessed a taxpayer, who non—willfully failed to timely report her 14 accounts in the U.K., on a per account basis. In other words, each account not listed on a timely filed FBAR was a non—willful violation; thus, more than one FBAR violation per year may be assessed, according to the court.
Remarkably, although the Boyd court believed the statutory language to be ambiguous, it focused on the language of the reasonable cause exception, which uses the terms “transactions” and “accounts”—prompting the court to find that the statute intends the relationship with each account to implicate non—willful FBAR violations.
Many taxpayers and practitioners believe the Boyd decision is incorrect and fails to appreciate that penalties only attach to non—willful violations of the regulations. Again, the three relevant regulations, discussed above, more logically indicate that the penalties will attach to FBARs (i.e., the annually required report)—not to each foreign account. Again, the regulations apply to whether the FBAR was filed, whether the FBAR was filed timely, and whether the FBAR was accurate.
Even the Internal Revenue Manual (IRM) language arguably supports a “per year” approach, providing that the FBAR “must be filed for each calendar year that the person has a financial interest in, or signature authority over, foreign financial account(s) whose aggregate balance exceeds the $10,000 threshold at any time during the year.”[14] And, per the IRM, most examiners will impose one penalty per year for non—willful violations.[15]
Conclusion
Significantly, Bittner looks again at whether the maximum penalty for non—willful FBAR violations applies per year, or per account. Most practitioners hope that, unlike the Boyd court, the Bittner court will acknowledge the “per year” approach as logically indicated in the regulations—where penalties are attached to FBAR violations, not each foreign account.
Otherwise, under a “per account” approach, taxpayers may find themselves in situations where the punishment far exceeds the crime—indeed, non—willful violators with numerous accounts could potentially suffer much more than a willful violator with one account.
If you have questions or concerns regarding FBAR reporting, please contact Frost Law today at 410-497-5947.
[1]31 U.S.C. §5314; 31 C.F.R. §1010.350; 31 C.F.R. §1010.306c; Instructions to FinCEN Form 114, Report of Foreign Bank and Financial Accounts. [2]31 U.S.C. §53 21a5Bi. Such penalties are adjusted for inflation annually. See31 C.F.R. §1010.821, Table 1. [3]No. CV 18—803—MWF (C.D. Cal. Apr. 23, 2019). [4]No. 4:19—cv—00415 (E.D. Tex. Jun 06, 2019). [5]Id. [6]The government contends in its complaint that Taxpayer maintained signature authority or control over more than 50 accounts. [7]Pub. L. No. 91—508, 84 Stat. 1114 (1970). [8]31 U.S.C. §5314. [9]31 U.S.C. §5321(a)(5)(A), 31 U.S.C. §5321(a)(5)(B)(i). [10]31 C.F.R. §1010.350(a). [11]31 C.F.R. §1010.306(c). [12]31 C.F.R. §1010.306(d).See also31 C.F.R. §1010.350(a). [13]No. CV 18—803—MWF (C.D. Cal. Apr. 23, 2019). [14]IRM 4.26.16.4(2). [15]IRM 4.26.16.6.4.1.
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