Supreme Court to weigh in on FBAR penalties

Background

Congress originally enacted the Bank Secrecy Act (BSA) in 1970, codified in Title 31 of the U.S. Code, to prevent the use of foreign financial accounts to launder money or evade taxes. Under the BSA, U.S. persons, including citizens, residents, corporations, partnerships, LLCs, trusts, and estates, must file an FBAR every year in which the U.S. person possesses a financial interest in or signature authority over a financial account outside the United States if the aggregate value of all those accounts located outside the United States exceeded $10,000 at any time during the calendar year. While the FBAR is due April 15 following the calendar year being reported, there is an automatic extension to Oct. 15. An FBAR must be filed electronically through the BSA E-Filing System. Although it is administered by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, the IRS plays an active role in enforcing FBAR compliance.

FBAR penalties and the dispute

Under 31 U.S. Code Section 5321(a)(5), penalties for failing to timely file an FBAR range from $10,000 for a nonwillful violation to 50% of the maximum account value or $100,000 (whichever is greater) for a willful violation. “Willful” includes reckless disregard and is met when the filer clearly ought to have known there was a grave risk that the FBAR obligation was not being met and the obligation could be ascertained with certainty very easily, as held recently in Bedrosian v. U.S. Both penalties are adjusted annually for inflation. Nonwillful violation penalties may be removed if the filer can demonstrate that reasonable cause existed for the omission.

For FBARs filed late or not filed at all, the IRS applies a penalty for each account that should have been included on the delinquent FBAR. Taxpayers take the position that this application of the FBAR penalty is not correct and that the penalty should be applied on a “per-form” basis for each delinquent FBAR. This disagreement is highlighted in Bittner, a case arising in the 5th Circuit Court, and U.S. v. Boyd, an earlier case from the 9th Circuit Court. The Boyd court held that the $10,000 nonwillful penalty applies on a per-form basis, meaning that the $10,000 penalty is applied once for the single nonwillful violation as opposed to being applied for each separate account that should have been reported on the delinquent FBAR. The 5th Circuit in Bittner adopted the opposite approach and held that the $10,000 penalty is applied on a per-account basis and should be assessed for each foreign financial account not reported on the delinquent FBAR.

Looking ahead

The different approaches can produce dramatic differences in the amount of FBAR penalties imposed. The taxpayer in Bittner, for example, failed to timely report 272 foreign accounts over a five-year period. Using Boyd’s per-form method would have resulted in a total of $50,000 in penalties, whereas Bittner’s per-account approach resulted in $2.72 million in penalties. In deciding to hear the Bittner case, the Supreme Court hopefully will resolve these inconsistent approaches and give taxpayers with foreign financial accounts some certainty in this area. As the 2021 extended FBAR filing deadline approaches, taxpayers should consider the following when reviewing their financial holdings:

• The $10,000 threshold triggering an FBAR filing requirement is on an aggregate basis of all foreign accounts and applies if the aggregate value exceeded $10,000 at any time during the year.
• An FBAR requirement also is triggered by having signature authority over a foreign financial account. For instance, a taxpayer can have an FBAR filing obligation if it is a trustee or beneficiary with signature authority over foreign accounts, if the taxpayer has power of attorney over individuals who have foreign financial accounts, or if the taxpayer is a corporate officer or employee with signature authority over a business’s foreign bank accounts.

In addition, while not the subject of this article, taxpayers also should be aware of the separate IRC Section 6038D requirement to file a Form 8938, “Statement of Specified Foreign Financial Assets,” to report interests in specified foreign financial assets if the aggregate value of such interests is more than $50,000.