The United States Supreme Court agreed to hear the case of Alexandru Bittner, who was held liable for $2.72 million in penalties by the Internal Revenue Service (IRS) for failing to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR).
The case centers around the Bank Secrecy Act (BSA). Although the BSA is not part of the Internal Revenue Code, it requires that any U.S. persons with either a “financial interest in” or “signature authority over” a foreign financial account to complete and file the FBAR report annually. This applies if the aggregate value of those foreign accounts exceeds $10,000 at any time during the calendar year. The Treasury Department delegated enforcement efforts under the BSA to the IRS and in 2008, the U.S. government engaged in a crackdown on undisclosed offshore accounts. Penalties can be imposed for failure to file the FBAR on both a civil and criminal level.
Under the BSA, the maximum penalty for a non-willful FBAR violation is $10,000. The IRS has argued that each bank account taxpayer fails to report should be considered a separate failure to file occurrence, warranting a penalty of $10,000. The Circuit Courts of Appeals have released two opinions that are on opposite ends of the enforcement spectrum.
In the first case, United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the 9th Circuit Court of Appeals disagreed with the IRS and ruled that since the taxpayer was only required to file a single FBAR, there was only one violation. The maximum penalty for this violation was $10,000.
In the second case, United States. v. Bittner, No. 20-40597 (5th Cir. 2021), the 5th Circuit Court of Appeals agreed with the IRS’ position that each account not properly disclosed on the FBAR constituted a separate failure to file. As Bittner held a financial interest in more than 50 accounts during the 2007-2011 tax years, the assessed penalty was $2.72 million.
In light of the split Circuit decisions, Bittner appealed to the U.S. Supreme Court for review. The IRS, in a brief filed in May, agreed that the Supreme Court should grant review in the matter as the 9th Circuit’s decision “threatens to significantly weaken the deterrent effect of the penalty provisions within the Ninth Circuit.”
The Supreme Courts next session will start the first Monday in October 2022.
What this Means for Taxpayers
Taxpayers could face less draconian penalties if Bittner prevails, causing disclosure cases to resolve more quickly, reducing taxpayer compliance costs, and unburdening an already taxed IRS. If the cost for coming into compliance comes down – will actual compliance increase?
The cooling of the IRS’ enforcement action would result in the loss of significant penalty revenue. So the question must be asked: where will the IRS look to make up the difference?
The International Tax Team at Wolf & Company will continue to monitor news releases and provide updates as this matter progresses.
If you think you have unreported offshore accounts/foreign assets and want to discuss your options to become compliant, please reach out. Wolf’s International Tax Team is here to assist you.