It is important to be aware that failing to file a Report of Foreign Bank and Financial Account (FBAR) can result in severe financial consequences. A $10,000 civil penalty is imposed for non-willful failures to file an FBAR, while willful failures are subject to a penalty that is greater of $100,000 or 50% of the unreported account balances. Two significant federal cases have recently addressed FBAR penalty issues
United States v. Collins
In the case of United States v. Collins, the Court of Appeals for the Third Circuit (which has appellate jurisdiction over federal court cases decided in Pennsylvania, New Jersey, and Delaware) upheld a district court’s decision against the taxpayer in connection with $300,000 of FBAR penalties assessed against him for his 2007 and 2008 tax years, finding that the taxpayer’s failures to report his foreign accounts were willful. The taxpayer maintained that his voluntary filing of amended returns and initial acceptance into the IRS’s voluntary offshore disclosure program served as evidence that his non-filing was a mistake. The taxpayer also contended that neither he, nor his accountant, nor his lawyer thought he owned any tax for the years in question, and his accountant was furthermore unaware of the FBAR requirement.
The Third Circuit, however, was unconvinced, pointing to the taxpayer’s checking “No” to Schedule B’s question of whether he had foreign accounts. The court was also skeptical of the taxpayer’s claim that he was unaware of and should have known about the FBAR filing requirement, given that he managed hundreds of thousands of dollars in his French, Canadian and Swiss bank accounts. The court additionally noted that his voluntary correction did not negate willfulness and was “tangential to the core inquiry.”
United States v. Bittner
The Supreme Court has agreed to hear the case of United States v. Bittner, and will decide whether non-willful violations of the FBAR reporting requirements apply per form or per account.
As noted above, Section 5321 of Title 31 of the U.S. Code sets the civil penalty for non-willful violations at a cap of $10,000, though violations for this purpose are not simultaneously defined. Taxpayers have historically argued that the $10,000 penalty is per FBAR form, while the government has instead argued that it applies per account. In Bittner, decided in November of 2021, the Court of Appeals for the Fifth Circuit (which has appellate jurisdiction over federal court cases decided in Louisiana, Mississippi, and Texas) held that the taxpayer was liable for penalties based on each of the dozens of accounts he failed to report for the years in question, resulting in $2.72 million of penalties for five years of violations, instead of $50,000.
This decision is at odds with the March 2021 ruling from the Court of Appeals for the Ninth Circuit in the case of United States v. Boyd, where the court held that non-willful FBAR penalties apply per form.
The IRS is only adhering to the Boyd decision in the Ninth Circuit (i.e., with respect to taxpayers in Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington), and there is another case pending in the Second Circuit (which would apply to taxpayers in Connecticut, New York, and Vermont) on this same issue.
Given the Third Circuit’s stark position in Collins regarding what constitutes a willful failure to file an FBAR (as well as that position’s direct applicability to all New Jersey, Pennsylvania, and Delaware individuals and businesses), as well as the potential for the Supreme Court to agree with the government’s argument in Bittner, it is critical to proactively address foreign bank account issues (including missed filings), and especially to take care when answering questions concerning those accounts on tax returns and on the FBARs themselves.
We will continue to keep you updated on these important developments, but please contact your MSPC advisor in the interval should you have any questions.