Is an FBAR Penalty issued Per Form?
Is an FBAR Penalty issued Per Form or Per Account: This case involves Alexandru Bittner and non-willful FBAR Penalties (FBAR willfulness penalties are calculated differently). We have authored several legal articles on this particular case, because it has been a very controversial FBAR penalty case thus far. In Bittner, the IRS issued $3M in non-willful FBAR penalties against taxpayer.
But, in a recent 2020 case ruling, the District Court in Texas (Eastern District) issued a very well-written, detailed, and sensible argument supporting a ruling in favor of Bittner and against the U.S. government.
The ruling denied the government’s attempt to hit Defendant with multi-account, non-willful FBAR penalties in the same year.
We will summarize why the court rules FBAR penalties are per form and not per account.
Non-Willful FBAR Penalties can be Rough
Taxpayers with unreported foreign accounts may be subject to FBAR Penalties.
The penalties may range extensively, based on the specific facts and circumstances of the filer.
The penalties range form a warning letter in lieu of penalty, all the way up to a $10,000 per account, per year violation.
It is the rare case when a Taxpayer receives the highest penalty ($10,000 per account, per year) – but unfortunately, it happened to Mr. Bittner.
The U.S. Government then filed in District Court to enforce and collect on the FBAR penalties.
Thereafter, Mr. Bittner pursued a Partial Summary Judgment Motion seeking to limit the penalties, and the Court (surprisingly) granted the motion.
The Texas Courts ruling limits the amount of non-willful per account vs. per FBAR form penalties.
*The $10,000 penalty adjusts for inflation.
FBAR Penalty Per Account vs. Per FBAR Form
The FBAR is (now) an electric form used to report foreign accounts.
Taxpayers do not file FBARs per account; rather, they file one annual FBAR to report all the accounts in that year.
Therefore, it would make sense if a Taxpayer missed the FBAR, then they would be penalized on the FBAR – not each account on the FBAR.
The court agreed.
FBAR Court Ruling
Here are some key excerpts from the court’s ruling:
“From 1996–2011, Mr. Bittner was a United States citizen and maintained an aggregate balance of more than $10,000 in foreign financial accounts. But he did not timely file FBARs for any of those years until May 2012.
In response, in June 2017, the IRS assessed the following penalties against Mr. Bittner for non-willful FBAR violations under 31 U.S.C. § 5321(a)(5)(A) and (B)(i): Year Total Number of Mr. Bittner’s Accounts Penalized Amount of FBAR Penalties Sought by Summary Judgment
Year Total Accounts Amount of FBAR Penalties 2007 61 $610,000 2008 51 $510,000 2009 53 $530,000 2010 53 $530,000 2011 54 $540,000 TOTAL 272 $2,720,000
The Government filed this action to reduce its penalty assessment to judgment, seeking a total of $2,720,000 in penalties against Mr. Bittner.
The Government’s motion for partial summary judgment, however, seeks only $1,770,000 in penalties, computed on the basis of the number of foreign accounts Mr. Bittner admitted to maintaining from 2007–2010.
The Government seeks partial summary judgment on the following:
Year Total Accounts Amount of FBAR Penalties 2007 51 $510,000 2008 43 $430,000 2009 42 $420,000 2010 42 $410,000 TOTAL 177 $1,770,00
Government Per Account FBAR Penalty Argument
The U.S. Government puts forward two main arguments in support of annual multi-account penalties:
Argument 1: Reasonable Cause is Per Account
“The Government advances two primary arguments for why non-willful FBAR violations relate to specific financial accounts rather than to FBAR forms. First, the Government argues that, because the reasonable cause exception forgives the penalty for a non-willful FBAR violation and references the “balance in the account,” the non-willful violation itself must relate to each account.
That is, if the exception applies on an account-by-account basis, then the violation that the exception forgives must also apply on an account-by-account basis. While the Court recognizes this logic, it is unpersuaded. The Government has not provided any good reason for why the exception to a rule should somehow inform the calculation of the penalty for a violation of that rule.
Here, Congress assesses a maximum $10,000 fine for a non-willful violation—which is an account holder’s non-willful failure to submit her annual FBAR—while also providing a statutorily permissible excuse for noncompliance—the reasonable cause exception—that is completely independent from the violation itself.
It does not follow that the penalty is calculated on an account-by-account basis just because Congress provided that a taxpayer’s accurate reporting of the balance in her account(s) is a possible ground for excusing that penalty.
Congress can forgive non-willful FBAR violations any way it likes—even in ways that have nothing to do with the underlying violation. And why Congress elected to forgive non-willful FBAR violations in the particular way it did is not the issue before this Court; any attempt by this Court to comment on why the reasonable cause exception mentions “balance in the account” while the penalty provision does not would be pure conjecture.”
Argument 2: Willful Modifies Non-Willful
“The Government also argues that, because the penalty for willful violations simply modifies the penalty for non-willful violations, the underlying violation must also be the same. And because “the willful variant of the penalty is assessed with reference to each account,” the non-willful variant of the penalty should also be understood to relate to each account (Dkt. #29).
The Court acknowledges that the willful and non-willful variants of the penalty are connected, but the problem with this argument is it overlooks the fact that Congress may have had perfectly good reasons for choosing to compute the penalty for willful violations different from the penalty for non-willful violations. Indeed, willful violators pose a fundamentally different obstacle to the Government’s ability to monitor foreign financial transactions than non-willful violators do, and perhaps Congress drafted the provisions with different language to reflect those differences.
Ultimately, the most the Court can safely do is rely on the plain language that appears in the statute; because the penalty for willful violations includes explicit reference to “the existence of an account” and “the balance in the account” while the penalty for non-willful violations does not, the Court can infer that Congress intended the penalty for willful violations to relate to specific accounts and the penalty for non-willful violations not to.”
Court Holding on Non-Willful FBAR Penalty Violations
The court’s ruling is very thorough and well-written.
Here is the gist of it:
“The Court is persuaded that non-willful FBAR reporting deficiencies constitute a single violation within the meaning of § 5321(a)(5)(A) and (B)(i) and carry a maximum annual $10,000 civil money penalty, irrespective of the number of foreign financial accounts maintained.
This interpretation of the non-willful civil penalty is consistent with the plain language of the BSA when considered in view of the overall statutory and regulatory scheme, advances Congress’ and the Secretary of the Treasury’s stated purposes, and avoids absurd outcomes that would result if the non-willful civil penalty related to specific financial accounts.”
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