The U.S. Supreme Court handed the Internal Revenue Service (IRS) a loss in a case related to penalties for nonwillful failure to file an FBAR.
The case heard by the SCOTUS involved Alexandru Bittner, a dual citizen of the U.S. and Romania who returned to the U.S. from Romania in 2011. At that time, Mr. Bittner was unaware of the requirement of the Bank Secrecy Act to file a Report of Foreign Bank and Financial Accounts (FBAR).
When he discovered the requirement, he filed five late FBAR reports from the years 2007 through 2011. An unusual feature of this appeal is that Mr. Bittner had a large number of foreign accounts. As such, he detailed the accounts in his FBAR filings as follows:
- 2007: 61 accounts were identified in the initial FBAR
- 2008: The following year, Mr. Bittner had 51 accounts
- 2009: By the following year, Mr. Bittner had 53 accounts
- 2010: The number of accounts held steady in 2010 with 53 accounts
- 2011: By this year, Mr. Bittner had 54 accounts
The legal argument arose over the application of penalties for late-filing an FBAR. The IRS view is that the penalty for a nonwillful late filing of each report is $10,000 per account. By IRS math, that would be $10K x the 272 accounts listed on the five reports, or $2.72 million. By the calculation of the taxpayer, the amount due was $10K per FBAR report or $50,000. Moving through the court system, the U.S. Fifth Circuit Court supported the government assessment of $2.72 million. The debate challenges decisions from the Fifth and Ninth Circuit courts, with the essential question posed as “are nonwillful penalties for late FBARs applied per report or per account?”
In his majority opinion, Justice Gorsuch wrote, “Best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.”
The finding is helpful to expats living abroad. Given the reach of FATCA and FBAR requirements, some foreign financial institutions prefer not catering to American citizens given the red tape involved with reporting their accounts and remaining in compliance with the IRS. This makes obtaining a mortgage, taking out a loan, or just holding accounts abroad difficult for Americans. In pushing to reduce tax fraud and tax evasion, the IRS has unwittingly provoked some Americans to give up their U.S. citizenship in exchange for relief from U.S. tax compliance.
Penalties for nonwillful FBAR infractions are serious, but fines for willful FBAR maneuvers are much worse. If you have questions about one offshore account—or 273 accounts—be sure to speak with an experienced tax lawyer or tax professional for guidance in maintaining tax compliance.
Skilled tax attorneys offer strong defense if challenged by the IRS due to an offshore tax holding or other tax controversy
Serving local and international clients from offices in Chicago and Cleveland, the tax group at Robert J. Fedor, Esq., LLC helps you respond strategically to questions about foreign bank accounts, federal income tax requirements, or allegations surrounding fraudulent tax returns. Call 800-579-0997 or contact us today.
