The Supreme Court agreed on June 11, 2022 to hear Bittner v. United States, a dispute involving the maximum penalty the IRS can assess for failing to file Foreign Bank Account Reports (Form 114, “FBAR”) with the Financial Crimes Enforcement Network (FinCEN). The law imposes a $10,000 penalty for a non-willful violation of the FBAR filing requirement, yet Circuit Courts are split on how to define “violation.”
Split Circuits
The Fifth Circuit Court of Appeals held in November 2021 that Bittner was liable for penalties for failing to file FBARs based on 51 to 61 separate accounts that he failed to report for each year at issue. Bittner argued he should only be liable for one form that he non-willfully failed to file for each of the five tax years at issue. The IRS assessed penalties of $2.72 million using a per-account standard, rather than $50,000 that would result from a per-form standard.
In contrast, the Ninth Circuit held in March 2021 in United States v. Boyd that the penalty was to be applied per form, not per account. Furthermore, a similar matter is now ongoing in the Second Circuit in United States v. Kaufman, which involves comparable dispute regarding the per-account vs. per-form penalty computations. The government filed its appellate brief in that matter on June 15.
The Positions
The statute, 31 U.S. Code Section 5321, states that a civil penalty may be imposed for each violation of any provision of Sec. 5314, which governs FBAR requirements. Sec. 5321(a)(5)(B)(i) establishes that this penalty shall not exceed $10,000 for a non-willful violation. Although FBAR filings are required under the Bank Secrecy Act and are not an income tax return, the IRS is tasked with administering FBAR filings and penalty assessments through a delegation of authority.
The Fifth and Ninth Circuits differed in their interpretation of what constitutes a “violation,” each arguing that the conclusion they reached would lead to fewer unintended results. The Fifth Circuit Court found that a per-year-per-form application of the penalty would lead to uncertainty in the law because Treasury, as a result, could increase penalties by requiring taxpayers to file a separate form for each account. On the other hand, the Ninth Circuit found an application of penalties on a per-account-per-year basis would lead to excessive penalties not intended by Congress.
In his petition to the Supreme Court, the taxpayer argued that the Eighth Amendment to the U.S. Constitution, which prohibits excessive fines, should govern the result because a per-account standard leads to penalties that are grossly disproportionate to a taxpayer’s offense.
Recent Developments
According to Daniel N. Price, formerly of the IRS Office of Chief Counsel (Small Business/Self-Employed), the IRS is “quietly following” the per-form penalty standard only for taxpayers located in the Ninth Circuit, as a result of the court’s decision in Boyd. This inconsistent standard may effectively prejudice taxpayers on the determination of FBAR penalties based solely on where they live. Since May 2015, IRS examiners have had discretion to assess one $10,000 penalty per year for non-willful FBAR violations, unless facts and circumstances dictate otherwise (SBSE-04-0515-0025 (May 13, 2015) and IRM 4.26.16.5.2.1 (June 24, 2021)).
Several interest groups, including the Center for Taxpayer Rights, American College of Tax Counsel, and the U.S. Chamber of Commerce, each filed amicus briefs with the Supreme Court in support of Bittner’s position. The Supreme Court is scheduled to hear oral arguments on Nov. 2, 2022.
Final Thoughts
As seen in the Bittner case presently before the Supreme Court, the difference in penalties between the two approaches can be substantial, particularly in situations where foreign bank accounts are reportable by more than one U.S. person. This is often the case in tiered fund structures where intermediate partnerships hold more than 50% of portfolio companies owning foreign accounts or in portfolio company structures that include consolidated groups of U.S. corporations. Noncompliance with the FBAR reporting rules would result in penalties being applied to each entity in such an ownership.
CBIZ will continue to monitor developments and impacts in this area. For more information, please contact a member of our team.
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