Per-Account or Per-Form Penalty?

BakerHostetlerKey Takeaways:

  • The law regarding computation of FBAR penalties is unclear.
  • The United States Supreme Court has agreed to hear a case to settle a conflict among the circuit courts.
  • Until the Supreme Court case is decided, taxpayers should work to delay IRS settlement discussions unless the favorable Ninth Circuit rules apply to the penalty computation.

On June 21, the U.S. Supreme Court agreed to hear a case to decide whether penalties for non-willful Report of Foreign Bank and Financial Accounts (FBAR) compliance failures apply on a per-form or a per-account basis. The IRS has been aggressive in asserting these penalties, and it often does so on a per-account basis. The current uncertainty in this area may place some taxpayers in the unenviable position of either accepting a significant penalty or facing the prospect of drawn-out disputes with uncertain outcomes. The Court’s decision is expected to bring clarity to those with offshore accounts, including so-called accidental Americans who may be late to discover their U.S. tax and FBAR filing obligations.

The United States has long sought to prevent tax evasion by requiring U.S. persons to annually report interests in or signature authority over foreign financial accounts with balances that exceed $10,000. A U.S. person complies with the law by timely filing an annual informational report, the FBAR. This filing provides the U.S. with information about a U.S. person’s “accounts” (a broad term that includes checking, savings and brokerage accounts as well as interests in mutual funds and insurance policies having a cash value) that are maintained abroad, typically with financial institutions such as banks, insurance companies or investment managers; for example, an account maintained with a foreign branch of a U.S. bank must be reported. If a U.S. person has multiple reportable accounts, all such accounts are reported on a single FBAR form.

If a U.S. person fails to comply with FBAR reporting requirements, unless reasonable cause is demonstrated, the IRS then imposes monetary penalties (set at $10,000 for non-willful violations and substantially more for willful violations) and may make a criminal referral to the U.S. Department of Justice (DOJ). The law currently is unclear regarding whether the penalty applies separately to each account that is not correctly reported or at the form level, regardless of the number of accounts. 

The case before the U.S. Supreme Court involves a foreign-born businessman who became a U.S. citizen but then returned to his home country (without renouncing his U.S. citizenship) to invest in and operate local businesses as the country began to democratize. According to the foreign businessman, the penalty for his non-willful failure to file FBARs for five years to disclose more than 50 reportable foreign accounts should be computed on a per-form basis, thus totaling no more than $50,000. The IRS position, however, which was accepted by the Fifth Circuit, is that FBAR penalties for non-willful noncompliance should be applied on a per-account basis, meaning that in the businessman’s case, penalties would exceed $2.7 million.

Over the past 20 years, the IRS and the U.S. DOJ have run several compliance and litigation initiatives targeting a historic incidence of FBAR noncompliance as well as perceived U.S. tax evasion facilitated by offshore actors. Through these initiatives, the U.S. government has collected billions of dollars in taxes, interest and penalties, and in certain cases, it successfully has pursued criminal charges or entered into deferred prosecution agreements (for instance, with large Swiss banks). While penalties may be an appropriate tool for encouraging compliance, penalties should be clear in their application, and the government should not interpret ambiguous statutory language against taxpayers to exact outsized penalties.

Some clients with FBAR reporting failures are unaware that their unique personal circumstances – whether holding a U.S. green card but living outside the United States, or maintaining relationships with U.S. banks that manage money on a discretionary basis through accounts maintained at offshore branches – may subject them to FBAR reporting requirements. Some cases involve situations where local advisers (typically those unfamiliar with IRS practice and procedure) engage in a manner that makes reasonable cause assertions difficult for taxpayers. The outcome of the pending U.S. Supreme Court case may materially impact the type of settlement that may be available. 

Until the Court rules, U.S. persons (including persons living abroad who may be deemed U.S. persons) wishing to resolve non-willful FBAR compliance failures should exercise extreme caution when approaching FBAR violation settlement discussions with the IRS – except when the appellate jurisdiction for the case rests with the Ninth Circuit, where a per-form interpretation has been upheld.

The case before the U.S. Supreme Court is United States v. Bittner, 19 F.4th 734 (5th Cir. 2021), cert. granted, No. 21-1195, 2022 WL 2203345 (U.S. June 21, 2022).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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