FBAR – Fifth Circuit, Non-Willful Penalty Multiplies “Per Account” in Bittner Case

Ka’Ching! It’s a win for the Internal Revenue Service (IRS)!

At the end of November, in United States v. Bittner, (No. 20-4059, 5th Cir. 11/30/21), the Fifth Circuit overruled the lower court and held that the FBAR non-willful US$10,000 penalty applies on a per account rather than a per form basis.  The taxpayer was hit with a hefty penalty involving 177 FBAR “violations” (thus, US$1.77 million) since he had a financial interest in more than 25 accounts per year for each of three years.  Last summer, in the lower court, Eastern District of Texas, Bittner was the first case to side with the taxpayer ruling the FBAR non-willful penalty is per form and not per account. Now that it has been overruled on appeal, US taxpayers are left with greater anxiety over possible FBAR violations, especially if their case comes within the Fifth Circuit.

“Reasonable Cause Defense”

If the taxpayer has reasonable cause for the FBAR non-compliance, it is possible to abate penalties.   Mr. Bittner lost on his assertion of the “reasonable cause” defense to the non-willful penalty.  “Reasonable cause” generally means that the taxpayer has exercised ordinary business care and prudence in meeting his tax duties. Whether reasonable cause exists is a very “fact sensitive” inquiry; it depends on the facts and circumstances of the particular case.  In analyzing the matter, the court examined whether the taxpayer exercised “ordinary business care and prudence” and Mr. Bittner fell short.

It is useful to look at what the court said; extrapolations below / citations omitted:

We have emphasized that when assessing reasonable cause, “[t]he most important factor is the extent of the taxpayer’s effort to assess his proper liability.” .Bittner conceded he put no effort into ascertaining and fulfilling his reporting obligations. He testified he never even inquired about them, and when asked why, he answered, “Why should I?,” “I didn’t feel like it,” and “Why? We’re in Romania.” [VJ Notes – this taxpayer has a bad attitude and unexpectedly, the court was not pleased with it].  The onus was on Bittner to find out what he was supposed to do, and yet he admittedly did nothing.”

In addition the court noted that Mr. Bittner was “undoubtedly a sophisticated business professional” who had ownership in many companies, as well as a foreign property in Brussels about which he had asked tax-related questions; he negotiated purchases of assets for the Romanian government; he had experience transferring his assets into holding companies, and was using so-called “numbered accounts.” Mr. Bittner’s worldliness and business experience were a big contribution to his undoing when it came to the reasonable cause defense.

IRS Discretion

The IRS has a lot of discretion in assessing penalties for “non-willful” FBAR violations, and the Fifth Circuit in Bittner certainly has not curtailed it.  The Internal Revenue Manual (IRM) sets out what the IRS “thinks” it can do in the FBAR penalty playground.  The examining agent, for example, is given discretion to assess lesser penalties – the agent can assess only one FBAR penalty per year, even when there are several undisclosed foreign accounts. The examiner also has the option to assert only one FBAR penalty when there are multiple years of violations. Per the IRM, the particular facts of the case, however, may indicate that assertion of a separate penalty is warranted for each account and for each year.  (Read – oodles of penalty dollars for the IRS).

Other Court Cases on the “Per Form” v. “Per Account” Issue

  • In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the taxpayer had fourteen financial accounts in the United Kingdom, but failed to file an FBAR for 2010, the year in issue.  Since the IRS concluded her violations were not “willful”, the agency mitigated the penalties and assessed a non-willful penalty for 2010 on each of 13 accounts with a total FBAR penalty of US$47,279. The taxpayer argued that the penalty was in excess of that permitted by the Bank Secrecy Act, claiming that the maximum US$10,000 penalty is based on the failure to file the FBAR itself rather than per account that should have appeared on the FBAR.  The district court rejected the taxpayer’s argument, but she won on appeal to the Ninth Circuit: “We reverse this judgment and conclude that § 5321(a)(5)(A) authorizes the IRS to impose only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts”.  That is now the law within the Ninth Circuit.
  • In United States v. Zvi Kaufman  (D.C. Conn.  Jan. 11, 2021), three tax years were involved during which the taxpayer had a financial interest in or signatory authority over various financial accounts in Israel (thirteen foreign financial accounts in 2008, twelve in 2009, and seventeen in 2010).  The IRS asserted non-willful FBAR penalties on a per account basis, per year. The IRS obviously used its discretion to lower the possible penalties (e.g., for 2008 the penalty that could have assessed was US$10,000 x 13 accounts = US$130,000, but IRS assessed only US$42,249 penalty for that year). Mr. Kaufman argued that the maximum amount of civil monetary penalties that could be imposed for his non-willful violations was $10,000 for each year that the FBAR was not filed, resulting in a total penalty amount of $30,000.  The district court (D.C. Conn.) agreed with Mr. Kaufman reaching its conclusion by analyzing the statute, a complicated and painful task.

The Takeaway

If you have FBAR issues, IRS has procedures in place and there may be a penalty-free way to regain compliance.  The IRS is being very aggressive with its FBAR penalty position and the courts are not in agreement on the penalty cap.  FBAR penalties can wipe out your overseas accounts, but worrying about it is simply not productive. Contact me if you have FBAR matters that need resolution.

Watch and Listen – More on Mr. FBAR

John Richardson and Virginia La Torre Jeker – Looking For Mr. FBAR

John Richardson and Virginia La Torre Jeker Virginia La Torre Jeker – Beyond Mr. FBAR – The New Voluntary Disclosure


Posted: December 30, 2021

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