Split Among Federal Circuit Courts on the Application of the “Non-Willful” FBAR Penalty
Any individual that has direct ownership, signatory authority or beneficial ownership over a foreign bank account that has a balance of $10,000 during any point of the year is required to file a Report of Foreign Bank and Financial Accounts (“FBAR”). The penalties for failing to file an FBAR can be very steep. The size of the penalty is dependent upon whether the failure to file the FBAR was done willfully or non-willfully. If the taxpayer acted willfully, the permissible penalty can be the greater of $100,000 or fifty percent (50%) of the highest account balance per year. On the other hand, if the taxpayer acted non-willfully, those penalties are limited to $10,000. However, the calculation of this non-willful penalty is actually more complicated than it seems, and due to a recent Appellate Court decision, the calculation of that penalty will be different depending on where you live in the United States.
Last month, the Fifth Circuit (Texas, Louisiana and Mississippi) ruled on a dispute between a taxpayer by the name of Alexandru Bittner and the IRS related to the amount of penalties Mr. Bittner should be subject to for the failure to file several years of FBAR’s. In that case, the Court determined that Mr. Bittner acted non-willfully when he failed to file FBAR’s for five years – 2007 through 2011. Mr. Bittner had many accounts that were supposed to be reported and finally filed late FBARs for 2007 through 2011. In total, the IRS determined that there were a total of 272 FBAR violations during those years as a result of the number of undisclosed accounts. As a result, the IRS assessed a penalty of $2.72 million against Mr. Bittner – 272 violations over the 5-year period times the $10,000 non-willful penalty. Mr. Bittner argued that the penalty should be limited to $50,000 – the $10,000 non-willful penalty times that number of unfiled FBAR’s. After all, even though he had dozens of accounts, they all were reported together on one FBAR form (each year). When the IRS took Mr. Bittner to court to recover these FBAR penalties, the district court agreed with Mr. Bittner’s view that the $10,000 non-willful penalty should be applied per unfiled FBAR form not per account listed on the unfiled FBAR form. However, the Appellate Court disagreed with the district court’s interpretation of the rules and regulations regarding the application of the non-willful FBAR penalty. The Court held that the rules and regulations had both a substantive and procedural element. The substantive requirement is that the taxpayer has to file an FBAR if the taxpayer has a foreign financial account. The procedural requirement is that the FBAR must provide information prescribed by the IRS. Relying on the procedural requirement, the Court stated that the penalty counted for each unreported account. The Appellate Court therefore held that Mr. Bittner was liable for the $2.72 million penalty.
The Bittner case in the Fifth Circuit has caused great confusion across the country because it is in direct conflict with another case from the Ninth Circuit (U.S. v. Boyd). (The Ninth federal circuit consists of nine western states.) In Boyd, the Court ruled in the opposite fashion on the applicability of the non-willful FBAR penalty – the penalty should be limited to the number of actual unfiled FBAR’s regardless of the number of accounts on said FBAR. The Court in Bittner even acknowledged that it was parting ways from the Ninth Circuit decision in Boyd. Therefore, as a tax practitioner, the question is which rule applies to your taxpayer. It is clear if you live in Texas, Louisiana, and Mississippi, which are covered by the Fifth Circuit, that your taxpayer will be penalized per account. On the other hand, if your taxpayer resides in any of the Ninth Circuit states – Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington– he/she will only pay non-willful FBAR penalty per unfiled FBAR itself. As for taxpayers in the other states, the question is unclear. Because of this “split” between the Circuits, it is imperative that the U.S. Supreme Court resolve this issue so that there are no disparate results across the country.