Non-Willful FBAR Penalties Are Calculated Per FBAR Report, Not Per Financial Account

(Parker Tax Publishing July 2020)

A district court held, in a case of first impression, that the non-willful penalty for failing to file a Report of Foreign Bank and Financial Accounts (FBAR) under 31 U.S.C. Sec. 5321(a)(5) relates to each FBAR report not timely or properly filed rather than to each foreign financial account maintained. In reaching its decision, the district court declined to follow the holding in U.S. v. Boyd, 2019 PTC 161 (C.D. Cal. 2019), where a district court held that the non-willful FBAR penalty applies to each bank account the taxpayer fails to list on the report. U.S. v. Bittner, 2020 PTC 195 (E.D. Tex. 2020).

Background

Alexandru Bittner is a Romanian-American dual citizen. Bittner earned a master's degree in engineering in Bucharest before immigrating to the United States in 1982. Bittner became a naturalized American citizen in 1987 or 1988. After living in the United States for eight years, Bittner moved back to Romania in 1990 and lived there until 2011. He did not renounce his American citizenship.

While living in Romania, Bittner generated a considerable stream of income through a variety of businesses and investments and opened a number of foreign bank accounts. Bittner was a sophisticated businessman whose investment ventures included, among other things, purchasing shares in hotels, buying apartments in the name of an entity, using holding companies to hold his assets, and negotiating deals with the Romanian government to purchase government assets. Bittner filed U.S. income tax returns for several years between 1991 and 2000.

Bittner generated over $70 million in total income through his various foreign businesses and investment ventures and he kept at least some of that income in a number of foreign financial accounts. From 1996 - 2011, the aggregate high balance in those foreign financial accounts exceeded $10,000. However, Bittner did not timely file Reports of Foreign Bank and Financial Accounts (FBARs) as required under 31 U.S.C. Sec. 5314 for any of those years until 2012. In 2017, the IRS assessed penalties against Bittner for non-willful violations of the FBAR reporting requirement. The government eventually filed an action against Bittner in a district court to recover over $1.7 million in FBAR penalties. The amount of the penalties sought by the government was computed on the basis of the number of foreign accounts Bittner admitted to maintaining from 2007 - 2010.

The requirement to annually report foreign financial accounts with an aggregate balance of over $10,000 applies under 31 U.S.C. Sec. 5314 and the regulations under that section. Penalties for non-willfully failing to file FBARs are authorized under 31 U.S.C. Sec. 5321(a)(5)(A) and, under 31 U.S.C. Sec. 5321(a)(5)(B)(i), the amount of the penalty may not exceed $10,000. A reasonable cause exception applies under 31 U.S.C. Sec. 5321(a)(5)(B)(ii) if the amount of the transaction or the balance in the account at the time of the transaction was properly reported. Under 31 U.S.C. Sec. 5321(a)(5)(C), when a penalty for willful FBAR violations applies, the penalty is calculated based on the amount of the transaction or the balance of the account.

Observation: Before 2004, the FBAR penalty applied only to willful violations. In 2004, Congress amended 31 U.S.C. Sec. 5321 to add penalties for non-willful violations, but also provided a reasonable cause exception.

Bittner disputed the amount of the penalties assessed against him. Specifically, he argued that the penalty under 31 U.S.C. Sec. 5321(a)(5)(A) and (B)(i) applies per annual FBAR report not properly or timely filed, not per foreign financial account maintained. The government responded with two arguments for why non-willful FBAR violations relate to specific financial accounts rather than to FBAR forms. First, it argued that because the reasonable cause exception refers to the "balance in the account," the non-willful violation itself must relate to each account. Second, the government argued that, because the penalty for willful violations simply modifies the penalty for non-willful violations, the underlying violation must also be the same, and because the willful variant of the penalty applies to each account, the non-willful variant must also relate to each account.

District Court's Analysis

In a case of first impression in the Fifth Circuit, the district court sided with Bittner in holding that non-willful FBAR penalties relate to each FBAR form not timely or properly filed rather than to each foreign financial account maintained but not timely or properly reported.

The district court noted that the amount of the penalty for a willful FBAR violation under 31 U.S.C. Sec. 5321(a)(5)(C) depends on the balance in the account at the time of the violation. Based on that provision, the court reasoned that Congress clearly knew how to make FBAR penalties account specific, as it did so in no uncertain terms for willful violations. The court also noted that the penalty for a willful violation was part of the statutory scheme well before Congress amended the statute in 2004 to add the non-willfulness provision. In the court's view, Congress therefore had a template for how to relate an FBAR reporting penalty to specific financial accounts, and the fact that it did not do so for non-willful violations was persuasive evidence that it intended for the non-willful penalties not to relate to specific accounts. The court also saw the reasonable cause exception as additional evidence of Congress's intent not to apply the non-willful penalty on a per-account basis. The court found that Congress related the reasonable cause exception to the balance in the account and could have done the same when defining the non-willful FBAR violation and penalty. In the court's view, Congress knew what it was doing when it drafted the non-willful civil penalty without any reference to "account" or "balance in the account."

The court further reasoned that it made sense in the overall statutory scheme for the penalty to relate to the FBAR form rather than to each individual account maintained. The court observed that individuals who are required to file an FBAR are obligated to file only one report per year. In the court's view, it stood to reason that a violation of the statute would attach directly to the obligation that the statute creates - the filing of a single report - rather than attaching to each individual foreign financial account maintained. The court also noted that, regardless of the number of accounts, the FBAR reporting obligation is triggered by the aggregate balance of the accounts exceeding $10,000. The court said that, absent some directive from Congress indicating otherwise, it would make little sense to read 31 U.S.C. Sec. 5321(a)(5)(A) and (B)(i) to impose per-account penalties for non-willful FBAR violations when the number of foreign accounts an individual maintains has no bearing whatsoever on that individual's obligation to file an FBAR in the first place.

The court was unpersuaded by the government's arguments. With respect to the reasonable cause exception, the court saw no reason why the exception to the rule should somehow inform the calculation of the penalty for a violation of that rule. As for the argument that the willful penalty only modifies the penalty for non-willful violations, the court found that this argument overlooked the fact that Congress may have had good reasons for choosing to compute the penalty for willful violations differently from the penalty for non-willful violations.

The district court noted that in U.S. v. Boyd, 2019 PTC 161 (C.D. Cal. 2019), a California district court considered the same issue and decided that the non-willful FBAR penalty applies on a per-account basis. However, the court said that it disagreed with the reasoning and outcome of that decision. The court found that the Boyd court failed to provide adequate guidance as to how it reached the conclusion it did and that, after a thorough analysis of the statute's text and purpose, it had no choice but to reach the opposite conclusion.

Finally, the court addressed whether Bittner qualified for the reasonable cause exception. The court found that while Bittner had sought the advice of a CPA through whom he learned of the FBAR requirement, but that was not until 2012 - 16 years after he was first required to file an FBAR. Further, the court found that, given Bittner's business and investment sophistication and awareness of at least some of his U.S. income tax obligations, he could not claim with a straight face that he was so unaware of his reporting obligations that he did not even feel compelled to investigate the matter.

For a discussion of FBAR information reporting for foreign bank accounts, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com