In what many tax lawyers and others have long hoped it would do, the U.S. Supreme Court has at last agreed to consider a so-called "non-willful FBAR penalty" case, which is expected to result in clarification as to how the penalties in such non-willful FBAR matters should be determined.
At issue is whether the United States' notoriously persecutory penalty regime for those found to have "non-willfully" failed to file Foreign Bank Account Reports for one or more years with the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) should be based on the number of accounts they failed to file FBARs for, or the number of years (as represented by "forms", as in "FBAR forms") they neglected to file.
The case in question is that of Alexandru Bittner, a Romania-born businessman and investor who has been one of the most visible challengers of the way U.S. taxpayers with overseas accounts that they have been found to have failed to tell the U.S. government about are treated, in cases in which the taxpayer in question either didn't know about the FBAR filing requirements, or otherwise had not sought to "willfully" hide the fact that they held overseas bank or financial accounts.
The court disclosed it had granted certiorari in the Bittner case on page 2 of a 19-page court order list on Tuesday (yesterday, June 21).
As reported, Bittner's lawyers filed a writ of certiorari petition with the Supreme Court back in February of this year, arguing that the issue at the heart of a Circuit Court ruling at the end of November (United States v. Bittner, 19 F.4th 734 (5th Cir. 11/30/21) – which had held that the FBAR non-willful US$10,000 penalty should be applied on a per (bank) account rather than per (FBAR) form basis.
“This critical issue arises all the time," the lawyers' 37-page petition noted, referring to the inconsistent way non-willful FBAR penalties are assigned, with the result that the non-willful FBAR penalties awarded to otherwise "identically situated" taxpayers "will now turn on whether the taxpayer is from California or Texas.
"The question presented is: Whether [an FBAR] 'violation' under the [Bank Secrecy] Act is [deemed to be] the failure to file an annual FBAR, no matter the number of foreign accounts, or whether there is a separate violation for each individual account that was not properly reported," the report added.
FBARs are 'reporting forms'
Unlike income tax returns, an FBAR provides information only, as to the maximum amount of money a U.S. taxpayer holds in various non-U.S. accounts during the year in question. It does not, in other words, compute any taxes, or set out amounts of money that might be owed to the government.
FBARs were introduced in the wake of the passage of the Bank Secrecy Act of 1970, although it was some years before the IRS and FinCEN developed the ability to obtain the data necessary to spot those who had failed to file one or more FBARs that they should have, along with the political mandate to do so.
Once this happened, FBAR cases involving large penalties began to appear in U.S. courts, and as this began to happen, a discrepancy between the way different courts assigned the US$10,000 penalty in the case of non-willful FBAR violations also began to emerge.
In the case of Bittner, a Texas District Court judge agreed in July, 2020, with the taxpayer's contention that "non-willful FBAR violations" should be based on the number of FBAR forms filed, rather than on the number of accounts he had held during the time period in question. The following year, however, another court held that he was liable for the penalties based on each of the dozens of accounts he had failed to report in each of the five years, rather than on the basis of the five FBAR forms he had failed to file – assessing him US$2.72 million in FBAR penalties for the five years of violations, rather than US$50,000.
This ruling conflicted with other FBAR decisions around the same time, made by other courts, including a Ninth Circuit ruling that took the view that non-willful penalties should be applied per form (United States V. Boyd).
Implications of new FBAR penalty
clarity on future legal cases
Not surprisingly, whichever way the Supreme Court rules on the matter of non-willful FBAR penalties, it's going to affect the way such cases are litigated going forward, legal experts say.
That so many cases involving large numbers of non-willfully un-filed FBARs hit the U.S. courts relatively recently, they admit, was largely a function of the combination of the introduction of the FBAR-filing requirement, in 1970, and the development, some years later, of the ability of U.S. officials to detect un-reported overseas accounts.
Since then, awareness of the legal obligation to file FBARs has become more widespread, enabling those who haven't yet been detected to seek legal advice, and arrange to come into compliance in a penalty-free, or penalty-reducing, way.
Jack Townsend, a Charlottesville, Virginia-based offshore tax expert whose FederalTaxCrimes.blogspot.com blog is avidly-read by other cross-border tax practitioners, says he thinks there are "still some big-number cases in the administrative pipeline" that will probably find their way into the court system, once the matter of the way penalties are to be assessed has at last been finalized.
"In the beginning, many of the big-number FBAR cases could afford to go ahead with litigation, particularly when the law was unsettled," he added.
"Now that there will be official clarity – including the Bittner case now before the Supreme Court, with a decision by June 2023 – each side will be better able to assess the litigating hazards they face, and reach settlements that perhaps neither side likes, but which both sides will realize reflect the litigating hazards.
Many of those settlements can occur in the administrative process, before the court suit phase."
As for those U.S. taxpayers who suddenly become aware that they are sitting on some pretty huge potential FBAR violations that they need to fess up to, Townsend said, as before, they can take advice from experienced legal professionals, who will help guide them into the best position from which to face a nonwillful penalty.
"But that requires experienced counsel, with good judgment, as well as a client who is willing to take their advice."
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