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George F. Bearup, J.D. Senior Legal Trust Advisor

29-Mar-22

FBAR Penalties

Take-Away: Clients with foreign bank accounts need to be made aware of the civil penalties for not filing the annual FBAR form required under the Bank Secrecy Act. Some federal courts interpret the civil penalty for not filing the FBAR form very liberally, which results in the imposition of excessive civil penalties.

Background:  The 1990 Bank Secrecy Act requires a citizen or resident to keep records and file reports when that individual makes a transaction or maintains a relationship with a foreign financial agency. [31 U.S.C. 5314(a).] The Regulations that implement this statute require each individual with a financial interest in a financial account in a foreign country to report that such a relationship exists and provide such information that is specified on a form provided by Treasury, a foreign bank account report, or FBAR. [31 U.S.C. 5314.]

  • Financial Interest” An individual is treated as having a financial interest in any foreign account that the individual owns or that is owned by a corporation in which the individual has an ownership interest greater than 50%. A report is required to be filed on or before June 30 of each calendar year with respect to foreign financial accounts that exceeds $10,000 maintained during the previous calendar year.
  • FBAR: An individual generally is required to disclose on an FBAR form specific information about each qualifying foreign account. However, when an individual has a financial interest in 25 or more qualifying accounts, the individual need only disclose the number of accounts. [Regulation 1010.350(g)(1).] Those individual account owners who fall within this exception, however, are required to provide detailed information concerning each account when requested by the Secretary of the Treasury.
  • Penalties: Treasury may impose a civil money penalty on any individual who violates or causes any violation of these sections. Initially, only willful violations were subject to penalty. Later, in 2004, Congress added a non-willful violation penalty. Different penalties attach to non-willful violations. A non-willful violation penalty, if the violation was due to reasonable cause, is not to exceed $10,000. A willful violation of the statute brings a maximum penalty of the greater of $100,000 or 50% of the amount of the transaction, or the balance in the account at the time of the non-disclosure violation.

Differing Court Interpretations:  While the Bank Secrecy Act is now over 30 years old, there is an inconsistent interpretation of the Bank Secrecy Act and its FBAR filing rules when it comes to the imposition of its penalties. The Ninth Circuit Court of Appeals has taken a per form view of violations, such that the $10,000 non-willful civil penalty is imposed for the failure to file each year’s FBAR form by an individual. See- Boyd, 991 F.3d at 1081; Girardi, 2021 WL 1016215, and Kaufman, 2021 WL 83478. In each of these 9th Federal Circuit Court of Appeals cases the court imposed a $10,000 civil penalty for each year the taxpayer failed to file a FBAR form, regardless of the number of foreign bank accounts held by that taxpayer. Despite that precedent, we now have a more recent Federal Circuit Court of Appeals decision that imposes the non-willful civil penalty with regard to each foreign bank account that would have been disclosed had an annual FBAR been filed  by the taxpayer.

United States v Bittner, (Fifth Circuit Court of Appeals, November 30, 2021)

Facts: Mr. Bittner (Alex) immigrated to the U.S. in 1982 from Romania. Alex was naturalized a US citizen in 1987. Alex returned to Romania as a successful businessman in 1990. Alex earned millions of dollars and acquired interests in many different companies including real estate, hotels, restaurants, logging, and manufacturing in Romania and throughout Europe. Alex opened dozens of bank accounts in Romania, Switzerland, and Liechtenstein using ‘numbered accounts.’ Apparently Alex was unaware that as an American citizen he had to report his interests in each of these foreign accounts. Alex never filed a FBAR while he lived in Romania. Alex returned to the U.S. in 2011. When he learned of his FBAR reporting obligations he hired a CPA who filed late FBARs, but those FBARs were deficient since they only listed his largest bank account, and the forms also failed to disclose Alex’s interest in the 25+ other foreign bank accounts. A second CPA filed corrective FBARs for the years 2007 to 2011 (which were time-barred from civil penalties.) In those late, albeit correct FBARs, Alex disclosed all of his foreign bank account information and their balances, even though he was not required to do so.

Assessed Penalty: In 2017, the IRS assessed $2.72 million in civil penalties against Alex for non-willful violations of Section 5314, i.e. $10,000 for each unreported account for each year from 2007 to 2011 that Alex did not file a FBAR: specifically, 51 accounts in 2007, 43 accounts in 2008, 42 accounts in 2009, 41 accounts in 2010, and 43 accounts in 2011..

District Court:  The District Court (Eastern District of Texas) found Alex liable for these civil penalties arising from his failure to timely file FBAR forms, and the Judge denied Alex’s reasonable cause defense. However, the District Judge reduced the penalty assessment against Alex to $50,000, finding that the $10,000 maximum civil penalty attaches to each failure by him to file the annual FBAR form, not each failure by Alex to report each of his foreign accounts.

Appellate Court: The federal appeals court panel found that the civil penalty assessed against Alex for his failure to file the FBAR form was for each undisclosed account, not for each annual FBAR report that should have been filed by Alex.

  • Reasonable Cause: The panel found that reasonable cause is a legal term of art. It provides an objective standard. It requires a showing that the individual exercised ordinary business care and prudence, considering all pertinent facts and circumstances on a case-by-case basis. Alex had a ‘heavy burden’ to establish his reasonable cause for failing to file the annual FBARs. Alex did not help himself in his testimony on this question: Alex conceded that he put no effort into ascertaining and fulfilling his FBAR reporting obligations. Alex testified that 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.” The panel also observed that Alex’s ‘business savvy’ that made his failure to inquire about his reporting obligations even more unreasonable. “A reasonable person, particularly one with the sophistication, investments, and wealth of the [taxpayer].. would have sought advice regarding his obligation to file an FBAR.”
  • Civil Penalty: The panel noted that properly assessing the penalty hinges on what constitutes a ‘violation’ of Section 5314. Specifically, the panel found that the Regulations distinguish (i) the substantive obligation to file reports disclosing each foreign account, from (ii) the procedural obligation to annually file an appropriate reporting form: “Section 1010.350(a) implements the two distinct requirements: each person with a ‘financial account in a foreign country [1]shall report such relationship to the Commissioner of the Internal Revenue for each year in which such relationship exists and [2] shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons.”

“The District court reasoned that a violation of section 5314 ‘attaches directly to the obligation that the statute creates- the filing of a single report. We disagree. Section 5314 does not create the obligation to file a ‘single report.’ Rather, it gives the Secretary discretion to prescribe how to fulfill the statute’s requirement of reporting qualifying accounts. Moreover, the district court’s reading would lead to a result unmoored from the text of section 5314: it would give the Secretary discretion not only to define the reporting mechanism, but also to define the number of violations subject to penalty. After all, the Secretary could require multiple FBARs instead of allowing one FBAR to report multiple accounts (as she has done.) Streamlining the process this way, however, cannot re-define the underlying reporting requirement imposed by section 5314….It merely honors Congress’s desire ‘to avoid burdening unreasonably a person making a transaction with a foreign financial agency.’”

In sum, the panel concluded that the term violation as used in the statute is the failure to report a, or any, foreign bank account, not the failure to file an FBAR. Accordingly, the civil penalty applies to the failure to report each and every foreign bank account, not the failure to file an annual FBAR.

Conclusion: With two federal circuit courts disagreeing as to what the $10,000 non-willful penalty applies, to each foreign bank account, or to the failure to file an annual FBAR, the U.S. Supreme Court may have to take up this question as to the scope and purpose of the civil penalty. Until then, individuals with foreign bank accounts need to be mindful of the need to timely file a FBAR, and alerted to the potential size of the exposure to the civil penalty if they own multiple foreign bank accounts.