In United States v. Bittner, the U.S. Court of Appeals for the Fifth Circuit held that the $10,000 penalty for non-willful violation of the FBAR filing requirement applies not for each FBAR which the taxpayer fails to file, but for each account reportable on an unfiled FBAR.[1] The Supreme Court has granted certiorari. Oral argument has been docketed for November 2, 2022.[2]
- Bittner’s Foreign Accounts and Disclosures.
Born in Romania in 1957, Alexandru Bittner served in the Romanian Army, earned a master’s degree in chemical engineering, immigrated to the United States in 1982, and was naturalized in 1987.[3] He returned to Romania in 1990, staying until 2011 without renouncing his American citizenship.[4] While living in Romania, Bittner generated over $70 million in income through a variety of business and investment ventures.[5] He negotiated purchases of Romanian government assets and transferred his business assets, including title to several investment properties, to holding companies in London and Geneva.[6]
Bittner maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein, using “numbered accounts” “[t]o hide [his] name.”[7] He used accountants to maintain financial records and ensure compliance with Romanian tax laws.[8] As a U.S. citizen he was also required to comply with the U.S. Internal Revenue Code and the U.S. Bank Secrecy Act. Under the Bank Secrecy Act, he was required to file an annual FBAR.
After Bittner returned to the United States in 2011, he was advised of his obligation to file FBARs. He hired a CPA, who filed FBARs for him in May 2012. The FBARs were deficient, however, because they only reported Bittner’s largest foreign financial account. Since Bittner owned interests in 25 or more foreign financial accounts, a box to that effect should have been checked on his FBARs, and there would have no obligation to provide any further information on foreign financial accounts unless the government requested it.[9] Instead, a box was checked on Bittner’s FBARs incorrectly stating that he did not have interests in other foreign financial accounts.[10]
In September, 2013, Bittner hired a new CPA, who filed amended FBARs for Bittner for the years 2007 through 2011.[11] The statute of limitations barred assessment of FBAR penalties against Bittner for any year before 2007.[12] Again, a box could have been checked on Bittner’s amended FBARs indicating that he held interests in 25 or more foreign financial accounts, and nothing more reported. But Bittner’s amended FBARs gratuitously reported detailed information on all of his foreign financial accounts—61 accounts in 2007, 51 accounts in 2008, 53 accounts in 2010, and 54 accounts in 2011.[13]
- FBARs and the Offshore Voluntary Disclosure Program
Americans had been evading U.S. income tax by transferring financial assets overseas and investing them there without reporting the gross income generated by the assets on a U.S. income tax return.[14] The Bank Secrecy Act counters this by requiring Americans to annually report to the U.S. government their interests in foreign financial accounts, and imposing criminal and civil penalties for failure to meet the reporting requirement.[15]
Bank Secrecy Act Section 5314(a) (“Section 5314”) provides that “the Secretary of the Treasury shall require a resident or citizen of the United States … to keep records, file reports, or keep records and file reports, when the … person makes a transaction or makes a relation for any person with a foreign financial agency.”[16] Section 5314(a) requires that the records and reports contain specific information “in the way and to the extent the Secretary prescribes.” An FBAR is the form prescribed for reporting.[17] An FBAR must be filed for a given calendar year if the taxpayer’s aggregate balance of foreign financial accounts exceeds $10,000 at any time during the year.[18] If a taxpayer is required to file an FBAR for a given year, the taxpayer must report on the FBAR the high balance of each of the taxpayer’s foreign financial accounts for the year, unless the taxpayer had an ownership interest in, or signature authority over, 25 or more foreign financial accounts during the year, in which event a box to that effect should be checked, and nothing more would need to be reported concerning foreign financial accounts for the year.[19] An FBAR for a given calendar year is due to be filed by the succeeding June 30, and is automatically extended to the succeeding October 15.[20]
Bank Secrecy Act Section 5321(a)(5)(A) (“Section 5321(a)(5)(A))” authorizes the government to “impose a civil money penalty on any person who violates, or causes the violation of, any provision of section 5314.” The maximum penalty for a non-willful violation “shall not exceed $10,000.”[21] For a willful violation, the act authorizes a penalty equal to the greater of $100,000 or 50 percent of the account balance.[22] Had the box been checked on Bittner’s FBARs indicating that he had interests in 25 or more foreign financial accounts during the year, and nothing more been reported concerning his foreign financial accounts for the year, that likely would have been the end of the matter.
Bittner also could have disclosed his foreign financial accounts by means of an IRS voluntary disclosure program. Under the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”), the IRS resolved foreign accounts compliance cases upon the following terms:
- The taxpayer filed original or amended U.S. income tax returns as needed for the preceding seven years (“the voluntary disclosure period”).
- The taxpayer filed complete and accurate original or amended offshore-related information returns and FBARs as needed for the voluntary disclosure period.
- The taxpayer cooperated in the voluntary disclosure process, including providing information on offshore financial accounts, institutions, and facilitators, and signing agreements as needed to extend the period of time for assessing tax and penalties.
- The taxpayer paid an accuracy-related penalty under IRC Internal Revenue Code of 1986, as amended (“IRC”) § 6662(a) equal to 20 percent of the full amount the underpayment of tax for each year.
- The taxpayer paid failure to file penalties under IRC § 6651(a)(1) if applicable.
- The taxpayer paid failure to pay penalties under IRC § 6651(a)(2) if applicable.
- The taxpayer paid, in addition to applicable accuracy-related, failure to file, and failure to pay penalties, a miscellaneous Title 26 offshore penalty equal to 25 percent of the highest aggregate balance in foreign bank accounts or foreign financial assets during the voluntary disclosure period.
- The taxpayer paid in full payment of all tax, interest, accuracy-related penalty, and, if applicable, failure to file and failure to pay penalties with submission of the required original or amended tax returns, original or amended information return, and original or amended FBARs.
- The taxpayer executed a Form 906, Closing Agreement on Final Determination Covering Specific Matters.[23]
In most OVDI cases, the miscellaneous Title 26 offshore penalty was 5 percent of the taxpayer’s high aggregate balance of foreign financial accounts over the voluntary disclosure period.[24]
On September 9, 2011 the OVDI was replaced by the substantially similar Offshore Voluntary Disclosure Program (“OVDP”).[25] Apparently Bittner did not make a submission under either the OVDI or the OVDP.[26]
The facts concerning willfulness were conflicting. The holding of financial assets in Swiss bank accounts identified by number rather than the account owner’s name, with directions to the Swiss bank not to send account statements or other correspondence to the account owner, has been recognized as evidence of the account owner’s willfulness.[27] Nonetheless, Bittner filed a U.S. income tax return for 1991, 1997, 1998, 1999, and 2000, while he was living in Romania,[28] although he filed no FBARs for those years.[29] This suggests that neither Bittner nor his tax preparer knew of the FBAR filing requirement.
- IRS Action and District and Appellate Court Decisions
The IRS classified Bittner’s noncompliance as non-willful and assessed a $10,000 penalty against him for each foreign account not reported on an FBAR for the years 2007 through 2011—a total of $2.27 million in penalties. Bittner refused to pay those penalties, and the United States sued him to reduce the penalties to judgment.[30] The U.S. District Court for the Eastern District of Texas rejected Bittner’s reasonable cause defense and granted the government’s motion for summary judgment in part, but only for one $10,000 penalty for each FBAR in controversy—a total of $50,000.[31] On appeal, the U.S. Court of Appeals for the Fifth Circuit affirmed entry of judgment for the government, but reversed as to the amount of the judgment, imposing a judgment for the full $2.27 million requested by the government.[32]
- The Rationale for Supreme Court Review
In the author’s view, the penalty imposed by the Fifth Circuit upon Mr. Bittner is excessive and unreasonable. Bittner did not transfer assets overseas. He was trying to comply with the law, as evidenced by his retention of one CPA firm and then another. He reasonably relied upon the CPAs, who failed him. The Fifth Circuit’s decision also undermines the policy encouraging voluntary compliance with the law.
The Fifth Circuit’s decision also creates inconsistency and confusion, as noted in amici briefs filed to support the petition for certiorari.[33] The decision also is at odds with the decision of the U.S. Court of Appeals for the Ninth Circuit in United States v. Boyd.[34]Jane Boyd, a U.S. citizen, had financial accounts in the United Kingdom that increased significantly upon her father’s death in 2009 with deposits of her inheritance.[35] Her 2010 individual income tax return failed to report interest and dividends from those U.K. accounts, and she failed to timely file a 2010 FBAR. In 2012, Boyd was accepted into the OVDP, enabling her to become compliant with the law in exchange for a predictable, uniform penalty. She filed an amended U.S. income tax return for 2010 reporting all of the interest and dividend income from her U.K. accounts,[36] but then she opted out of the OVDP. Then the IRS examined Boyd’s amended 2010 U.S. income tax return, and determined that she had committed 13 separate FBAR non-willful violations for 2010—one for each foreign financial account not reported on a timely-filed FBAR.[37] The IRS assessed a penalty totaling $47,279 against Boyd.[38]
In the government’s suit to collect the $47,279 in penalties, Boyd argued that a filing violation is the failure to file a timely and accurate FBAR, so that the maximum penalty authorized was $10,000 for her failure to file a 2010 FBAR. Considering cross-motions for summary judgment, the U.S. District Court for the Central District of California granted the government’s motion.[39] On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed in a 2-1 decision, holding that Boyd committed a single violation by failing to file a 2010 FBAR. Since the violation was non-willful, only a single $10,000 penalty could be sustained.[40]
Thus the Ninth and Fifth Circuits are in direct conflict on the meaning of “violation of . . . any provision of section 5314” in Section 5321(a)(5)(A). The Ninth Circuit holds that a violation for this purpose means the failure to timely file an accurate FBAR, and imposes one $10,000 penalty for each non-willful failure to timely file an accurate FBAR. The Fifth Circuit holds that a violation for this purpose means the failure to accurately report an account on a timely-filed FBAR, and imposes one $10,000 penalty for each non-willful failure to accurately report an account on a timely-filed FBAR. The Supreme Court has granted certiorari to resolve the conflict.
[1] Bittner v. United States, 19 F.4th 734 (5th Cir.2021). “FBAR” is an acronym for FinCEN Form 114, Report of Foreign Bank and Financial Accounts.
[2] Bittner v. United States, 19 F.4th 734 (5th Cir.2021), cert. granted, 2022 WL 2203345 (Jun. 21, 2022).
[3] 19 F.4th at 739.
[4] United States v. Bittner, 469 F.Supp.3d 709, 713 (E.D. Texas 2020), rev’d, 19 F.4th 734 (5th Cir.2021), cert. granted, 2022 WL 2203345 (June 21, 2022).
[7] Id.
[8] Id.
[9] In hundreds of cases over the last 10 years, I have filed many FBARs on which a box was checked indicating that the taxpayer had a financial interest in, or signature authority over, 25 or more foreign financial accounts during the year, and which reported no further information on the foreign financial accounts. Not once has the government requested additional information on such foreign financial accounts.
[10] Id.
[11] The Fifth Circuit called them “corrected” FBARs. 19 F.4th at 739.
[12] The IRS may assess a 31 USC § 5321(a) civil penalty at any time before the end of the six-year period beginning on the date of the transaction with respect to which the penalty is assessed. 31 USC § 5321(b)(1); IRM4.26.17.3.1.1(1) (Dec.11, 2019). The “date of the transaction” with respect to the FBAR filing requirement is the due date of the FBAR, whether it is filed or not. IRM4.26.17.3.1.1(2). United States v. Horowitz, 361 F.Supp.3d 511, 516 (D. Md.), aff’d, 978 F.3d 80 (4th Cir. 2020).
[13] 19 F.4th at 739.
[14] The United States taxes its citizens as well its residents on their worldwide gross income. E.g., United States v Little, 119 AFTR2d 2017-1715, 1718 (S.D.N.Y. 2017); Gerencser v. Commissioner, TC Memo 2016-151, at 1182 and n.20 (2016). A “resident” of the United States for this purpose means a lawful permanent resident (“green card” holder), as well as an individual who satisfies the substantial presence test of 26 USC § 7701(b)(3). 26 USC § 7701(b)(1).
[15] Public Law 97-258 (Sept. 13, 1982), codified at 31 USC §§ 5311-5322.
[16] 31 USC § 5314(a).
[18] Jan. 2017) (hereinafter FBAR Line-By-Line Instructions), at 4. For FBAR purposes, amounts expressed in a foreign currency are converted to U.S. Dollars at the U.S. Treasury’s Financial Management Service rate for the last day of the calendar year. Id. at 10.
[19] Id., at 15.
[20] 31 CFR §1010.306(c); FBAR Line-By-Line Instructions, at 4.
[21] 31 USC §5321(a)(5)(B)(i).
[22] 31 USC §5321(a)(5)(C). This is sometimes called “the draconian penalty.”
[23] 2011 Offshore Voluntary Disclosure Initiative (last reviewed or updated Jun. 3, 2011), FAQ 7.
[24] The miscellaneous Title 26 offshore penalty was reduced to 5 percent of the taxpayer’s high aggregate balance of foreign bank accounts/entities for a taxpayer meeting all four of the following conditions: (a) the taxpayer did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change of ownership on an existing account, upon the death of the owner of the account); (b) the taxpayer exercised minimal, infrequent contact with the account; (c) the taxpayer had not, except for a withdrawal closing the account and transferring the funds to an account in the United States, withdrawn more than $1,000 from the account in any year of the voluntary disclosure period; and (d) the taxpayer could establish that all applicable U.S. taxes had been paid on funds deposited to the account, and that only earnings on the account had escaped U.S. taxation. Memorandum of Steven T. Miller, Deputy Commissioner for Services and Enforcement, “Authorization to Apply Penalty Framework to Voluntary Disclosure Requests with Offshore Issues” (Mar. 1, 2011).
[25] Offshore Voluntary Disclosure Disclosure Program, Frequently Asked Questions (June 26, 2012). The OVDP continued the 5 percent miscellaneous Title 26 offshore penalty. Id. at FAQ 52. The Streamlined Filing Compliance Procedures, which replaced the OVDP on September 28, 2018, continued the 5 percent miscellaneous Title 26 offshore penalty. IR 2018-176 (Sept. 4, 2018). The Streamlined Filing Compliance Procedures remain in effect today.
[26] We are unable to determine what Bittner’s miscellaneous Title 26 offshore penalty under OVDI or OVDP might have been, as neither the Fifth Circuit nor the District Court in its published opinion mentioned an aggregate balance of Bittner’s foreign financial accounts for the voluntary disclosure period.
[27] E.g., United States v. Rum, 995 F.3d 882 (11th Cir.), cert. denied, 142 S.Ct. 591, 211 L.Ed.3d 367 (2021); United States v. Horowitz, 978 F.3d 80 (4th Cir. 2020); United States v. Goldsmith, 541 F.Supp.3d 1058 (S.D. Cal.), appeal dismissed, 2022 WL 1654759 (9th Cir. 2022); United States v. Gentges, 531 F.Supp.3d 731 (S.D.N.Y. 2021). See also Kimble v. United States, 991 F.3d 1238 (Fed. Cir. 2021); Landa v. United States, 153 Fed. Cl. 585 (2021).
[28] 469 F.Supp.3d at 713.
[29] 19 F.4th at 739.
[30] 469 F.Supp.3d at 715.
[32] 19 F.4th at 749. It is unclear whether the Fifth Circuit would apply the 31 USC § 5321(a)(5)(B)(i) penalty for an account reported inaccurately or incompletely on an FBAR or only for an account omitted from an FBAR.
[33] See, e.g, Brief for the Chamber of Commerce of the United States of America as Amicus Curiae Supporting Petitioner, at 4 (April 2022).
[34] United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021).
[35] Id. at 1079.
[36] Id.
[37] United States v. Boyd, 2019 WL 1976472, at *1 (C.D. Cal. 2019), rev’d, 991 F.3d 1077 (9th Cir. 2021).
[38] Id. at *1-*2. The government’s theory would have supported assessment of a larger penalty against Boyd.
[39] 991 F.3d at 1079.
[40] 991 F.3d at 1082-83.
This article was first published in the American Bar Association Taxation Section’s Tax Times.