by Michele Weiss
US taxpayers are obligated to file a foreign bank account report (“FBAR”) if the aggregate value of their foreign account interests exceeds $10,000 on any day during a calendar year. 31 U.S.C. §5314; 31 C.F.R. §§1010.350(a), 1010.306(c). Taxpayers can be assessed a maximum FBAR penalty of $10,000 for a non-willful violation of their obligation to report their interests in foreign accounts. 31 U.S.C. §5321(a)(5)(A)-(B). Annually, taxpayers file one FBAR that contains information for all of the foreign account interests that they need to report for that year. The circuit courts of appeal are split on whether taxpayers can be assessed an FBAR penalty greater than $10,000 for any year in which they non-willfully fail to meet their obligation to file an FBAR and they are required to report multiple accounts on their FBAR. More specifically, the Circuits are split on what constitutes a non-willful violation.
Is a non-willful violation a failure to file an annual FBAR or is it a failure to report an interest in a foreign account? If a non-willful violation is a failure to file an FBAR, then a taxpayer can be assessed an FBAR penalty for a maximum of one non-willful violation, annually. However, if a non-willful violation is a failure to report a foreign account, then a taxpayer can be assessed FBAR penalties for multiple non-willful violations in any year during which the taxpayer is required to report multiple foreign accounts. More specifically, a taxpayer could be assessed a non-willful FBAR penalty for each foreign account that the taxpayer fails to report for the year. Recent cases illustrate the split in interpreting what constitutes a non-willful violation pursuant to 31 U.S.C. §5321(a)(5)(A)-(B).
In United States v. Boyd, 991 F.3d 1077 (9thCir. 2021), the Ninth Circuit held that a non-willful violation is a failure to file an annual FBAR. Consequently, taxpayers can be assessed a maximum of one non-willful FBAR penalty per year regardless of how many foreign accounts they are required to report on their FBAR for that year. Boyd was decided on March 24, 2021.
A mere eight months later, on November 30, 2021, the Fifth Circuit took the opposite approach in United States v. Bittner, 19 F.4th 734 (5thCir. 2021). The IRS determined that Mr. Bittner non-willfully failed to file FBARs for a period of five years. Mr. Bittner’s maximum non-willful FBAR penalty for the five-year period would have been $50,000 if a non-willful violation were based on his failure to file an annual FBAR form for each of the five years. However, the IRS determined that each account that Mr. Bittner failed to report during the five-year period was a non-willful violation. The IRS assessed a $2,700,000 non-willful FBAR penalty against Mr. Bittner for that five-year period. The Eastern District of Texas and the Fifth Circuit upheld the IRS’ determination.
Mr. Bittner filed a petition for a writ of certiorari for the Supreme Court to hear his case. Mr. Bittner’s petition requests that the Supreme Court resolve the split in opinion between the 5th Circuit and 9th Circuits on the meaning of a non-willful violation for FBAR penalty purposes.
Taxpayers under the jurisdiction of the 9th Circuit should contemplate the impact of a potential change in the definition of a non-willful violation for purposes of the IRS determining non-willful FBAR penalties. More specifically, Taxpayers in the 9thCircuit with unreported multiple interests in foreign accounts should consider coming forward with disclosing those accounts before a potential change to a more unfavorable law that could result in multiple FBAR penalties for a year in which they were required to report their interests in multiple foreign accounts.
Voluntarily disclosing foreign accounts is a sensitive matter that should be undertaken with the counsel and advice of attorneys experienced with these types of matters. The attorneys at Holtz, Slavett & Drabkin, APLC, have extensive experience in foreign information reporting voluntary disclosure matters and have helped numerous clients successfully navigate the FBAR voluntary disclosure process, including streamlined procedures. For more information, please contact Michele Weiss.
