Taxpayer Wins FBAR Penalty Case
In 2012, Alexandru Bittner filed FinCEN Forms 114, Report of Foreign Bank and Financial Accounts, (“FBARs”) for the years 2007-2011. A U.S. citizen or resident with a financial interest in, or signature authority over, one or more foreign financial accounts with an aggregate balance exceeding $10,000 at any time during a calendar year, must report the foreign financial accounts on an FBAR filed for that year. An FBAR for a given calendar year is due to be filed by the succeeding April 15th, though it may be extended to October 15th by a timely-filed extension form.
The Bank Secrecy Act, 31 U.S.C. § 5314, and regulations thereunder, 31 C.F.R. § 1010.350, impose the FBAR reporting requirement. The purpose of the FBAR reporting requirement is to curb the evasion of U.S. income tax by the use of foreign financial accounts—U.S. citizens and residents are subject to U.S. income tax on their worldwide income. A non-willful violation of the FBAR reporting requirement is subject to a civil penalty of $10,000, 31 U.S.C. § 5321(a)(5) (B)(i), except that there is no penalty if there is reasonable cause for the violation. U.S.C. § 5321(a)(5)(B)(ii). A willful violation is subject to a civil penalty equal to the greater of $100,000 or 50 percent of the aggregate balance of accounts reportable on an FBAR (this is sometimes called the “draconian” penalty). 31 U.S.C. § 5321(a)(5)(C). A willful violation is also punishable by a criminal penalty, 31 U.S.C. § 5322, though such prosecutions are rare.
The IRS has traditionally shown restraint in imposing penalties upon taxpayers who correct their noncompliance voluntarily, without the IRS prompting them about it. This was apparently what Mr. Bittner as attempting to do. He filed FBARs reporting his interests in foreign financial accounts as follows:
|Year||Number of Accounts Reported on Mr. Bittner’s FBAR|
A “violation” punishable by the BSA penalties clearly is a failure to file a correct, complete, timely FBAR. Internal Revenue Service voluntary disclosure programs enable taxpayers to avoid or mitigate the penalties by filing delinquent FBARs and becoming compliant before the government learns of the delinquency.
In June, 2017, the United States assessed a $10,000 penalty for each account which Mr. Bittner failed to timely report on an FBAR, a total of $2,720,000 in penalties. The government thus took the preposterous position that each account not reported properly on an FBAR was a “violation” for purposes of the Bank Secrecy Act—that the amount of penalties imposed upon Mr. Bittner should depend upon the fortuity of number of accounts into which he had divided his foreign funds. The government relied upon a 2019 California case, United States v. Boyd, No. CV 18-803-MWF, 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019), for its preposterous position.
More brazen yet, the government sued Mr. Bittner in the U.S. District Court for the Eastern District of Texas to collect the outrageous penalties assessed against him. United States v. Alexandru Bittner, No. 4:19-cv-415 (April 23, 2019). The government moved for partial summary judgment on the 177 accounts which Mr. Bittner admitted owning, a total of $1,770,000 in penalties. Mr. Bittner countered that at most he could be held liable for one $10,000 penalty for each year for which he failed to timely file an FBAR—a total of $50,000 in penalties. Mr. Bittner added that he should be excused from FBAR penalties altogether on the basis of reasonable cause.
On June 29, 2020, the District Court entered an Opinion and Order analyzing the Bank Secrecy Act agreeing with Mr. Bittner that a “violation” for the BSA penalty provision was the failure to file a timely, correct, complete FBAR for a given year. The Court denied summary judgment to the government and granted it in favor of Mr. Bittner. United States v. Alexandru Bittner, 2020 WL 3498082 (Jun. 29, 2020). It was the right result, a stunning victory for Mr. Bittner and taxpayers generally.
The District Court found that Mr. Bittner failed to establish a basis for reasonable cause to excuse him from FBAR penalties altogether.
The statute of limitations on assessment of an FBAR penalty is six years, 31 U.S.C. § 5321(b)(1), and it begins to run on the FBAR due date, whether the FBAR is filed or not. E.g., United States v. Williams, 489 Fed.Appx. 655, 657 n.4 (4th Cir. 2012); United States v. Horowitz, 361 F.Supp3d 511, 516 (D. Md. 2019); United States v. Bussell, 2015 WL 9957826 *6 (C.D. Cal. 2015); United States v. Markus, 2018 WL 3435068 *4 (D.N.J. 2018); United States v. Cohen, 2019 WL 8231039 *1, *4 (C.D. Cal. 2019). The FBARs in question were due on the 30th of June succeeding the calendar year to which they related. FBAR penalties assessed in June, 2017 could have been timely as to FBARs for 2010 and 2011, but not for any earlier year. This argument if raised could have saved Mr. Bittner $30,000 in penalties. But apparently it was not raised. I have seen this issue missed in other cases.
The District Court’s decision in Boyd is on appeal to the U.S. Court of Appeals for the Ninth Circuit. United States v. Boyd, No. 19-55585 (9th Cir. May 22, 2019). Hopefully the Ninth Circuit will reverse.