In a recent case concerning the civil penalties for failing to report non-U.S. financial accounts on the Foreign Bank Account Report (FinCEN Form 1114, hereinafter ‘FBAR’) the U.S. Court of Appeals for the Fifth Circuit surprisingly determined that FBAR penalties are calculated based on the number of accounts that were not reported rather than the number of FBAR forms that were not filed. See United States v. Bittner, No. 20-40597 (5th Cir. 2021).
In Bittner, the Fifth Circuit had affirmed the trial court’s denial of the taxpayer’s reasonable cause defense and ruled that the a penalty was appropriate. However, in a split from the rest of the country and other circuits, the Fifth Circuit calculated the applicable civil penalty not based on the failure to file the individual form itself, but rather based on the number of financial accounts that were not reported on the form. This decision is contrary to the decision reached by the Ninth Circuit Court of Appeals in United States v Boyd, 991 F.3d 1077 (9th Cir. 2021).
As a practical concern this decision subjects taxpayers who reside in the Fifth Circuit, which includes portions of Louisiana, Mississippi and Texas, may be subject to much higher FBAR penalties for the same behavior as compared with U.S. taxpayers who reside elsewhere. To avoid being subject to such a result, taxpayers residing in the Fifth Circuit should carefully consider the Federal Court in which to contest such a determination.
In 1987 Mr. Bittner became a naturalized US citizen. In 1990 he returned to his home country Romania and became a successful businessman and investor. He opened dozens of bank accounts in Romania, Switzerland, and Liechtenstein, but failed to file timely FBAR reports.
In June 2011, the IRS assessed $2.72 million in civil penalties against him—$10,000 for each unreported account each year from 2007 to 2011.
In 2012, Mr. Bittner returned to the U.S. and hired a CPA who prepared and filed his outstanding FBARs. Later Bittner found out that filed FBARs were deficient, and hired new CPA. In September 2013 new CPA filed corrected FBARs for 2007-2011.
In June 2019, the government sued to reduce these penalty assessments to judgment. Both Bittner and the IRS moved for summary judgment based on application of the $10,000 penalty limitation for negligent reporting. Mr. Bittner argued the penalty should apply on a per-form basis and the government arguing for a per-account basis. The United States District Court for the Eastern District of Texas (“district court”) found Mr. Bittner liable and denied his reasonable cause defense. The district court held that the $10,000 maximum penalty applies to each non-willful violation on a per-form basis, and the court entered judgment of $50,000—$10,000 for each year from 2007 to 2011. Both parties timely appealed.
Fifth’s Circuit Reasoning
In ruling that FBAR penalties apply on a per account rather than per form basis, the Fifth Circuit held that each failure to report a qualifying foreign account constitutes a separate reporting violation subject to penalty. In its reasoning, the Fifth Circuit focused its analysis on what constitutes a ‘violation’ under 31 USC § 5314. The Fifth Circuit agreed with the government position that the District Court erred in determining what constitutes a violation by focusing on the regulations under 31 USC § 5314 rather than on code section itself, and explained that the term ‘violation’ should be interpreted based on the plain text of section 31 USC § 5314.
Taxpayers should be aware that the IRS litigating position is to establish across the country that FBAR penalties should be determined on a per account basis rather than per form basis. This could significantly increase the amount of civil penalties a taxpayer is facing for failure to timely make an FBAR report. If you have an unreported non-U.S. financial account, it may be better to come into compliance sooner rather than later and always with the assistance of a tax professional experienced in resolving tax matters.