FACTS MATTER!  TAXPAYERS CAN WIN WILLFUL FAILURE TO FILE FBAR CASES IN COURT!

By Coleman Jackson, Attorney, CPA

March 16, 2023

Under United States law an annual reporting and disclosure responsibility is placed on any United States person with any financial interest in or signatory authority over, a bank, brokerage, stock, or any other financial account in a foreign country.  See 31 U.S.C. Sec. 5314(a) and regulation 31 C.F.R. Sec. 1010.350(a).  The Bank Secrecy Act (“BSA”), U.S.C. Sec. 5311, et seq., requires U.S. persons to keep records and file reports with respect to their foreign bank account holdings.  United States Person is defined in the statute and regulations as U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold under the statute.  The reporting threshold is bank account(s) with balances of $10,000 at any time during the calendar year in either one financial account or any combination of financial accounts.  U.S. citizens and lawful permanent residents of the United States are included in the definition of U.S. persons regardless of where they actually reside in the world, so long as, their U.S. citizenship has not been forfeited, or LPR’s Green Card status has not been administratively or judicially revoked or abandoned.  Moreover, resident aliens of U.S. territories and U.S. territory entities are also subject to FBAR reporting.

Currently the FBAR is filed on Form 114 each April 15^th with the Financial Crimes Enforcement Network.  The civil penalties vary depending upon whether the U.S. person who failed to timely file Form 114 acted in a non-willful manner or whether they acted in a willful manner.  Non-willful violations of the FBAR filing requirements result in a maximum penalty of $10,000.  However, the penalty for willfully violating the FBAR reporting requirements can result in a civil penalty of the greater of $100,000 or fifty percent of the highest balance in the account at the time of the violation.  See 31 U.S.C. Sec. 5321(a) for a full discussion of permitted penalties that can be exacted on U.S. persons who violate the FBAR reporting requirements.    The U.S. Congress has written the FBAR statutes in such a way, well the best way to describe it is like this—strict liability.   In the case of willful violation; upon conviction it is strict liability for sure because there is no reasonable cause defense available to a taxpayer who willfully violates the FBAR disclosure requirements.  But as we disclose later in this blog, facts and circumstances matter in willful failure to file cases.  But as for the non-willful cases, let’s make clear right now:  Reasonable Cause is a possible defense for non-willful violations of the FBAR statutes.  If the U.S. person did not fail to file or the failure to timely file was attributable to a reasonable cause (such as reliance on accountants or professional tax preparers or other credible reasons), there should not be an FBAR penalty and any attempts by the IRS to collect a penalty would be a violation of the statute.  See White Mountain Apache Tribe, 537 U.S. 465, 477 (2003) and 31 U.S.C. Sec. 5321(a)(5)(B)(ii)(I). 

In this blog, we will focus on the alleged willful violation of the FBAR reporting requirements.  First the taxpayer need to remain silent because the Courts have said the burden of proof is on the Internal Revenue Service to prove that the taxpayer willfully violated the FBAR reporting requirements.    MAKE NO ADMISSONS that you had the requisite intent to violate the law.  An admission to an IRS examiner, agent or officer will be difficult to overcome even with the most skillful legal team.  So the best thing is to remain silent, seek legal counsel and fully cooperate with the IRS.  That does not include making uninformed admissions. The law governing FBAR (when is actions non-willful, inadvertent as opposed to willful) is complex and what the taxpayer may think is an honest statement or rendition of facts, may not be the whole truth and nothing but the truth.  It is hard and perhaps impossible to unravel half-truths, errors, misunderstandings or outright lies without unintended legal consequences.  Lies tumble into more lies and unless the taxpayer is into gymnastics, its best to leave the tumbling to the experts.

What is willful behavior in federal tax law?  Willful conduct is clearly something more than negligence or inadvertent actions. The United States Supreme Court stated over ten years ago that “where willfulness is a statutory condition of civil liability, it is generally taken to cover not only knowing violations of a standard, but reckless ones as well.”  The U.S. Supreme Court case of  Safeco Ins. Co. of Am. v Burr, 551 U.S. 47, 57 (2007) controls what the IRS must prove if they hope to prevail in a civil ‘willful violation of the FBAR reporting requirements case’.    Note that negligence or inadvertent actions are not included in the U.S. Supreme Court’s ‘willful’ definition.  Negligent and inadvertent failure to comply with the FBAR reporting requirements are classified as ‘non-willful violations’; and in those cases the offending U.S. person should raise all reasonable cause defenses that might be plausible under the circumstances.  The taxpayer should not pay any more penalty than they lawfully owe after considering all the facts and circumstances.  Beware:   repetitive violations of the FBAR reporting requirements could possibly be construed as ‘willful behavior’.  Multiple inadvertent errors may not pass the smell test—this reckless behavior could be the stench of willful snubbing the tax system, and could very likely lead to a ‘willful violation’ charge and even possibly a tax evasion charge.  If those are the facts and circumstances, a reasonable cause defense is seriously jeopardized.  Recklessness is but a few steps from intentional.  The more education U.S. persons have regarding the things discussed in this blog; the closer on the ‘decision continuum’ they come to ‘recklessness and intentional’ when their subsequent behavior doesn’t conform to their level of knowledge.  Good moral character matters in tax law- and everywhere else in a civil society.

The best way to look at this is in what I refer to as a “decision continuum “; in the case of ‘failure to timely comply with the FBAR reporting requirements’ that decision continuum – goes from negligence to one or more inadvertent actions on to many more inadvertent actions to intentional actions resulting in failure to comply with the FBAR reporting requirements.  The proper civil penalty, if any, depends upon the U.S. person’s culpability in failing to comply with the law.  The actual penalty paid could range from zero dollars in the case of a successful reasonable cause defense in a non-willful violation case to millions or more dollars in high dollar foreign bank accounts with willful violation of the FBAR reporting requirements.  A penalty based on a percentage of the foreign bank account balance can become enormous quickly!  In reality the FBAR penalties coupled with other tax penalties and interest could erase a taxpayers’ wealth and upon conviction take away their liberty.  Taxpayers should never concede anything in these cases because the monetary exposure can be extremely high!  There are also potential criminal exposures for FBAR violations; we have written about criminal exposures resulting from FBAR violations in one or more of our previous blogs; the standards of proof and burdens in criminal matters are different than in those civil cases.  We will skip that discussion here.    Best initial strategy in FBAR cases is silence until the U.S. person and their legal team can figure out what they are dealing with and develop the ideal legal strategy under the circumstances.

If the IRS attempts to impose the ‘willful violation penalty’ which is the greater of $100,000 or fifty percent of the account balance at the time of the violation, remember; in a civil penalty case the government must prove your actions were ‘willful’.  They must prove by a preponderance of the evidence (more likely than not) that you willfully did something other than sign your tax return.   Nor does checking the box “NO” concerning foreign bank accounts on the tax return constitutes  prima facie evidence of ‘willful intent to violate the FBAR reporting requirements’.  Often in the past the IRS has made these arguments about the signature and the checked boxes on the taxpayer’s tax return.  But Courts have repetitively stated that “a taxpayer’s signature on a return does not in itself prove his knowledge of the contents”.  A competent court will examine all the facts and circumstances then apply the applicable laws which mean that there is room for argument and putting forward a vigorous defense.  In a case United States v Mohney, 949 F.2d 1397 (6^th Cir. 1991), the Court describes the nuance that courts goes through when analyzing these types of tax cases.   By the way, these cases can be tried in federal district court, federal claims court or in the U.S.  Tax Court.  Cases can be tried in the tax court without first paying the penalty; however, in the district courts or federal claims court, taxpayer’s must first pay the civil FBAR penalty and any other related tax penalties and interest.

An FBAR penalty case decided in April 2017 in the United States District Court for the Eastern District of Pennsylvania ( Case 2:15-cv-05853-MMB, Arthur Bedrosian v The United States of America, Department of the Treasury, Internal Revenue Service) should  give taxpayer’s struggling through IRS allegations of willful violation of FBAR reporting requirements  heart.  In Bedrosian case, the taxpayer won against the U.S. government’s willful failure to file FBAR allegation in court!  Taxpayers can win willful failure to file FBAR cases in court!  As reported by the Court in the Bedrosian case, Bedrosian, a Chief Executive Officer in the pharmaceutical industry was a United States citizen who had two foreign bank accounts.  For years on the advice of his accountants, he failed to disclose these accounts on his tax return and he did not file the required FBAR reports for either account although the reporting threshold of $10,000 was met in those years.  In 2007 after going to another accountant for his tax work, he was advised that he had FBAR filing issues.  He disclosed one of the accounts but not the other in his 2007 FBAR filings.  To be brief:   the IRS sent him a letter on July 18, 2013 stating that it was imposing a penalty for his willful failure to file TDF 90.22.1.   The FBAR reporting Form in 2007 was Form TDF 90.22.1; it is now Form 114.  Anyway, the IRS proposed to access a penalty of $975,789.17 which was 50% of the maximum value of the account ($1,951,578.34) which is the largest permitted penalty under the statute.    Bedrosian filed suit in federal district court in October 27, 2015.  The thing to note in the Bedrosian case is that the Court said facts matter in willful failure to file FBAR cases!  The government must prove Bedrosian willfully failed to submit an accurate FBAR report in 2007; Bedrosian’s knowledge concerning his FBAR reporting requirements are relevant facts, and his relationship with his accountants are also relevant facts; even though, there are no reasonable cause defense in ‘willful failing to file FBAR cases’.   FACTS MATTER!  TAXPAYERS CAN WIN WILLFUL FAILURE TO FILE FBAR CASES IN COURT!   The point of this case is U.S. persons may have hope in court in willful failure to file FBAR cases because the IRS must prove that the taxpayer willfully violated the FBAR statute.   This is true even though ‘a reasonable cause’ exception only exist for non-willful violations as shown in 31 U.S.C. Sec. 5321(a)(5(C)(ii).   Intent to violate the statute  or reckless disregard of the disclosure requirements (don’t give a hoot attitude) must be proved; what someone’s intent is can be proven by direct evidence; such as an admission against interest, credible witness testimony, contemporaneous letters or documents; but most likely, the courts will decide these type of cases on all the facts and circumstances.  The government must prove that the taxpayer violated the statue willfully, which has been defined by the U.S. Supreme Court and subsequent courts as ‘knowing intent or reckless behavior’.  If the facts are on the U.S. person’s side, taxpayers can win willful failure to file FBAR cases in court.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

THE U.S. SUPREME COURT OPINED

THAT THE REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS

MAXIMUM NONWILLFUL VIOLATION PENALTY IS $10,000 PER FBAR NOT PER ACCOUNT

By:  Coleman Jackson, Attorney & Certified Public Accountant

March 6, 2023

The Bank Secrecy Act (BSA) and its implementing regulations require certain individuals to file annual reports with the federal government about their foreign bank accounts. The statute imposes a maximum $10,000 penalty for nonwillful violations of the law. But recently a question has arisen in the U.S. Supreme Court. Does someone who fails to file a timely or accurate annual report commit a single violation subject to a single $10,000 penalty? Or does that person commit separate violations and incur different $10,000 penalties for each account not properly recorded within a single report? Because the Ninth Circuit read the law one way and the Fifth Circuit the other, the U.S. Supreme Court took the case and recently decided in favor of the taxpayers.

BSA simply requires those who possess foreign accounts with an aggregate balance of more than $10,000 to file an annual report on a form known as an “FBAR”—the Report of Foreign Bank and Financial Accounts. 31 U. S. C. §5314; 31 CFR §1010.306 (2021). These reports are designed to help the government “trace funds” that may be used for “illicit purposes” and identify “unreported income” that may be subject to taxation separately under the terms of the Internal Revenue Code.

9^th Circuit case: Jane Boyd, an American citizen, held 13 relevant accounts in the United Kingdom. Because the aggregate amount in Ms. Boyd’s accounts exceeded $10,000 in 2009, she should have filed an FBAR in 2010. Neglecting to do so, she corrected the error in 2012, submitting a complete and accurate report at that time. The government acknowledged that Ms. Boyd’s violation of the law was “non-willful”, and imposed a $130,000 penalty—$10,000 for each of her 13 late-reported accounts. Ninth Circuit vindicated Ms. Boyd’s view, holding that the BSA authorizes “only one nonwillful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” 991 F. 3d, at 1078.

5^th Circuit case: Alexandru Bittner was born and raised in Romania, but immigrated to the United States at a young age in 1982 and became a naturalized citizen. After the fall of communism, Mr. Bittner returned to Romania in 1990 where he launched a successful business career. Like many dual citizens, he did not appreciate that U. S. law required him to keep the government apprised of his overseas financial accounts even while he lived abroad. Shortly after returning to the United States in 2011, Mr. Bittner learned of his reporting obligations and engaged an accountant to help him prepare the required reports—covering five years, from 2007 through 2011. Under governing regulations, filers with signatory authority over or a qualifying interest in fewer than 25 accounts must provide details about each account, but individuals with 25 or more accounts need only check a box and disclose the total number of accounts. 31 CFR §1010.350(g). Mr. Bittner and his new accountant volunteered details for each and every one of his accounts—61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011. 19 F. 4th, at 738.  Because the government took the view that nonwillful penalties apply to each account not accurately or timely reported, and because Mr. Bittner’s late-filed reports for 2007–2011 collectively involved 272 accounts, the government thought a fine of $2.72 million was in order. Mr. Bittner challenged his penalty in court, arguing that the BSA authorizes a maximum penalty for nonwillful violations of $10,000 per report, not $10,000 per account. The district court agreed with Mr. Bittner’s reading of the law, United States v. Bittner, 469 F. Supp. 3d 709, 724–726 (ED Tex. 2020), but the Fifth Circuit upheld the government’s assessment, 19 F. 4th, at 749.

U.S. Supreme Court decision: To resolve who has the better reading of the law, U.S. Supreme Court begins with the terms of the most immediately relevant statutory provisions, 31 U. S. C. §5314 and §5321. Section 5314 (Secretary of the Treasury “shall” require certain persons to “keep records, file reports, or keep records and file reports” when they “mak[e] a transaction or maintai[n] a relation” with a “foreign financial agency.”) does not speak of accounts or their number. The word “account” does not even appear. Instead, the relevant legal duty is the duty to file reports. Whether a report is filed late, whether a timely report contains one mistake about the “address of [the] participants in a transaction,” or whether a report includes multiple willful errors in its “description of . . . transaction[s],” the duty to supply a compliant report is violated. As a baseline, §5321(a)(5) authorizes the Secretary to impose a civil penalty of up to $10,000 for “any violation” of §5314. The law still does not speak of accounts or their number. Also, the law authorizes the Secretary to impose a maximum penalty of either $100,000 or 50% of “the balance in the account at the time of the violation”—whichever is greater. §§5321(a)(5)(C) and (D)(ii). So here, at last, the law does tailor penalties to accounts. But the statute does so only for a certain category of cases that involve willful violations, not for cases like ours that involve only nonwillful violations. When Congress includes particular language in one section of a statute but omits it from a neighbor, we normally understand that difference in language to convey a difference in meaning (expressio unius est exclusio alterius). The government’s interpretation defies this traditional rule of statutory construction. Therefore, the Supreme Court held that the BSA’s $10,000 maximum penalty for the non-willful failure to file a compliant FBAR should be calculated on a per report, rather than a per account, basis. The decision, which was issued on February 28, 2023, was a close vote, 5-4, with Justice Barrett writing in the dissent, “The most natural reading of the statute establishes that each failure to report a qualifying foreign account constitutes a separate reporting violation, so the Government can levy penalties on a per-account basis. Nevertheless, the Supreme Court reversed the Fifth Circuit and remanded the case back to district court.

What does the Supreme Court’s Decision in Bittner Mean to Foreign Bank Account Holders:

What is not clear is what this means for taxpayers who have paid civil fines for unintentional account violations in the past. The ruling also raises the question of whether the IRS will be more aggressive in characterizing violations as willful now that differences in penalty calculations will be more significant.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100