Fifth Circuit: Penalty for FBAR violation applies on per-account basis, not on per-form basis

A case concerning penalties for a violation of FBAR rules on per-account basis, not on per-form basis

A case concerning penalties for a violation of FBAR rules

The U.S. Court of Appeals for the Fifth Circuit held that the penalty for a violation of the “Report of Foreign Bank and Financial Accounts” (FBAR) rules to report a qualifying account applies on a per-account basis (and not on per-form basis).

The Fifth Circuit, in vacating and remanding the case to the federal district court, concluded that the $10,000 penalty cap for a failure to file an FBAR applies for each account. The appeals court affirmed summary judgment on the taxpayer’s failure to establish a reasonable cause defense.

The case is: United States v. Bittner, No. 20-40597 (5th Cir. November 30, 2021). Read the Fifth Circuit’s decision [PDF 267 KB]

Background

The taxpayer (born in Romania and a naturalized U.S. citizen) returned to Romania where he earned millions of dollars in various investments and business interests. To manage his wealth, the taxpayer maintained dozens of numbered bank accounts (to hide his name) in Romania, Switzerland, and Liechtenstein. The taxpayer was unaware that as a U.S. citizen, he had to report his interests in certain foreign financial accounts, and he never filed FBARs while living in Romania.

The taxpayer returned to the United States in 2011. Upon learning of his FBAR reporting obligations, he ultimately filed FBARs for the years 2007 to 2011. However, those FBARs listed only his largest account and incorrectly stated he did not have an interest in 25 or more qualifying accounts. Two years later, in 2013, amended FBARs were filed disclosing the unreported accounts.

The U.S. government assessed $2.72 million in civil penalties against the taxpayer for non-willful violations—$10,000 for each unreported account each year from 2007 to 2011 (for a total of 272 accounts).

In 2019, the government brought suit in federal district court to reduce these penalty assessments to judgment. The district court (on cross-motions for summary judgment) found the taxpayer was liable for a penalty for violations of the FBAR rules; however, the district court reduced the assessment to $50,000, holding that the $10,000 maximum penalty attaches to each failure to file an annual FBAR—not to each failure to report an account. 

Fifth Circuit

The Fifth Circuit held that the penalty for violation of the FBAR rules applies on a per-account basis, and thus vacated and remanded this part of the district court’s judgment.

The Fifth Circuit explained that the text of the Bank Secrecy Act of 1970 and its regulations impose (1) a statutory requirement to report each qualifying transaction or relation with a foreign financial agency, and (2) a regulatory requirement to file these reports on an FBAR before a certain date each year.

The appeals court noted that the use of the term “violation” in the statutory provision (as opposed to the regulatory requirement) confirms that the “violation” contemplated is the failure to report an account, not the failure to file an FBAR—finding that the statutory language plainly describes a “violation” in terms of a failure to report a transaction or an account. 

KPMG observation

The decision from the Fifth Circuit differs from the findings of the Ninth Circuit in a March 2021 decision, thus creating a split between these circuits. In the earlier case, the Ninth Circuit held that one penalty applies for the untimely filing of a single accurate FBAR that includes multiple foreign accounts. Read TaxNewsFlash

 

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