The Fifth Circuit recently held in United States v. Bittner, ___ F. 4th ___ (5th Cir. 11/30/21) that the non-willful FBAR penalty should be applied on a per account basis, rather than on a per form basis. The Court cited 31 U.S.C. §5314 and the regulations promulgated thereunder including 31 CFR §§ 1010.306 and 1010.350 as the predicate for applying the FBAR penalties on a per account basis. The Taxpayer in Bittner had a financial interest in over 25 foreign financial accounts over a three year period. The assessment of the FBAR penalty by the IRS resulted in an aggregate per account penalty of $1.77 million.
The unanimous decision in Bittner, directly conflicts with the holding in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021) where the Ninth Circuits ruled that the non-willful FBAR penalty should be assessed per form and not per account.
The Bittner and Boyd decisions may set the stage for a showdown in the U.S. Supreme Court in the event Bittner petitions for certiorari. In the alternative, the Supreme Court may wait to see whether a consensus emerges among the other Circuits as to how to treat this issue.
In Bittner, the IRS argued that because the reasonable cause exception to the non-willful FBAR penalty references the “balance in the account” language, the reasonable cause exception should be applied on an account by account basis. The Government further maintained in Bittner that the same reasoning should be applied in the assessment of the non-willful penalty.
The Government further argued that, because the penalty for willful violations is assessed with reference to each account, the non-willful penalty should also be assessed with reference to each account. The District Court rejected both of the Government arguments and held that the $10,000 maximum penalty for a non-willful violation applies on a per form basis rather than on a per account basis.
The Fifth Circuit, relying heavily on the dissent in Boyd, reversed the lower court’s ruling which capped the $10,000 non-willful FBAR penalty on a per form basis. In ruling in favor of the Government, there is now authority for the IRS to assert the non-willful FBAR penalty on a per account basis.
The Bittner decision will certainly bolster the Government’s position that the non-willful FBAR penalty should be applied on a per account basis. Furthermore, the Boyd decision has no binding effect on the Government. Consequently, taxpayers who have failed to file their FBARS may be subject to significant penalties.
A number of avenues exist where a taxpayer can make an offshore disclosure and either avoid or minimize FBAR penalties. Depending upon the circumstances, a Taxpayer, who is seeking to make an offshore disclosure, may be eligible for either the foreign or domestic streamlined procedures which would result in significant savings.
In more complex cases where criminal risk is present, it may be necessary for a Taxpayer to make a disclosure using the Voluntary Disclosure Practice Rules announced in November of 2018. The new rules replace the procedures set forth in the Offshore Voluntary Disclosure Program (OVDP) and it prior iterations.
A note of caution. Anyone considering making an offshore disclosure should avoid the temptation of making a “quiet disclosure,” which is frowned upon by the Government and is indicia that the Taxpayer is attempting to prevent the Government from discovering the Taxpayer’s failure to comply with the FBAR statute and related regulations.
The streamlined domestic offshore procedures and the Voluntary Disclosure Practice Rules both provide for a one time miscellaneous offshore penalty, as well as interest. An accuracy related penalty in the case of the Voluntary Disclosure Practice Rules is also assessed on any additional income tax due.
Given the complexities related to FBAR reporting, the penalty regimen, the various avenues available for making a disclosure and the possible application of the FBAR penalty mitigation guidelines, anyone considering making a disclosure should discuss their specific circumstances with an experienced and knowledgeable tax attorney who can assess the Taxpayer’s situation and quantify the potential savings by making an offshore disclosure.