Some Taxpayers are Successful in FBAR Penalty Defense Cases

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Some Taxpayers are Successful in FBAR Penalty Defense Cases

Each year, U.S. taxpayers with money or assets in offshore bank or financial accounts are required to disclose these accounts through the Foreign Bank and Financial Account Report, or FBAR, if the aggregated value of these accounts exceeded $10,000 at any time during the previous year. If you fail to file this report as required and are caught by the IRS, you could face serious penalties, including potential criminal charges, if your behavior was willful. Even if your behavior was an unintentional error, however, you could still end up facing draconian civil penalties, including massive fines. Recently, the IRS has tried to make these fines even more massive by claiming that they should be assessed per account rather than per FBAR filing. Our experienced Tax Lawyers at the Tax Law Offices of David W. Klasing have been following this issue as it works its way through the courts, including a very rare recent decision that came down in favor of the U.S. taxpayer.

The Penalty Per FBAR vs. Penalty Per Account Question

A non-willful violation of the FBAR reporting requirement is subject to a civil penalty of $10,000, as per 31 U.S.C. § 5321(a)(5) (B)(i), unless the agency finds that there was reasonable cause for the violation, in which case they can choose to impose no penalty. 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, as per 31 U.S.C. § 5321(a)(5)(C). A question has emerged, however, about whether a “violation,” as referred to in the statute, should be defined as the failure to file the yearly FBAR form or each failure to disclose a different foreign bank or a financial account on the FBAR.

Taxpayer advocates have promoted a common-sense reading of the law, arguing that the plain language of the statute indicates that the penalties are to be imposed per each failure to file an accurate FBAR, meaning that only one penalty can be assessed per year the FBAR was not properly filed. However, the IRS has recently been assessing the penalty in some high-profile cases based on how many offshore or foreign financial accounts the taxpayer failed to report on the FBAR. This can make a massive difference in the fines assessed. If a taxpayer non-willfully failed to disclose ten different foreign or offshore bank or financial accounts in a single year’s FBAR, this would result in a $10,000 fine if the calculation is made per FBAR, but a $100,000 fine if the calculation is made per account. One case out of the Central District of California affirmed the IRS’s “per account” reading of the law, although that ruling is on appeal to the 9th Circuit.

A Recent Case Proves Some Courts Are Open to the Taxpayers’ Argument

Although past rulings on this issue have tended to favor the IRS’s argument, the taxpayers’ plain reading of the law as meaning that penalties should be assessed per FBAR as opposed to per account won a big victory recently in a case out of the Eastern District of Texas. In that case, known as U.S v. Bittner, the IRS sued to collect the full amount of penalties owed to them by Alexandru Bittner, who had come forward through a voluntary disclosure program to deal with the fact he had failed to file FBAR reports as required in from the years 2007-2011, despite having accounts overseas that met the minimum threshold during each of those years.

Because Mr. Bittner’s actions were found to be non-willful, he was assessed a penalty of $10,000 per violation. However, the IRS used the per account definition of violation to assess the penalties, and over the five years Bittner failed to file, there were 272 different accounts that he should have reported. As such, there was a massive difference between a per FBAR assessment of penalties, which would come in at $50,000, and a per account assessment, which would come in at $2,720,000.

In this case, the court ruled against the IRS, affirming that a “violation” for the penalty provision was the failure to file a timely, correct, complete FBAR for a given year. This was undoubtedly a huge financial relief for Mr. Bittner and a landmark ruling for taxpayers and common sense. However, the issue is still working its way through the circuit courts, who will likely have the final say on the matter.

If You Are Dealing With FBAR Issues, Including Overassessment of Civil Penalty Fees, Call Our Experienced Tax Attorneys and CPAs Today

The best way to make sure you avoid issues with FBAR violations is to hire a skilled dual licensed Tax Lawyer and CPA like those at the Tax Law Offices of David W. Klasing before filing your returns so that we can assess your offshore financial accounts and associated reported taxable income, advise you of your foreign reporting obligations, and ensure that everything is correctly and timely filed. If you have already made mistakes on past FBAR filings and or omitted reporting your offshore sources of taxable income, we can typically bring you back into compliance through a delinquent information filing program, (where no offshore income was omitted) a domestic or expat streamlined voluntary disclosure (where your actions were non-willful) of through a full blown offshore voluntary disclosure program (where your actions were intentional or could easily look that way) without criminal penalties being assessed against you. If the IRS tries to assess your civil penalties per account rather than per FBAR, we can challenge the matter in court. Call us today at (661) 432-1480 to set up a free, confidential consultation or schedule online here.

Questions and Answers about Offshore Voluntary Disclosure Initiative (OVDI)

Note: this program is canceled but much of the information below still has relevance.

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