As Sherlock Holmes Would Say, “The Game’s Afoot”: A Possible SCOTUS Tax Case?

December 3, 2021

By Kenneth S. Levinson and Masha M. Yevzelman

Sherlock Holmes black silhouette, isolated on white background

If you are into Foreign Bank Account Reports (FBARs), your concern about penalties for failing to comply with those FinCEN 114 reporting rules just took an exciting, and perhaps fearsome, turn. On, Tuesday, November 30, 2021, the Fifth Circuit decided United States v. Bittner (F.3d, No. 20-40597). Declining to follow an earlier Ninth Circuit decision in United States v. Boyd (991 F.3d 1077), the Bittner court determined that penalties for not filing FBARs applied on a per account basis, not on a per year or per form basis.

This is a meaningful split among the Circuits, raising the possibility that we may see a tax case back in the U.S. Supreme Court…

Let’s set the background. Congress enacted the Bank Secrecy Act of 1970 (BSA) to combat the widespread use of foreign banks located in jurisdictions with strict bank secrecy laws for the purpose of evading U.S. taxes (see Pub. L. No. 91-508, 84 Stat. 1114; 31 U.S.C. §§ 5311–5322). The act authorized Treasury to require U.S. citizens and U.S. residents (green card holders and resident aliens) to keep records of and to report their foreign financial accounts. Regulations promulgated under the BSA’s authority require U.S. persons to report annually each of their foreign financial accounts (including accounts over which the U.S. person only has signature authority) on an FBAR if the aggregate highest value of all such accounts exceeds $10,000 at any point during the year (31 C.F.R. § 1010.350).

Penalties for non-willful civil FBAR violations were not to exceed $10,000: 31 U.S.C. § 5321(a)(5)(A), (B)(i). For willful violations, on the other hand, the maximum penalty for violations is the greater of $100,000 or 50 percent of the “the balance in the account at the time of the violation”: 31 U.S.C. § 5321(a)(5)(A), (C), (D).

In Boyd, the Ninth Circuit panel split on whether the FBAR penalties applied on a per account vs. per year (per form) basis. Jayne Boyd did not in a timely manner file an FBAR to disclose her foreign financial accounts in the United Kingdom. The IRS assessed Boyd non-willful FBAR penalties on a per-account basis for one calendar year in the amount of $47,279. That court reversed the IRS, concluding that the penalties for a non-willful reporting violation were determined on a per year (that is, a per FBAR form) basis and, therefore, limited the penalty to $10,000.

In Bittner, at issue were the foreign financial accounts of Alexandru Bittner, who was born in Romania, later became a naturalized U.S. citizen, and then returned to live in Romania. Bittner had a significant number of foreign financial accounts outside the United States in Romania, Switzerland, and Liechtenstein. He filed FBARs but did not report all of his accounts, omitting from his FBARs between 50 and 60 accounts each year. The IRS assessed $2.72 million in non-willful FBAR penalties. The U.S. District Court for the Eastern District of Texas followed the Ninth Circuit decision in Boyd and reduced the proposed IRS penalty (of $2.72 million) down to $50,000 (determined as $10,000 per year for each of the five years in contest, 2007-2011).

This week, the Fifth Circuit reversed the District Court, concluding that the violation of the reporting requirement is “the failure to report a qualifying account, not the failure to file an FBAR,” and remanded the case for further proceedings.

Where does this leave us? To borrow from Apollo 13: “Taxpayers, we have a problem.”

Boyd and Bittner take diametrically opposing views of the same statute and penalty scheme relating to FBARs. Although the Bittner decision was just issued, and the taxpayer’s appeal and rehearing options have not yet been determined, there is at this moment a clear conflict between two Circuits, providing fertile grounds for SCOTUS to resolve the conflict.

Do you think an FBAR penalty case might actually be of interest to the Justices?

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