Professor Moriarty Is Going to Make an Appearance at the U.S. Supreme Court

October 26, 2022

By Kenneth S. Levinson and Masha M. Yevzelman

Remember how back in December of 2021 in “As Sherlock Holmes Would Say, ‘The Game’s Afoot’: A Possible SCOTUS Tax Case?” we told you that there was a split in the Circuits regarding the imposition of non-willful Foreign Bank Account Report (FBAR) penalties by the IRS on noncompliant taxpayers, and predicted the Supreme Court would accept this case, as unlikely as that may have been historically for a “tax” case? The Ninth Circuit in United States v. Boyd (991 F.3d 1077 (9th Cir. 2021)) had concluded that the penalties were on a “per year” basis, while the Fifth Circuit in United States v. Bittner (19 F.4th 734 (5th Cir. 2021)) had concluded that the FBAR penalties were imposed on a “per account” basis.

Indeed, the Supremes did accept the Bittner case for certiorari on June 21, 2022. That case is going to be argued before the Court on Tuesday, November 2.

The actual question before the Court is: “Whether a ‘violation’ under the [Bank Secrecy] Act is the failure to file an annual FBAR (no matter the number of foreign accounts), or whether there is a separate violation for each individual account that was not properly reported.”

It is a question simply stated. But enter Professor Moriarty to complicate things. The IRS has been investigating offshore reporting noncompliance for assets, income, and accounts for many years, well before the UBS investigation and resulting nonprosecution agreement starting in 2005. FBAR reporting obligations have been around since enactment of the Bank Secrecy Act in 1970. Do the “seniors” among you remember Project Haven (the Miami grand jury investigating unreported income and accounts in the Caribbean in the mid-to-late 1970s)? It spawned two shows on “60 Minutes” and a related Supreme Court case itself (United States v. Payner, 447 U.S. 727 (1980)). That’s a very interesting evidence case in the context of unreported offshore accounts and trusts.

But we digress. FBARs require annual filings by U.S. persons possessing (generally) ownership, control or signature or other authority over foreign accounts. These required annual filings have been the subject of concerted IRS audit activity, federal legislation even after the Bank Secrecy Act itself (e.g., FATCA), and a multiplicity of “Intergovernmental Agreements” (some 113 countries at last count)—which require various forms of mandatory disclosure to the IRS by either foreign countries or their foreign financial institutions themselves of ownership or control of foreign accounts by U.S. persons. There have also been quite a number of IRS initiatives to encourage voluntary compliance through numerous “voluntary disclosure” and “streamlined compliance” initiatives to encourage noncompliant taxpayers to report their reportable foreign accounts. Not all delinquent taxpayers have taken (or been able to take) advantage of these options, which is why the taxpayers in Boyd and Bittner, and many others, have found themselves the object of IRS enforcement and penalty actions.

All of this background and context is intended to demonstrate that reporting all reportable foreign accounts is an important tax compliance and tax policy requirement, as evidenced both by Congressional enactments and IRS enforcement actions. Neither body takes kindly to Americans hiding foreign accounts, income, or activities abroad. We all have an obligation to report our worldwide income and assets and to provide reporting documentation as obliged by law.

The FBAR form itself includes obligations to fully report information regarding every account (once the “$10,000 aggregate value” test has been met during the reporting year). Every account to which the form (FinCEN 114 today) applies, whatever the type of ownership or authority over the account, is to be reported. The types of reportable accounts generally fall into one of THREE different account descriptions in various “Parts” of the FBAR form: Part 2: Financial Accounts Owned Separately, Part 3: Financial Accounts Owned Jointly, and Part 4: Financial Accounts with Signature Authority.

The critical point is that every such reportable account is to be identified and reported.

The required reporting for each of them is simply consolidated on a single submission (the FinCEN 114) for the calendar year in question. A failure to include even one account means that the full required compliance obligation for that year has not been met, and penalties can ensue.

So, this is the enforcement landscape presented to the Supreme Court: If a taxpayer fails to file the FBAR at all, he or she or it can be penalized for that failure. If a taxpayer has failed to include one or more accounts, but has filed for/included others, the taxpayer can be penalized for those failures themselves. If a taxpayer has failed to include reportable accounts in one “Part” (for example, has not included reportable “joint” accounts while having reported both separately owned and signature accounts), the taxpayer can be penalized for those failures.

The question to the Court in Bittner, literally, is whether the penalties for such reporting failures apply on a “per account” or “per year” basis.

In addition to the parties in the actual dispute before the Court, various interested organizations have been submitting amicus briefs, some siding with the government and arguing that the penalty should apply on a per-account basis (e.g., The National Whistleblower Center) and others siding with the taxpayer and arguing that the penalty should apply on a per-form (per year) basis (e.g., The Center for Taxpayer Rights, the U.S. Chamber of Commerce, and the American College of Tax Counsel).

One of us (Ken) thinks that the government should prevail because this is a per account reporting obligation and therefore a per account penalty exposure is contemplated by the law. Under this view, the obligation to report is for each and every reportable account, wherever it is captured in the Form’s various “Parts.”  The inability to assess penalties on a per account basis could enable taxpayers to limit their penalty exposure regardless of the number, type, ownership, or control over the unreported accounts, and a failure to report any account as required could preclude the IRS from correlating the (unreported) FBAR information with other income tax or required reporting obligations.

The other one of us (Masha), however, believes that the taxpayer should win, and that the government’s interpretation of the law is too draconian, especially because at issue is the scope of penalties for “non-willful” violations.

What we can agree on, however, is that Professor Moriarty will look to minimize his penalty exposure by claiming the FBAR reporting penalties apply only on a “per year” basis.

What do you think?

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