The Reporting of Foreign Bank and Financial Accounts (FBAR) requirements have caused many issues for years now. Arguments surrounding willful reporting failures and penalties have continually topped the list.
Most recently, there were two court cases that dealt with these topics. In the Bittner v. United States case, the Supreme Court released information that should finally help determine whether the penalty for a non-willful failure to file the Form 114 is to be applied on a per-account basis or on a per-form basis.
In another case, the plaintiff in Toth v. United States filed a petition for certiorari asking the U.S. Supreme Court to determine whether penalties for willful failure to file an FBAR are limited by the excessive fines clause of the Eighth Amendment to the U.S. Constitution. She is seeking a review of a decision that affirmed a $2.17 million civil penalty imposed by the Internal Revenue Service (IRS) for willfully failing to file multiple FBARs.
Are FBAR Fines Excessive?
Background on Reporting
The Bank Secrecy Act requires U.S. citizens with certain foreign accounts to file an FBAR. The filing requirement kicks in when a U.S. person has a financial interest in, or other authority over, one or more foreign bank accounts with an aggregate balance that exceeded $10,000 during the previous calendar year.
The filing requirement is enforced through civil and criminal penalties. For individuals whose failure to file an FBAR is willful, the maximum civil penalty is the greater of $100,000 or 50% of the balance in the unreported account.
Initial Case Details
The plaintiff was born in Argentina after her family fled Germany in the 1930s. She immigrated to the United States in 1962, married and had four children. The plaintiff earned a college degree, worked most of her life as a homemaker and became a U.S. citizen in the 1980s.
While in the United States, the plaintiff’s father became a successful businessman. In 1999, he gave her several million dollars by opening an account in her name at the same Swiss bank he used. The plaintiff knew about this account and had access to the funds in it. However, she did not file an FBAR for the account until 2010. That year, she submitted a partially completed FBAR for 2009. She later filed a completed report for 2009, as well as FBARs for the previous five years.
In 2011, the IRS determined the plaintiff’s failure to file an FBAR for 2007 had been willful and assessed a penalty of $2,173,703. She did not pay the penalty. When the IRS sued to collect, the plaintiff represented herself in the collection proceeding.
Lower Court Proceeding
In the collection proceeding, which took place in a U.S. District Court in the District of Massachusetts, the plaintiff argued her failure to file wasn’t willful. However, as a sanction, the court found her failure to file willful after other, less onerous, sanctions were imposed that failed to improve her compliance with court-ordered discovery.
The court also found willfulness was shown by her in the following manners:
- Conscious effort to avoid learning about FBAR reporting requirements
- Deliberate attempts to keep her Swiss account secret
Furthermore, the court rejected her other argument — that the penalty violated the excessive fines clause of the Eighth Amendment. It found the clause did not apply to civil penalties and, even if it did, the penalty wasn’t excessive or grossly disproportionate.
Appellate Court’s Decision
The plaintiff appealed the district court’s decision, but didn’t fare any better with the First Circuit. The appeals court affirmed the district court’s sanctions order, which established she had acted willfully when she failed to file the FBARs because there was evidence she acted willfully, both when she violated discovery orders and when she failed to file the reports.
In addition, though the plaintiff disputed the penalty amount, the First Circuit rejected her argument the penalty was limited to $100,000, because the maximum amount of the penalty was increased to the greater of $100,000 or 50% of the account balance by regulatory amendments. Finally, the appeals court held the excessive fines clause didn’t apply to civil FBAR penalties.
Monitoring the Outcome of These Supreme Court Cases
These FBAR cases will be monitored very closely by the tax community as they could have a big impact on those that have not filed FBARs. If they are taxpayer favorable, this might be an opportunity for U.S. taxpayers who still have not reported on foreign accounts to come forward and settle their situation as the penalties might be much less than in the past.
Moore Doeren Mayhew’s advisors have extensive experience with FBAR filings and are available to discuss these cases and how they might impact your unique situation. Contact us today.