Just when it seemed that things couldn’t get any stranger in the world of foreign accounts compliance…
In United States v. Bittner, No. 19-cv-00415 (ED TX), the government seeks to reduce to judgment an incredible $3 million of non-willful FBAR penalties.
The unpaid tax on the amended returns for the relevant period was a paltry $625 but there could be more to the story. The location of the accounts, except for two, were in Romania where Taxpayer worked and resided. Of the two non-Romanian accounts, one was in Switzerland and the other in Liechtenstein.
The financial institution of the account in Liechtenstein (Liechtensteinische Landesbank) is on the IRS’ Foreign Financial Institutions or Facilitators list.
This is the second case under litigation involving multiple non-willful FBAR penalties for the same tax period; the other case – United States v. Boyd, is on appeal following the district court’s finding for the government.
Here are some relevant facts from the complaint and answer.
[Taxpayer] was born in Romania in 1957 where he lived until 1982 during the communist era.
[Taxpayer] studied mechanical and chemical engineering…[Taxpayer] obtained a Master’s degree in chemical engineering in 1981.
In early 1982, he immigrated to the United States with the assistance of the Hebrew National Aid Society. [Taxpayer] learned English as a second language. He became a naturalized citizen in 1987 and resided in the United States until 1990. His first job in the U.S. was a dishwasher. He then became a plumber’s apprentice. Later, he obtained a master plumbing certificate. [Taxpayer] then worked as a plumber with various employers until he moved back to Romania while also fixing up houses on the side.
[Taxpayer] moved back to Romania in 1990 where he lived until late 2011. He returned following the revolution and fall of communism because he believed there would be opportunity for a better life in his home county. Upon his return, he registered with the United States embassy.
During those two decades in Romania, he made only 3–4 short trips back to the United States to visit family, primarily his older sister and brother-in-law.
While in Romania, [Taxpayer] did file some Form 1040 tax returns in the 1990s reporting U.S. sourced income from his minority interest in a restaurant operated by his sister and brother-in-law. His brother-in-law prepared those returns on his behalf.
After returning to the United States and discovering he had been required to file tax returns (reporting worldwide income) and FBARs, [Taxpayer] hired CPA Beckley with the goal of getting into compliance with those filing obligations.
[Taxpayer] included a Schedule B as part of his income tax return for every year from 2007 through 2011. Yet, [Taxpayer] answered “no” to the question on Schedule B regarding whether he had a financial interest in, or signature authority over, a financial account located in a foreign country.
Prior to May 21, 2012, [Taxpayer] had never filed an FBAR despite having signature authority or control over in excess of 50 accounts from 2007 through 2011.
The number of foreign accounts would seem very high, but not uncommon. Foreign financial institutions automatically deposit funds into sweep accounts when fixed deposit accounts (CDs) mature. A taxpayer that has 5 fixed deposit accounts with 1 year terms could have 15 accounts the following year just by reinvesting the CDs (5 accounts to start with, 5 sweep accounts created by the bank when the accounts mature, and 5 additional accounts when the deposits are reinvested).
On May 21, 2012, [Taxpayer] filed delinquent FBARs for 2007, 2008 and 2010. However, [Taxpayer’s] late-filed FBARs only reported a single foreign bank account for 2007, 2008, and 2010.
[Taxpayer] failed to timely file FBARs for 2007 through 2011 reporting all of the foreign bank accounts… [Taxpayer’s] failure to timely report his financial interest in, or signature authority over, all of his foreign bank accounts was non-willful.
As of October 22, 2018, [Taxpayer] owed the United States $2,981,343.56 in penalties assessed under 31 U.S.C. § 5321, including interest and other statutory additions that have accrued, and will continue to accrue, as provided by law.
Reasonable cause – reliance on preparer
[Taxpayer] alleges that he engaged CPA Jeff Beckley (“CPA Beckley”) to prepare any required tax returns and FBARs; that CPA Beckley prepared tax returns and FBARs for 2007 through 2011 and filed them on Taxpayer’s behalf in May of 2012; that CPA Beckley nevertheless checked the “no” box on the income tax returns filed simultaneously with the FBAR filings and that [Taxpayer] did not notice that CPA Beckley had checked that box.
After discovering that a myriad of compliance issues had emerged from the tax returns prepared by CPA Beckley, [Taxpayer] engaged tax counsel and a new CPA. On September 25, 2013, [Taxpayer] filed amended FBARs, disclosing all bank accounts and balances.
Under 31 U.S.C. § 5321(a)(5) a non-willful FBAR penalty cannot exceed $10,000…
The statute does not define what an FBAR ‘violation’ is – whether a violation is a failure to file the form, or if a violation is the failure to report the account.
Charging a non-willful penalty per account leads to absurd results. Consider these possibilities:
Taxpayer A has 20 accounts, each with a maximum value of $20,000. IRS asserts a $10,000 non-willful penalty, per account, resulting in $200,000 of penalties. The statute provides no ceiling on the total amount of non-willful penalties that can be asserted.
Taxpayer B has 1 account, with a value of $400,000. IRS asserts the maximum willful penalty, which is the greater of $100,000 or 50% of the balance. That penalty comes out to $200,000.
Both taxpayers have the same aggregate balance but because Taxpayer B was willful, it would be logical to expect a much higher penalty for Taxpayer B. However, the result here is that Taxpayer B’s FBAR penalty is the same as Taxpayer A’s penalty.
Taxpayer A has 5 accounts, each with a maximum value of $50,000. IRS asserts a $10,000 non-willful penalty, per account, for a 4 year period, resulting in $200,000 of penalties.
Taxpayer B has 1 account with $500,000. The IRS asserts a $10,000 non-willful penalty, per account, for a 4 year period, resulting in $40,000 of penalties.
Taxpayer B’s penalty is considerably less than Taxpayer A’s for no good reason other than Taxpayer A has more accounts, and even though the taxpayer A has a smaller aggregate balance!
IRS acted arbitrarily and capriciously
For reasons unknown, [Taxpayer] was singled out for excessively harsh treatment far greater than similarly situated persons.
On September 24, 2014, [Taxpayer] formally requested treatment under the IRS Streamlined Filing Compliance Procedure, but even though he qualified, he was arbitrarily and capriciously denied such treatment.
In addition, even outside of the IRS Streamlined Filing Compliance Procedure, individuals who in similar circumstances innocently fail to file FBARs on foreign bank accounts are typically subject to maximum penalties of $10,000 per year and often less or nothing. IRM 18.104.22.168.4.1(1); IRS FS 2011-13.
Such treatment is prescribed in the IRS’s Internal Revenue Manual (IRM”). Under the IRM, examiners typically will recommend one FBAR penalty per open year, regardless of the number of unreported accounts. IRM 22.214.171.124.4.1(1). The IRS arbitrarily and capriciously denied such treatment. The IRS arbitrarily and capriciously failed to apply its FBAR penalty mitigation guidelines under IRM Exhibit 4.26.16-1, even though Mr. Taxpayer clearly qualified for such. The IRS provided no evidentiary basis to deny penalty mitigation, other than unsupported factual assertions by the examiner. The IRS engaged in no reasoned decision making in not applying its mitigation guidelines.
The Eighth Amendment requires that any fine be “proportionate” to the conduct it seeks to punish.
Plaintiff’s assessment of astronomical penalties of nearly $3 million against [Taxpayer] for not timely filing 5 FBAR forms is far in excess of any appropriate punishment for his non-willful conduct with respect to those statutory violations.
[Taxpayer’s] failure to timely file FBARs was not connected with any avoidance of income tax. The total tax due shown on [Taxpayer’s] amended income tax returns for the years at issue was $625, which he paid.
Improper criminal sanction
Imposing nearly a $3 million cumulative penalty against [Taxpayer] for non-willful information reporting violations constitutes a criminal sanction as opposed to a civil penalty.
Such amount bears no relationship to any legitimate basis for a civil penalty and is necessarily criminal punishment.
Before a criminal sanction may be imposed, [Taxpayer] must first be charged with a crime by indictment or information, neither of which has happened.
It is unconscionable for Plaintiff to assess and now seek to collect fines of nearly $3 million against [Taxpayer] for innocent conduct that the government admits was entirely non-willful and was voluntarily disclosed to the government.
For the years at issue, [Taxpayer] was technically required to file 5 FBARs simply stating limited filer information and the number of foreign accounts in which he had a financial interest. Nothing further was required.
[Taxpayer] acted innocently and in good faith and the government admits that any failure with respect to his FBAR obligations were non-willful.
There is no legitimate basis to impose a civil fine of nearly $3 million against a citizen under these circumstances.
[Taxpayer] demands a trial by jury on all issues triable by a jury.
Because the taxpayer had more than 25 accounts, he would not have been required to separately list each account on his FBARs. Considering that he would have simply reported his identifying information and the total number of accounts- was the government actually deprived of any significant information?
Taxpayers have little built-in protection in the FBAR statute or its corresponding regulation against excessive fines. Bittner has huge ramifications for thousands of other similarly-situated taxpayers and will surely influence how the IRS assesses fines against non-willful taxpayers.