The US government requires citizens file an annual Report of Foreign Bank and Financial Accounts (FBAR) as part of their tax obligations for certain accounts. These forms allow citizens to disclose any qualifying foreign accounts and meet applicable tax obligations. Those who fail to do so can face serious penalties.
But how do the courts assess these penalties? Unfortunately, the answer is not clear. In a recent case, Bittner v. United States, the government has gone after a taxpayer who owns multiple foreign bank accounts. They state Bittner failed to properly report these assets for five years in violation of the Bank Secrecy Act and are pushing for maximum financial penalties.
Will the court provide guidance?
Penalties are set at a maximum of $10,000 per violation. The question here is what constitutes a violation. The courts could move forward to define a violation for the purposes of this case in one of two ways. Either the government penalizes the taxpayer for each year of failing to file these forms or penalizes for each individual form. If penalized for each year, he faces a fine of $50,000. Although still a steep penalty, it pales in comparison to the alternative. If the government can establish that the penalty should apply to each individual form (the government has accused Bittner of failing to file 272 forms during the time in question) at $10,000 per form, the fine jumps to over $2.7 million.
There is currently not much guidance on this issue. As such, the Supreme Court of the United States’ (SCOTUS) decision to hear this case will provide important precedent.
What will the court decide?
SCOTUS heard the case in November of 2022 and should issue a decision in coming months. Legal analysts have voiced concern that the justices appear to lean in favor of the government’s argument, noting that Bittner was not a naïve entrepreneur with a few accounts but a savvy business mogul pulling in over $70 million in income from these foreign accounts. The matter is not yet settled, and hope remains for tax advocates as Justice Gorsuch voiced concern about the potential for government overreach if the court rules in favor of the government.
We will provide an update on this important ruling as it becomes available, likely this spring.
What should taxpayers take from this case?
The case serves as a reminder of the need to properly file tax forms. Even the smaller of the two penalties discussed above is substantial. Taxpayers can avoid this position with proactive action to ensure compliance with tax applicable tax law. The attorneys at Goldburd McCone are familiar with these types of legal disputes and can help you avoid similar issues.