Tomorrow – Nov. 2nd – the U.S. Supreme Court will begin to hear arguments in a closely-watched case that's expected to result in clarification, at last, as to how the penalties in so-called "non-willful Foreign Bank Account Report (FBAR)" cases should be determined.
The "World Cup of the international tax compliance industry," as one tax industry official has taken to calling the pending hearings, is likely to be closely covered by the tax industry trade press, as well as by industry players on social media, tax industry sources have told the American Expat Financial News Journal.
As reported, the Supreme Court announced in June that it would hear the case, which involves a dual Romanian-U.S. citizen named Alexandru Bittner.
Over the last few years, Bittner has emerged as one of the most visible challengers of the way U.S. taxpayers with overseas accounts that they have been found to have failed to tell the U.S. government about are treated, in cases in which the taxpayer in question either didn't know about the FBAR filing requirements, or otherwise had not sought to "willfully" hide the fact that they held overseas bank or financial accounts.
The Supreme Court had turned down at least one previous appeal involving an FBAR case, in October of 2021.
Many tax industry officials and observers have long argued that only the Supreme Court could finally resolve a long-standing divergence of opinion with respect to how FBAR penalties should be dealt with, on the part of different U.S. circuit courts.
At issue has been whether the United States' notoriously persecutory penalty regime for those found to have "non-willfully" failed to file Foreign Bank Account Reports for one or more years with the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) should be based on the number of accounts they failed to file FBARs for, or on the number of years (as represented by "forms", as in "FBAR forms") they neglected to file.
This difference in interpretations results in staggeringly-different penalty amounts. In Bittner's case, for example, a "per-form/year" ruling would mean a penalty for his failure to report over five years of just US$50,000 – less than a fiftieth of the US$2.72 million that he'd owe if he were held to be liable on the basis of all of the dozens of accounts he had failed to report in each of the five years in question.
Bittner's lawyers filed a writ of certiorari petition with the Supreme Court back in February of this year, arguing that the issue at the heart of a Circuit Court ruling at the end of last November (United States v. Bittner, 19 F.4th 734 (5th Cir. 11/30/21) – which had held that the FBAR non-willful US$10,000 penalty should be applied on the more persecutory, per-(bank)-account rather than per-(FBAR)-form basis – was unfair, disproportionate and an example of "agency overreach" on the part of the IRS.
In a brief filed in August, the lawyers (Clark Hill Plc of San Antonio, Texas, and Haynes and Boone LLP, of Houston, Texas) reiterated their case for the court to correct a "perplexing [ruling] incompatible with ordinary experience and common sense".
"Petitioner had dozens of qualifying foreign accounts, and failed to file five annual reports," they wrote, in the 45-page brief.
"His conduct was entirely non-willful: He was living overseas and was unaware of the filing requirement; most of the accounts were owned by operating Romanian companies; and he ultimately filed corrected, though untimely, FBARs once properly advised of his duty to do so.
"Because the Fifth Circuit [which had determined that he had committed 272 FBAR violations] has misconstrued the [intentions of the Bank Secrecy] Act and embraced an impluasible result, [its] judgment should be reversed."
Analyzing the case yesterday on the SCOTUS blog, an independent website that monitors the activities of the U.S. Supreme Court, contributor (and Columbia University law professor) Ronald Mann noted that both the parties in the Bittner case dedicate a considerable proportion of their respective arguments to the business of "trying to control the narrative".
"Bittner’s counsel portrays him as an innocent Romanian, who came here [to the U.S.] to flee communism; became a citizen, and then returned to Romania upon the fall of communism," Mann went on.
"He particularly emphasizes that as the case comes to the Supreme Court, it involves penalties for non-willful failure to report.
"From that vantage, giving the Treasury Secretary the discretion to impose a fine of almost US$3 million for a wholly innocent misunderstanding about American law is a stark overreach.
"The government, by contrast, portrays Bittner as a wealthy mogul, pointing to more than US$70 million dollars of income produced from his various overseas ventures.
"The amount of under-reporting of foreign accounts is massive, it explains; this is just the kind of information the government needs to respond to the massive problem of money laundering that plagues our financial regulators."
In one of the previous trials leading up to today's hearing, in which an appellate court in Texas ruled in 2020 that non-willful FBAR penalties should apply 'per FBAR' not per account, an amicus ("friend of the court") brief had been filed by the the American College of Tax Counsel – a nationwide, non-profit organization of U.S. tax lawyers – which argued in favor of the approach that the court eventually took.
This time, as a number of FBAR-watchers have been expressing concern about over the last few days, an organization called the National Whistleblower Center has filed an amicus brief in which it takes the opposite view – that is, that the penalties be applied to each individual account that was not properly reported (the so-called "per-account” approach), even though the failure to report was held to be non-willful.
In its 26-page brief, the National Whistleblower Center argues that "by ruling in favor of" such a per-account enforcement regime, the court would "align the law with [Congress's] intent to effectively track illegal tax activities, with the support of whistleblower tips."
Whistleblowers, the brief continues, "have proven to be a boon for tax enforcement efforts, and a 'per-account' approach will continue the success of the IRS Whistleblower Program, safeguarding billions of tax dollars and deterring criminal activity." (Tweeted one expat FBAR follower: "The Bittner case has already been established by the IRS as 'non-willful'. How can ruinous penalties create a disincentive for [non-willfully] failing to fill out a form? By this logic, what would satisfy you? Shall we send the Bittners to the electric chair?"
Tomorrow's hearing will take place at 10am local (Washington, DC) time, and a recording of it and transcript will be posted afterwards on the Supreme Court's website, where information on these and other options for monitoring the case may be found by clicking here. To hear the oral arguments live, click here.
Although many Americans are still unaware of FBARs – in spite of their potentially-ruinous penalties – they actually date back to 1970, when they were created by an early U.S. anti-tax-evasion/money laundering/crime bill known as the Bank Secrecy Act.
But it was only after globalization began to become truly global, and concerns about organized, cross-border crime and terrorism also began to mount, that the U.S. began ramping up enforcement of the FBAR legislation, beginning in 2001 with the post 9/11 Patriot Act.
The FBAR penalty regime with then further enhanced in 2004, with the introduction of a potential penalty of up to US$10,000 per violation for "non-willful" violators. The willful penalty was also increased at this time from US$100,000 to "the greater of either US$100,000 or 50% of the taxpayer's account in question on the date it was meant to have been reported."
Meanwhile, in spite of inflation, the minimum US$10,000 amount necessary to trigger the need to file an FBAR has been unchanged since 1970. Had it been adjusted for inflation, that minimum today would be more than US$65,400, FBAR experts point out.
As far back as 2014, experts were calling for the FBAR regulations to be revisited. That's when Allison Christians, a law professor, associate dean of rsearch and holder of the H. Heward Stikeman Chair in Tax Law at McGill University in Montreal, Canada, wrote a paper that is still referred to by advocates of FBAR revisions, entitled "Paperwork and Punishment: It's Time to Fix FBAR."
Christian's paper may be read and downloaded by clicking here.
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