On June 21, the Supreme Court agreed to hear a case regarding the maximum penalty for non-willful violations of the FBAR (Foreign Bank Account Reporting).
What is the FBAR?
All Americans, whether living inside the U.S. or outside the U.S., whether dual citizen or only holding U.S. citizenship, regardless of age or income level, must report to FinCEN (the Financial Crimes Enforcement Network, a division under the U.S. Department of the Treasury) their non-U.S. financial accounts – such as bank accounts, brokerage accounts, and mutual funds – via the Foreign Bank Account Report or FBAR, Form 114. Per the Bank Secrecy Act, you must file an FBAR if the aggregate value of those non-U.S. financial accounts – measured at their highest balance during the year of reporting – exceeds $10,000.
How is the FBAR problematic for Americans abroad?
Issues the FBAR causes for Americans abroad, include but are not limited to:
- The filing threshold of $10,000 is too low. The threshold was set in 1970 when the Bank Secrecy Act was passed. The Act’s intention was to prevent money laundering, tax evasion, or other criminal activities, and tracking overseas financial accounts was an enforcement method. However, at today’s level of purchasing power, $10,000 is worth $75,000. Democrats Abroad advocates for the threshold to be adjusted for inflation.
- Poor communication from the Department of the Treasury to Americans abroad that the form exists and how to file it. Filing follows a multi-step online process which is completely separate from tax-return preparation and filing, and many professional tax preparers do not routinely ask questions that would identify whether an individual has a filing requirement. This results in low compliance from Americans abroad.
- FBAR filings largely duplicate the information collected by the IRS on Forms such as 8938 (“Statement of Foreign Financial Assets”), 8621 (“Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund”), and 3520A (“Annual Information Return of Foreign Trust with a U.S. Owner”). In addition to that duplicate information, FATCA requires Foreign Financial Institutions to file Form 8966 disclosing balances and income associated with accounts owned by U.S. citizens.
- Penalties are not commensurate with non-failure to file the FBAR. The standard fine is $10,000 per year for non-willful failure to file. Whether this penalty is calculated per form or per account is the issue at question in the Supreme Court case.
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General fear mongering from the government and the tax-preparation industry to comply. The specter of being penalized leads to fear, uncertainty, and doubt for many middle-class families as they attempt to navigate their legal and tax obligations.
What is Bittner v. United States?
Alexandru Bittner is a dual U.S.-Romania citizen who was living in Romania during 2007-2011 and failed to file the FBAR for that period. In 2019 the IRS penalized him $2.7 million, on the basis that he had breached the law 272 times, once per account in each of those five years. Bittner argues he breached the law at most 5 times, once for each year he failed to file, therefore owing a $50,000 fine.
A federal judge in Texas ruled that Mr. Bittner was liable for $10,000 for each form that he failed to file per filing year – not each account – therefore capping the penalty at $50,000. This agreed with an earlier ruling by the Ninth Circuit – in U.S. v. Jane Boyd – where Boyd was found liable for $10,000, instead of $50,000, for failure to report 5 accounts.
But in November 2021 the Fifth Circuit disagreed. This circuit split set up the Bittner case to be heard by the Supreme Court and stands to have a significant impact on how penalties may be assessed in the future.
Democrats Abroad Stands with Bittner
The U.S. Chamber of Commerce, the Center for Taxpayer Rights, and the American College of Tax Counsel have all filed amicus briefs in support of Bittner in the case. An amicus brief is usually filed by a person or entity who is not party to the case but has an interest, in order to present additional information for the justices to consider. Although Democrats Abroad considered filing an amicus brief for this case, the existing amicus briefs already cover arguments DA would have put forward, therefore we are announcing our support of those briefs rather than filing a duplicate brief.
Democrats Abroad welcomes the Supreme Court’s decision to hear this case as a means to clarify the assessment of FBAR penalties for Americans at home and abroad. Clarity on the maximum amount of the non-willful penalty will be beneficial to Americans abroad who fear that even inadvertent tax compliance mistakes could result in egregious penalties.
In addition, DA continues to advocate for a residence-based taxation system and an exemption from FATCA-reporting for accounts held in the country that an American lives in. These legislative fixes to U.S. laws would enable all Americans abroad the opportunity to participate fully in lawful financial activities no matter where they live.
More information on the Supreme Court’s decision to hear the case is available here:
https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/21-1195.html
More news coverage on this case:
- https://americanexpatfinance.com/news/item/993-us-supreme-court-at-last-agrees-to-decide-on-non-willful-fbar-filing-penalty
- https://www.bnnbloomberg.ca/us-supreme-court-agrees-to-weigh-fines-for-not-reporting-overseas-accounts-1.1781750
- https://www.law360.com/tax-authority/federal/articles/1504524 (Behind paywall)