The Supreme Court recently handed down a decision on a case dealing with the application of penalties for failure to report foreign financial accounts. While the court's ruling in the case of
The case revolves around Alexandru Bittner, a Romanian-American dual citizen, and mistakes he made filing a foreign bank and financial accounts report, often known as an FBAR. Bittner immigrated to the United States in the 1980s and became a citizen. He then returned to Romania and became very successful. While Bittner lived in Romania from 1996 to 2011, he was still a U.S. citizen and filed U.S. tax returns for those years. Upon returning to the U.S. in 2011, Bittner realized he was required to file FBARs and filed late FBARs for 1996 through 2010 and a timely FBAR for 2011.
The IRS then issued penalties for the years 2007 to 2011. Between 2007 and 2011 there were 272 accounts at issue and the IRS sought $2,720,000 in penalties, or $10,000 per account. Bittner argued that the penalties should be per year or report, not by account. Under Bittner's argument the assessment would be a much lower $50,000.
The U.S. Supreme Court ruled in a tight 5-4 decision to agree with Bittner, noting, "Rhe BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis."
While the Bittner result is taxpayer-favorable, there are important lessons rhat CPAs and their clients need to learn from this case. Even though the IRS was not able to levy the larger penalty, it still assessed penalties in the case. Notably, the taxpayer did not owe additional taxes, but the reporting was out of compliance. The lesson here is that in the ever-changing international reporting arena, penalties can be extremely punitive for taxpayers.
CPAs need to be aware not only of the filing requirements for taxpayers, but also the potential penalties of not filing correctly. For example, the Foreign Account Tax Compliance Act carries a minimum penalty for failure to submit required disclosure of $10,000. Taxpayers usually file the Form 8938 for reporting foreign assets. After 90 days of notification, the penalty increases $10,000 for every 30 days of continued disclosure. The maximum penalty is $50,000.
The Internal Revenue Code also imposes penalties on the failure to file timely Form 5471, "Information Return on U.S. Persons With Respect to Certain Foreign Corporations," and Form 5472, "Information Return of a Foreign Corporation Engaged in a U.S. Trade or Business." While a 5471 has a penalty of $10,000 per return with a max penalty of $60,000, a 5472 has a minimum penalty of $25,000 with no max penalty.
It's not just taxpayers missing the forms completely that often lead to penalties. Recently, our international tax controversy team dealt with a client who received an inheritance from a family member residing outside the U.S. The client then filed the returns electronically but forgot to paper file the Form 3520 in a timely manner. While the electronic forms were filed on time, the IRS assessed penalties for the late filing of the paper Form 3520. While our team was able to reach a resolution, the process was long and stressful for the taxpayer.
While Bittner v. United States is seen as a win for the taxpayer, and ultimately a taxpayer-favorable decision, it's a good reminder that international tax compliance is more important and complex than ever. With more and more companies and individuals doing business in and across multiple countries, taxpayers and CPAs need to be aware of how to be in compliance with the multiple forms and filing requirements for the IRS.
