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Are FBAR penalties potentially even more severe when party to a trust or estate?

Last week, the American College of Trust & Estate Counsel (“ACTEC”) filed an amicus brief in Alexander Bittner v. U.S., a Fifth Circuit case that has been appealed to the U.S. Supreme Court.  The question presented to the U.S. Supreme Court essentially comes down to whether the penalty for a person’s failure to report all their foreign bank accounts on a single form is on the basis of $10,000 per form or $10,000 per account basis? If the court maintains that the penalty should be $10,000 per year per foreign account maintained by a person and not reported, the penalties could add up extremely quickly, often exceeding the penalties assessed for willful violations. The ACTEC believes that this interpretation would be inconsistent with the willful violation policies. 

For fiduciary parties there are additional concerns, as there is a potential for many parties to face penalties for the exact same account- the trust itself, the trustees, the beneficiaries, any person with signature authority over the account, etc. The ACTEC believes that the imposition of penalties per account per person could violate the Eighth Amendment to the US Constitution that “excessive fines” shall not be imposed.

Bittner emigrated to the United States in 1982 and later became a U.S. citizen. While he filed U.S. income tax returns, he did not file FBARs until 2012 even though he had numerous foreign accounts. The Fifth Circuit upheld the IRS assessment of $2.7 million in FBAR penalties on 272 accounts and denied Bittner’s argument that his penalty should be based on unfiled FBAR forms covering allaccounts, which would result in a $50,000 penalty. Different Circuit courts have interpreted the rules differently and there is case law support for Bittner’s argument.

The ACTEC brief argues that taxpayers are entitled to clear, unambiguous, and even reasonable interpretations of statues. The brief supports the reversal of a Fifth Circuit court decision to apply multiple civil penalties per year for the non-willful failure to timely file accurate foreign bank and financial account reports (FBARs).

Tax practitioners have faced many complexities in applying the FBAR filing requirements for the various parties, and some clarity regarding the non-willful violation penalties would be valuable to the community and possibly save taxpayers from significant penalty assessments.

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