Per-Account Or Per-Form Penalty?

• Published date: 01 July 2022
• Subject Matter: Finance and Banking, Tax, Compliance, Financial Services, Tax Authorities
• Law Firm: BakerHostetler
• Author: Mr Edward Beckwith, J. Brian Davis, Jonathan M. Forster, Robert R. Galloway, George Mooradian, Carlos F. Ortiz, Jeffrey Paravano, Paul M. Schmidt, Elizabeth Ann Smith and Samantha White

Key Takeaways:

• The law regarding computation of FBAR penalties is unclear.
• The United States Supreme Court has agreed to hear a case to settle a conflict among the circuit courts.
• Until the Supreme Court case is decided, taxpayers should work to delay IRS settlement discussions unless the favorable Ninth Circuit rules apply to the penalty computation.

On June 21, the U.S. Supreme Court agreed to hear a case to decide whether penalties for non-willful Report of Foreign Bank and Financial Accounts (FBAR) compliance failures apply on a per-form or a per-account basis. The IRS has been aggressive in asserting these penalties, and it often does so on a per-account basis. The current uncertainty in this area may place some taxpayers in the unenviable position of either accepting a significant penalty or facing the prospect of drawn-out disputes with uncertain outcomes. The Court's decision is expected to bring clarity to those with offshore accounts, including so-called accidental Americans who may be late to discover their U.S. tax and FBAR filing obligations.

The United States has long sought to prevent tax evasion by requiring U.S. persons to annually report interests in or signature authority over foreign financial accounts with balances that exceed $10,000. A U.S. person complies with the law by timely filing an annual informational report, the FBAR. This filing provides the U.S. with information about a U.S. person's "accounts" (a broad term that includes checking, savings and brokerage accounts as well as interests in mutual funds and insurance policies having a cash value) that are maintained abroad, typically with financial institutions such as banks, insurance companies or investment managers; for example, an account maintained with a foreign branch of a U.S. bank must be reported. If a U.S. person has multiple reportable accounts, all such accounts are reported on a single FBAR form.

If a U.S. person fails to comply with FBAR reporting requirements, unless reasonable cause is demonstrated, the IRS then imposes monetary penalties (set at $10,000 for non-willful violations and substantially more for willful violations) and may make a criminal referral to the U.S. Department of Justice (DOJ). The law currently is unclear regarding whether the penalty applies separately to each account that is not correctly reported or at the form level, regardless of the number of accounts.

The case before the U.S. Supreme Court involves a foreign-born businessman who...