Why Taxpayers in Louisiana, Texas, and Mississippi Should Consider the IRS Streamlined Compliance Process Now | Free human rights


On November 30, 2021, the United States Court of Appeals for the Fifth Circuit issued its opinion in United States v. Bittner. Unlike rulings in other federal courts, the Fifth Circuit concluded that it was normal for the IRS to impose FBAR penalties against the taxpayer, Mr. Bittner, on a per account basis rather than per year. The Fifth Circuit further found that Mr. Bittner had failed to establish reasonable grounds for reducing the penalties.

Admittedly, the recent decision of Bittner is not taxpayer friendly. Indeed, all taxpayers who currently reside in the Fifth Circuit—that is to say, those in the states of Texas, Louisiana and Mississippi should carefully monitor the decision, especially if they have undisclosed foreign bank accounts. Because civil sanctions can now be quite significant in the logic of Bittner, taxpayers should consider whether it is appropriate to conclude IRS Streamlined Filing Compliance Procedures to mitigate their exposure to possible civil penalties.

Bittner facts

I have already written about the lower court decision in Bittner, that we find here. See also United States v. Bittner, 469 F. Supp. 3d 709 (ED Tex. 2020). In summary, the IRS has assessed more than $ 2.7 million in unintentional FBAR penalties against Mr. Bittner for his inability to timely file the FBARs for the 2007 to 2011 tax years. However, in calculating the amount of civil penalties, the IRS determined that he could use the number of undisclosed foreign accounts compared to the number of years. In other words, instead of imposing $ 50,000 in involuntary FBAR penalties for five tax years, the IRS imposed more than $ 2.7 million for the more than 270 foreign accounts Mr. Bittner had. had not properly disclosed from 2007 to 2011.

The district court drew up a well-reasoned opinion in favor of Mr Bittner. In that opinion, the district court concluded, in law, that the IRS could only impose unintentional FBAR penalties on an annual basis. Although the District Court disagreed with Mr Bittner’s assertion that it had established reasonable grounds to overturn the full penalties, it did in fact uphold Mr Bittner’s case in the extent to which the notice reduced the overall amount of the civil penalty by more than $ 2.5 million.

The government’s call

As might be expected, the government appealed the district court’s decision. In the appeal, the parties raised the following issues: (1) Did the District Court err in determining that Mr. Bittner failed to present reasonable cause? and (2) whether the involuntary FBAR penalty should be based on a per year or per account method.

Reasonable Motivations Defense of Mr. Bittner

A complete defense against the involuntary FBAR penalty is “reasonable cause. ” See 31 USC sec. 5321 (a) (5) (B) (ii) (I). Although the FBAR Status and its current regulations do not define the term “reasonable cause” for the purposes of the involuntary FBAR penalty, the Fifth Circuit has borrowed the meaning of that term from the Internal Revenue Code. And, by virtue of this meaning and previous judicial interpretations defining reasonable cause under Title 26, the Fifth Circuit concluded that reasonable cause for unintentional FBAR penalties meant: (1) the taxpayer must show that he or she exercised ordinary business diligence and prudence, having regard to all the facts and circumstances; (2) the reasonable cause standard is “objective” and not “subjective”; and (3) the taxpayer bears the “heavy burden” of establishing reasonable cause.

Because the reasonable cause determination is so fact-based, Mr. Bittner argued that his reasonable cause defense was prematurely decided at the summary judgment stage. In other words, Mr. Bittner asked for a trial on the question of reasonable cause. The Fifth Circuit agreed with the district court’s ruling that reasonable cause could be determined through summary judgment. And, on the question of defense on reasonable grounds, the Fifth Circuit concluded:

With respect to the merits of Bittner’s defense, having considered all the relevant facts and circumstances, we find that Bittner failed to exercise ordinary business diligence and prudence in failing to meet its reporting obligations. We have emphasized that in assessing reasonable cause, the most important factor is the extent of the taxpayer’s efforts to assess their appropriate liability. Bittner admitted that he had made no effort to verify and meet his reporting obligations. He said he never even inquired about them, and when asked why, he replied, “Why should I? “,” I didn’t want to “and” Why? ” We are in Romania. It was up to Bittner to find out what he was supposed to do, and yet it is true that he had done nothing.

As the District Court observed, “Bittner was undoubtedly a sophisticated business professional. He held interests in dozens of companies, negotiated purchases of Romanian government assets, transferred his assets to holding companies and hid his income in “numbered accounts.” He even once inquired about tax obligations “as a Romanian citizen”. . . own[ing] real estate in Brussels before buying investment properties. Bittner’s business acumen makes his inability to educate himself about his reporting obligations even more unreasonable.

Further, the Fifth Circuit disagreed that Mr. Bittner had demonstrated reasonable cause on the basis of the following factors: he spoke little English; he had only lived in the United States for eight years; he had minimal contact with the United States while living in Romania; he complied with Romanian tax laws; he was not aware of his reporting obligation; and he quickly filed outstanding FBARs after learning about his obligations. In this regard, the Fifth Circuit noted that these factors are relevant to the reasonable grounds investigation but not necessarily determinative of success in a reasonable grounds defense.

The basis by year or by civil penalties account

Having lost the reasonable cause defense, the Fifth Circuit turned to the government’s next claim that the district court erred in calculating the involuntary FBAR penalty. In short, the government argued that the relevant FBAR laws and regulations required that the civil sanction be determined on the failure to report each foreign bank account and not, as Mr. Bittner argued, on the failure to file the report. on the FBAR.

The fifth circuit agreed with the government’s reading of the competent authorities. Indeed, he ruled that “[t]The use of the term “violation” in other parts of Section 5321 (a) (5) confirms that the “violation” contemplated by Section 5321 (a) (5) (A) is the failure to declare an account, not the omission to file an FBAR.

In supporting the government, the Fifth Circuit outright rejected the district court’s rationale that the term “violation” should be defined by reference to the regulations of Section 53.14 Instead, the Fifth Circuit noted that the term “Violation” was used in the law. himself. According to the Fifth Circuit, Article 5314 requires both a “substantive” and a “procedural” element:

Article 5314 (a) “has both a substantive and a procedural element”. Basically, it orders the secretary to require a person to “file reports” when “making a transaction or having a relationship.” . . with a foreign financial agency. From a procedural point of view, “the reports contain [certain] information in a manner and to the extent prescribed by the secretary.

* * *

Together, therefore, the text of the BSA and its regulations impose (1) a legal obligation to report every qualifying transaction or relationship with a foreign financial agency and (2) a regulatory obligation to file such reports on an FBAR by a certain date. every year (June 30). By authorizing a sanction for “any violation of[ ] a provision of Section 5314 ”, as opposed to the regulations prescribed under Section 5314, Section 5321 (a) (5) (A) reads more naturally as referring to the legal obligation to report each account, not the regulatory requirement to deposit FBAR in any particular manner.

The Fifth Circuit also found additional support for its reading of the law in the statutory reasonable cause exception to the involuntary FBAR penalty. This provision provides that no penalty will be imposed if “such violation was due to a reasonable cause” and “the amount of the transaction or the account balance at the time of the transaction has been correctly reported”. Analyzing this language, the Fifth Circuit concluded that a “violation” referred to the failure to report the transaction amount or account balance and not the FBAR form.

Farewell thoughts

The Bittner The ruling demonstrates how difficult it can be for taxpayers to invoke the reasonable grounds defense for unintentional FBAR penalties. Perhaps more importantly, it also shows just how draconian non-voluntary FBAR penalties can be for a taxpayer with many offshore accounts in any given year.

Without a doubt, the question of whether the involuntary FBAR penalty should be calculated on a per account or per year basis is not over. Taxpayers can expect to see further litigation on this issue, even then with a potential resolution in the United States Supreme Court. Until then, however, taxpayers residing in the Fifth Circuit who have undeclared foreign accounts should consult a tax professional about their options to restore compliance. With the victory in Bittner, taxpayers can expect the IRS to continue to impose the involuntary FBAR penalty of $ 10,000 per account.

Taxpayers eligible for the IRS’s streamlined filing compliance procedures may find additional solace in this program, especially in the Fifth Circuit. Typically, the Title 26 civil penalty under the program is 5% of the amount of foreign accounts that were not disclosed in a timely manner. But, even here, taxpayers must be careful to properly meet all program requirements. Indeed, there will undoubtedly be more than a few unlucky taxpayers who attempt to participate in the program (thus providing the government with information on any undisclosed foreign accounts) to discover that their submission was invalid due to non-compliance with or. meet the eligibility criteria. For examples of taxpayers who failed to follow IRS Streamlined Filing Compliance Procedures, see here, here, and here.

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