Why Taxpayers in Louisiana, Texas, and Mississippi Should Consider the IRS’s Streamlined Compliance Procedure Program Now | Freeman Law

On November 30, 2021, the US Court of Appeals for the Fifth Circuit published its opinion in the US v. Bittner case. Contrary to rulings in other federal courts, the Fifth Circuit concluded that it is appropriate for the IRS not to impose intentional FBAR penalties on the taxpayer, Mr Bittner, on a per-account rather than per-year basis. The Fifth Circuit also concluded that Mr. Bittner had failed to provide a reasonable cause for the penalty waiver.

The latest decision in Bittner is certainly not taxpayer-friendly. In fact, all taxpayers currently resident on the Fifth Circuit – that is, those in the states of Texas, Louisiana, and Mississippi – should monitor the decision carefully, especially if they have undisclosed overseas bank accounts. Since civil law sanctions can now be quite high, Bittner argues, taxpayers should consider whether it is appropriate to participate in the IRS’s Streamlined Filing Compliance Procedures in order to mitigate their exposure to potential civil law sanctions.

Facts from Bittner

I have already written about the decision of the lower court in Bittner, which can be found here. See also US v. Bittner, 469 F. Supp. 3d 709 (ED Tex. 2020). In summary, the IRS has over $ 2.7 million in non-intentional FBAR penalties against Mr. Bittner for failing to timely fil FBARs for the 2007-2011 tax years, using the number of undisclosed overseas accounts versus the number of years as a basis. In other words, instead of imposing $ 50,000 in unintentional FBAR fines for five tax years, the IRS imposed over $ 2.7 million on the 270+ overseas accounts that Mr. Bittner failed to properly disclose between 2007 and 2011.

The regional court has written a reasoned opinion in favor of Mr. Bittner. In that opinion, the District Court concluded from a legal standpoint that the IRS can only impose non-intentional FBAR penalties on an annual basis. Although the District Court disagreed with Mr. Bittner’s allegation that he had demonstrated reasonable cause for the total waiver of the sentences, it effectively awarded Mr. Bittner a victory as the opinion increased the total amount of the civil penalty by more than $ 2.5 million Dollar reduced.

Government appeal

As expected, the government appealed the district court’s decision. In the appeal, the parties raised the following questions: (1) Whether the regional court wrongly found that Mr. Bittner did not give a reasonable reason; and (2) whether the FBAR unintentional penalty should be based on one method per year or per account.

Defending Reasonable Cause from Mr. Bittner

A full defense against the unintentional FBAR penalty is “good cause”. See 31 USC sec. 5321 (a) (5) (B) (ii) (I). Although the FBAR Statute and its applicable regulations do not define the term “reasonable cause” for the purposes of FBAR non-intentional punishment, the Fifth Circuit borrowed the meaning of the term from the Internal Revenue Code. And under that meaning and previous judicial interpretations defining a reasonable cause under Title 26, the Fifth Circuit concluded that a reasonable cause for non-intentional FBAR penalties was: (1) The taxpayer must demonstrate that he or she they used normal business care and caution, provided all facts and circumstances; (2) the standard for reasonable reasons is “objective” rather than “subjective”; and (3) the taxpayer bears the “heavy burden” of providing a reasonable cause.

Because the establishment of a reasonable cause is so factual, Mr Bittner argued that his objection was prematurely resolved for well-founded reasons at the stage of the summary judgment. In other words, Mr Bittner brought action on the reasoned cause. The Fifth Circuit agreed with the District Court finding that a reasonable cause could be established by injunction. And with regard to defense on justified grounds, the Fifth Ward concluded:

With regard to the well-foundedness of Bittner’s defense, after considering all relevant facts and circumstances, we come to the conclusion that Bittner did not exercise the usual commercial care and caution when failing to fulfill its reporting obligations. We have emphasized that the most important factor in assessing the legitimate cause is the extent of the taxpayer’s efforts to assess its reasonable liability. Bittner admitted that he had made no effort to establish and fulfill his reporting obligations. He testified that he had never asked about it, and when asked why, he replied, “Why should I?”, “I didn’t feel like it,” and “Why? We’re in Romania. ”Bittner had to figure out what to do, but admittedly hadn’t done anything.

“Bittner was undoubtedly a demanding businessman,” said the regional court. He held interests in dozens of companies, negotiated the purchase of Romanian state assets, transferred his assets to holding companies and hid his earnings in “numbered accounts”. Once he even asked about tax obligations “as a Romanian citizen”. . . own[ing] Real estate in Brussels’ before buying investment property. This makes Bittner’s entrepreneurial skill not to inquire about his reporting obligations all the more unreasonable.

In addition, the Fifth District disagreed that Mr. Bittner had shown reasonable reasons for the following reasons: He spoke little English; he had lived in the United States for only eight years; he had minimal contact with the United States during his stay in Romania; he obeyed Romanian tax laws; he was not aware of his duty to report; and he immediately filed outstanding FBARs after learning of his commitments. In this regard, the Fifth Circuit found that these factors were relevant to the investigation for reasonable reasons, but not necessarily critical to the success of a valid defense.

The basis of civil penalties per year or per account

After the defense was lost for a reasonable reason, the Fifth Circuit turned to the government’s next allegation that the District Court made a mistake in calculating the FBAR’s unintentional penalty. In short, the government claimed that the relevant FBAR statutes and regulations required the civil sanction for failure to report any foreign bank account, rather than, as Mr Bittner argued, failure to file the FBAR report, is set.

The Fifth Circle agreed with the government’s interpretation by the relevant authorities. In fact, it stated that “[t]The use of the term “breach” in any other part of Section 5321 (a) (5) confirms that the “breach” for the purposes of Section 5321 (a) (5) (A) is failure to report an account failure to submit an FBAR. “

On behalf of the government, the Fifth District Court firmly rejected the District Court’s reasoning that the term “infringement” should be defined with reference to the provisions of Section 5314. Rather, the Fifth District Court found that the term “violation” was used in the law itself. According to the Fifth District Court, Section 5314 requires both a “material” and a “procedural” element:

Section 5314 (a) “has both a tangible and a procedural element.” In essence, it directs the secretary to require an individual to “submit reports” when the individual is “engaged in a transaction or relationship. . . with a foreign finance agency. ‘ Procedurally, “reports must contain” [certain] Information in such manner and to the extent that the secretary prescribes.

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Taken together, the text of the BSA and its regulations result in (1) a legal obligation to report any qualified transaction or relationship with a foreign finance agency, and (2) a regulatory obligation to submit these reports to an FBAR before a certain date (30 June). By approving a penalty for “any violation of”[ ] a provision of Section 5314 “, as opposed to the requirements prescribed in Section 5314, Section 5321 (a) (5) (A) reads most naturally as a reference to the legal obligation to report every account – not the regulatory obligation to FBARs submit a special way.

The Fifth Circuit also found additional support for its interpretation of the statute in the legal exception to the FBAR non-intentional penalty. This provision provides that no penalty will be imposed if “such a breach was due to a reasonable cause” and “the amount of the transaction or the balance at the time of the transaction was properly reported”. In analyzing this language, the Fifth Circuit concluded that a “breach” was related to reporting the transaction amount or balance rather than reporting the FBAR form.

Farewell Thoughts

The Bittner ruling shows how difficult it can be for taxpayers to raise a reasoned objection to non-intentional FBAR penalties. Perhaps more importantly, it also shows how severe the unintentional FBAR penalties can be for a taxpayer with many overseas accounts in a given year.

Undoubtedly, the question of whether the FBAR unintentional penalty should be calculated either per account or per year is not resolved. Taxpayers can expect further litigation on the matter in this case, with a possible resolution in the United States Supreme Court. Until then, however, 5th District taxpayers who have unreported overseas accounts should consult a tax advisor about their options for regaining compliance. With the win at Bittner, taxpayers can expect the IRS to continue to enforce the FBAR non-intentional penalty of $ 10,000 per account.

Taxpayers eligible for the IRS’s streamlined filing compliance procedures can find additional solace in this program, especially on the Fifth Circuit. In general, the civil penalty under Title 26 under the program is 5% of the amount of overseas accounts that are not disclosed in a timely manner. But here too, taxpayers have to be careful that they properly comply with all the requirements of the program. In fact, there will undoubtedly be more than a few unfortunate taxpayers attempting to participate in the program (thereby submitting information to the government about any undisclosed overseas accounts) only to find that their filing is due to failure to comply or meet the minimum eligibility requirements. Examples of taxpayers who have failed to follow the IRS Streamlined Filing Compliance Procedures can be found here, here, and here.

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