Applicable Federal Rates - August 2020

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FBAR NON-WILLFUL PENALTY NOT CALCULATED BASED ON NUMBER OF ACCOUNTS

The FBAR rules require the filing of a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR) to report for accounts of U.S. persons aggregating $10,000 or more. For a non-willful failure to disclose, the maximum penalty imposed is $10,000.

Since one FBAR is used to report multiple accounts, a basic question is whether the non-willful failure to report several accounts gives rise to only one $10,000 penalty (based on one return), or $10,000 multiplied by the number of unreported accounts. This can make a big difference for taxpayers with multiple unreported accounts. This was especially important to the taxpayer in a recent case, where the number of unreported accounts ranged from 41 to 51 for 4 different tax years. If the penalty is calculated on a per return basis, then the penalty for the taxpayer is $40,000. On a per account basis, the penalty is $1,770,000. Luckily for the taxpayer, the District Court held that the penalty is imposed only per return, not per account.

In U.S. v. Boyd, 123 AFTR 2d 2019-1651 (C.D. Cal. 4/23/19), a different District Court previously held that the penalty is imposed on a per account basis. Here, the court rejected Boyd as precedent, largely because no rationale was stated for the court's conclusion, and thus the current court could not determine why its contrary analysis was incorrect. Instead, the court here noted that while the statutory language for the willful failure to file penalty specifically relates to accounts, the non-willful failure penalty language does not. Reasoning that if Congress wanted to impose the non-willful failure penalty based on the number of accounts, it showed it knew how to do so by doing so in the willful failure statutory language. Thus, by not using that language for non-willful failures, Congress did not intend to compute the penalty for non-willful failures based on the number of accounts.

Both Boyd and this case are only District Court cases, which limits their precedential authority. That, along with such courts being in different Circuit Courts of Appeal, means there is substantial uncertainty on how this issue will eventually play out and that there will likely be more cases to come.

U.S. v. Bittner, 126 AFTR 2d 2020-XXXX (DC TAX 6/29/20)