By Fred Einbinder, Board member and VP Advocacy
Chicago, November 2, 2022
In our September 4, 2022, issue of News and Views we highlighted the importance for AARO members of the granting for review (grant of certiorari) by the U.S. Supreme Court of the decision of the 5th Circuit Court of Appeals in the Bittner FBAR fine case (Alexandru Bittner v. United States). The Federal Court of Appeals for the 5th circuit, based in New Orleans, had accepted the IRS’ position that the $10,000 penalty for non-willful failure to file an annual FBAR must be applied on a “per account” rather than a “per filing” basis, which had resulted in the imposition by the IRS of penalties totaling the astronomical sum of $2.7 million rather than the $50,000 total (5 years X $10,000) set by the lower court (Federal District in Texas) in reduction of the IRS’s extraordinarily harsh fine.
The importance of this case warrants the present analysis aimed at informing our members of AARO’s close monitoring of this important case and its connection with AARO’s overall advocacy efforts relating to the burdens of financial reporting by Americans abroad. In furtherance of this endeavor, I have met with the Chicago based attorneys of the Moore tax law group, who have drafted an excellent amicus curiae (friend of the court) brief in support of the adoption of a per filing rather than a per account based FBAR penalty regime on behalf for the Center for Taxpayer Rights (i.e., they supported the calculation of a penalty of $50,000, rather than $2.7 million). They have graciously accepted to be interviewed for News and Views from Chicago (Ajay Gupta) and Washington DC (Zhanna Ziering – who was present at today’s oral arguments before the U.S. Supreme Court).
The Center for Taxpayer Rights advocates on behalf of taxpayers whose voices might otherwise not be heard. Several AARO board members have had the pleasure of working over the years with the Center’s Executive Director, Nina Olson, in her former role as the first National Taxpayer Advocate, a role that led her to recuse herself from involvement in the amicus brief filed by the Center in this case. Notably, AARO Board member, Laura Snyder’s excellent article, The Criminalization of the American Emigrant, published in Tax Notes see here, is prominently cited in the amicus brief.
In an attempt to avoid an overly technical legal analysis, I have borrowed from the classic (who, what, where, when, why and how) method used by good journalists, using the “why” to summarize the arguments made in the various briefs submitted to the Supreme Court and the “how” to tie this case to AARO’s advocacy efforts.
Drawing inspiration from the series of summaries made by our President, Doris Speer, and Board Member, Laura Snyder, of their comprehensive surveys carried out in 2021 of the concerns of AARO members and other Americans abroad, the present contribution will be followed in future News & Views issues by discussions of similar legal cases ‘in the pipeline’ and in particular the Toth case, which is being closely followed by Paul Atkinson, AARO Board member and Banking Committee chair. Toth, were it to make it to the Supreme Court, has the potential to be even more important than Bittner as it directly raises the potentially extremely important issue of the constitutionality of IRS FBAR fines under the “excessive fine” provision of the Eighth Amendment.
For now, on to the Bittner Case:
The Petitioner – Alexandru Bittner
Alexandru Bittner was born and raised in Romania and is a dual Romanian-U.S. Citizen. He emigrated to the U.S. in 1982 and acquired U.S. citizenship in 1982. His story appears to be that of an immigrant who through hard work realized the “American Dream” as he first worked as a dishwasher to make his way in the U.S. before returning to Romania in 1990 and becoming a highly successful entrepreneur in the post-Soviet era. He opened and maintained several non-U.S. bank accounts in Romania and in other European countries without knowledge of the requirement of a U.S. citizen to file annual FBAR forms. On learning of this obligation to file upon his return to the U.S. in 2011, he voluntarily filed FBARs for the missing 5 years (2007-11). He refiled in 2013 to correct omissions of certain accounts in the initial FBAR filings.
Despite their acceptance that the omissions were NON-WILLFUL, the IRS fined Mr. Bittner $2.72 million in penalties (claiming he had 271 missing accounts over 5 years, because they counted his 54-61 accounts several times over the 5-year period). Mr. Bittner’s “American Dream” had become an “American Nightmare.”
The Respondent – The United States Acting Through the IRS
The IRS was not the “natural” home for the administration, including the penalization (bordering on emigrant “criminalization,” as noted in the apt title of Laura Snyder’s tax Notes article) for FBARs. FBARs were not intended, when devised to implement the 1970 Bank Secrecy Act, to be vehicles for tax collection purposes. Rather, Congress’ intention at that time was to provide reporting aimed at ferreting out money laundering; a matter normally of interest and administered by the Treasury Department and in particular, FINCEN. But Treasury, by delegation, confided the administration, and consequently the penalty assessment, to the IRS. The nature of and consistency with Congressional intent of this delegation to the IRS is an issue raised in the several briefs (amici and petitioner). This is a timely advocacy issue for AARO, particularly given the IRS’s new-found $80 billion resources. See an article here communicated to members in our September 4, 2022 News & Views mentioning fears of overseas Americans that the additional billions that the Inflation Reduction Act sets aside for the IRS will create headaches for them.
The case is a challenge to the IRS’s assessment of penalties in the amount of $2.7 million for non-willful omissions to file FBAR forms by a Romanian-USA dual national for a period of 5 years on a “per account” rather than a “per filing” basis.
This case illustrates the importance for Americans abroad or stateside Americans holding foreign financial accounts to be familiar with their obligations under the FBAR filing requirements, which require that the FBAR form be filed detailing their foreign financial account if the aggregate (the total) of their assets in all of their accounts exceeds $10,000 at any time during the year. Otherwise, as the Bittner case demonstrates, one may be caught in a “trap for the unwary.”
This FBAR filing requirement, which is not part of the tax code, is distinct from the more recent FATCA, or Foreign Account Tax Compliance Act, filing requirements enacted in 2010. See more information here.
The U.S. Supreme Court, who heard oral arguments in the Bittner case on November 2nd, 2022, accepted to review (grant of certiorari) the decision of the 5th Circuit Court of Appeal which upheld the IRS’s imposition of the $2.7 million “per account” penalty. Another Circuit Court (the 9th based in San Francisco) had held to the contrary - that non-willful FBAR penalties may only be assessed “per form” - in the 2021 case of U.S. v Boyd. This conflict between the “Circuits” (regional Federal Courts of Appeal) is undoubtably the main reason the Supreme Court agreed to review the case on the petition of Mr. Bittner as the Court properly abhors conflicts within the federal system on identical legal issues. The practical consequence of this conflict for Mr. Bittner, who unfortunately found himself within the jurisdiction of the 5th Circuit, is $2.7 million!
IRS practice in assessing penalties on a “per account” basis, which appears to have crystalized in 2019, is not limited to large financial holdings and has included penalty assessments relating to several accounts with balances ranging from $30 to $816 in at least one case. This is because the $10,000 threshold relates to the aggregate of all accounts. Once the aggregate threshold is reached, one must report all accounts, no matter how small.
The case was first litigated in Texas where Mr. Bittner was resident and which unfortunately is within the jurisdiction of the 5th Circuit. The IRS cannot apply the “per account” basis for assessing penalties on residents in the 9th Circuit (California, Oregon, Washington, Alaska, Hawaii, Nevada and Arizona) because of the Boyd decision, but has been adamant in its commitment to apply the “per account” assessment to all taxpayers outside of the 9th Circuit. The rules (venue) governing whether U.S. citizens residing abroad would be subject to the 5th or 9th Circuit approach are highly complex.
Mr. Bittner, a dual Romanian-U.S. citizen, maintained accounts in a number of European countries.
Ms. Boyd, of the far more favorable penalty assessment case decided by the 9th Circuit, maintained financial accounts in the UK.
As demonstrated by these cases, FBAR filing requirements apply to financial accounts held anywhere in the world except the USA.
The financial accounts at issue in the Bittner case were from 2007-2011.
The 5th Circuit unfavorable decision was handed down at the end of November, 2021.
The U.S. Supreme Court accepted the petition for certiorari in June, 2022, and oral arguments were held on November 2nd, 2022.
While it is difficult to predict the precise date the Supreme Court will render its decision in Bittner, the decision should come out by June, 2023 at the very latest (the end of the Court’s current session), absent truly exceptional circumstances.
The principal arguments in favor of petitioner Bittner, gleaned from the various briefs filed with the Court, and in particular petitioner’s brief and the amici briefs filed notably by the Center for Taxpayer Rights, the American College of Tax Counsel and the U.S. Chamber of Commerce are:
- The present conflict between the 5th and 9th Circuits disparately treats similarly situated taxpayers, violating fundamental principles of American federalism and fairness
- The imposition of extraordinarily high penalties for non-willful omissions in filing FBARs is punitive and therefore inconsistent with the notion of non-willfulness, obliterating the distinction with intentional willful violations of the law and in violation of due process notions of “fair notice”
- The adoption by the IRS of a “per account” assessment basis is inconsistent with previous IRS practice and internal IRS guidance and inconsistent with due process notions of “fair notice”
- Recent IRS practice works against the policies of deterrence and the promotion of voluntary compliance and instead fosters a general sentiment against regulatory enforcement due to its unfair treatment of those caught in the web
- The “per account” approach disproportionally impacts the most vulnerable and least guilty, such as the elderly and disabled who depend on social security and risk a reduction in their monthly benefits towards the FBAR penalties, and Americans living abroad who are far more likely to have multiple “foreign” accounts and more limited access to U.S. tax return preparers
- In interpreting statutes (Bank Secrecy Act of 1970 and relevant succeeding legislation and regulations) any ambiguity ought to be interpreted in favor of the taxpayer
- (Exceedingly technical) arguments were made by the IRS and contested by petitioner and amici briefs relating to how the Bank Secrecy Act of 1970 and following legislation ought to be interpreted and the limits of the delegation by the Treasury Department to the IRS of FBAR compliance and the imposition of penalties.
(Relevance to AARO’s position papers and advocacy efforts see here.)
The issues raised in Bittner and certain of the arguments made in support of the petitioner’s position are highly relevant to past, present and future AARO advocacy efforts. AARO recommends abolishing the FBAR and consolidating financial reporting into at most a single filing, most sensibly as part of tax returns where reasonable awareness could be assured. See the following link to AARO’s position on financial reporting.
First, the Bittner case itself demonstrates the reality of the heavy financial and tax compliance burdens imposed on Americans abroad and the very real risk of being caught in a “trap for the unwary.” AARO’s position papers emphasize the very real burdens we bear. Mr. Bittner and the experiences of other Americans demonstrate that those burdens and “traps” are certainly not theoretical (these experiences are illustrated in the excellent surveys carried out by AARO’s President, Doris Speer, and Board member Laura Snyder).
While Bittner concerns the FBAR, similar ongoing or “in the pipeline” cases involving FATCA and other tax and financial reporting forms such as GILTI provide illustrations of the financial and emotional burdens engendered by complex and unnecessarily duplicative compliance requirements. In this vein, AARO has and will continue to press for a rational reduction in the number of forms required, together with clear and simple indications on forms and/or on IRS and other administrative agencies websites as to what is required to comply.
Second, as also underlined in our position papers and our advocacy efforts, Americans abroad are particularly vulnerable to being unfairly targeted by complex compliance requirements that increasingly create “traps for the unwary.” Evidence provided in the briefs to the Court in Bittner as to the extraordinary percentage of professional tax preparers who were unaware of FBAR or FATCA will be useful in advocacy efforts in the future aimed at educating members of Congress and other decision-makers of the reality of our concerns to combat the theoretical and often abstract framework in which politicians, the IRS and other agencies perceive compliance.
The Perspectives of the Practitioners:
I was fortunate in having had the opportunity to spend several hours today in Chicago discussing this case and general concerns relevant to Americans abroad with Ajay Gupta, one of the attorneys from Moore tax law group who represented the Center for Taxpayer Rights in the Bittner case. Ajay is a tax litigation attorney who is a former attorney-advisor at the U.S. Tax Court and an adjunct professor or tax law at DePaul and Chicago-Kent law schools in Chicago.
From Ajay’s perspective the key “takeaways” from his work on Bittner of relevance for AARO members and Americans abroad are:
First, Americans abroad, much like recent immigrants to the U.S. who may face the same problems as Mr. Bittner, ought to be subjects of particular concern by Congress and administrative agencies as they are more likely to be caught in traps of the unwary than the average state side taxpayer as a result of more limited resources and a host of filings unknown and inapplicable for the average U.S. based taxpayer and their tax counselors.
Second and directly related to his first point, the IRS position and practice as shown by Bittner, as in other cases, appears to be designed for and applied on a “gotcha” approach to compliance, contrary to the fundamental objectives of deterrence, voluntary compliance and respect for agency enforcement and the law
Third, the assessment of harsh penalties on persons who non-willfully omit or inaccurately file compliance forms “weaponizes” the IRS penalty mechanisms, leading to inefficiencies in enforcement and a sentiment of unfairness not intended by Congress, who did not originally contemplate holding non willful violators liable until an amendment of the Bank Secrecy Act in 2004.
Zhanna Ziering, also with the Moore tax law group, worked on the Amicus brief in Bittner. She is a nationally recognized FBAR expert and the co-author of Bloomberg’s Tax Management Portfolio, Report of Foreign Bank and Financial Accounts.
She was present at the Bittner oral argument before the Supreme Court on November 2, 2022, and offered the following assessment of possible outcomes based on her sense of the justices’ questioning and reactions:
It is highly likely that the Court will split in its opinion. Justice Gorsuch and the newly appointed Justice Jackson appeared favorable to petitioner Bittner’s arguments (and those of the amici, notably the Center for Taxpayer Rights) if for different reasons; Gorsuch’s general concerns about administrative agency overreach and Jackson’s interest in the potential for disproportionally negative effects of penalty assessment on the most vulnerable in society.
Justice Kagan appeared to be supportive of the Government’s position (IRS).
The Bittner case is likely to be decided sometime during the Court’s current term ending in June 2023. This case is only one of many cases related to penalties for violations and oversights in financial reporting, which AARO will monitor closely.