Residency Status Under A Treaty: Case Could Eventually Affect FBAR "Escape Hatch" Does residency status under a treaty affect whether a taxpayer must file FBAR forms? An often-used “escape hatch” to avoid FBAR filing may be the subject of future litigation after a judge’s order.

A recent decision from the U.S. District Court for the Southern District of California ruled in part for one side and in part for the other in Aroeste v. United States, a case of Report of Foreign Bank and Financial Accounts (FBAR) filing and penalties and where a request for records might just the first stage in litigation that could impact many FBAR non-filers.

Plaintiffs Alberto and Estella Aroeste sued the U.S. to recoup penalty payments and to discharge still- outstanding penalties for the non-filing of an FBAR for 2012 and 2013. The penalties were assessed after a three-year administrative audit of the Aroestes’ filings for tax years 2011 through 2015. The U.S. counterclaimed against the plaintiffs to recover the balance of unpaid penalties.

The district court partially stayed the case while it awaits a U.S. Supreme Court decision in Bittner v. U.S. That case presents a conflict over statutes under the Bank Secrecy Act whether a “violation” is the failure to file an annual FBAR no matter the number of foreign accounts or whether there is a separate violation for each account improperly reported.

The California district court said a decision in Bittner will control any penalties the plaintiffs owe.

Discovery question

Neither side disputed some details of this case. For example, an IRS audit of both plaintiffs’ tax filings for the 2011 through 2015 resulted in an assessment of some $3 million in back taxes and penalties, most of that from penalties assessed for failure to file information returns. The IRS audit led to the FBAR penalties at issue in this lawsuit, which were assessed only for tax years 2012 and 2013 because the plaintiffs did not disclose their holdings in various foreign bank accounts during those tax years.

The Aroestes seek in discovery the entire administrative record of the IRS during the now-completed audit – more than 7,000 pages. Read More
Supreme Court Decides For Bittner In Case Of FBAR Penalties A narrow U.S. Supreme Court decision in Bittner has curtailed federal penalties in a major case involving failure to file FBARs.

The U.S. Supreme Court has ruled 5-4 against a $2.72 million fine on a businessman who didn’t file reports for five years when he was living in Romania.

This case, Bittner v. United States, presented a conflict over statues under the Bank Secrecy Act (BSA). The question is whether a “violation” under the BSA is the failure to file an annual FBAR no matter the number of foreign accounts or a separate violation for each account that isn’t properly reported.

Regulations require filing a single annual FBAR for anyone with an aggregate balance over $10,000 in foreign accounts. The penalty for non-willful violation is up to $10,000.

Bittner maintained that he owed $50,000, or the penalty for each year. The IRS claimed he owed for each account, a total of 272 violations.

Writing for the Court, Justice Neil Gorsuch backed Bittner. “The BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis,” Gorsuch wrote.

Gorsuch also said the government had tried to penalize Bittner without fair warning under the statute that punishments would be handed out on per-account. He called the government’s attempt to assess a massive penalty against Bittner “incongruous” with how it would have treated someone with a single high-balance account.

Alexandru Bittner was born in Romania in 1957, immigrated to the U.S. in 1982 and became a citizen five years later. He returned to Romania in 1990, where he became a successful businessman and investor. He lived there for more than 20 years and was unaware that he was required to file U.S. income tax returns or FBARs. After returning to the U.S. in 2011, he engaged an accountant to prepare and file the returns and FBARs.

The IRS determined that he had failed to timely file FBARs for 2007 through 2011 and sought a maximum penalty: Read More
FBAR vs Form 8938: A Side-by-Side Comparison

When it comes to reporting foreign financial accounts as a US taxpayer abroad, there are two main forms to consider: FBAR and Form 8938. While they share many similarities, there are key differences between these two forms that can make a big difference in your reporting obligations and potential penalties for non-compliance.

In this blog post, we’ll provide a side-by-side comparison of FBAR and Form 8938 to help you understand the similarities and differences between the two forms, and make an informed decision about which one to use for reporting your foreign accounts. Let’s dive in!

What is the difference between Form 8938 and FBAR?

Form 8938 Vs. FBAR
Who must file? Specified individuals (US citizens, resident aliens, and certain non-resident aliens) and domestic entities that have an interest in specified foreign financial assets and meet the reporting threshold. US persons (US citizens, resident aliens, trusts, and estates) that have an interest in foreign financial accounts and meet the reporting threshold.

Does it include US territories? No, it doesn’t include US territories(Puerto Rico, American Samoa, Guam, The United States Virgin Islands, and The Northern Mariana Islands) Yes, resident aliens of US territories and US territory entities are subject to FBAR reporting.

What’s the reporting threshold?
Reporting thresholds vary by residency and filing status (Refer to the section above that covers FATCA reporting requirements). The aggregate value of all foreign financial accounts exceeds $10,000.

What is reported?
The maximum value of specified foreign financial assets, which include financial accounts with foreign financial institutions and certain other foreign non-account investment assets. The maximum value of financial accounts maintained by a financial institution physically located in a foreign country.

How are maximum account or asset values determined and reported?
Fair market value in US dollars in accord with the Form 8938 instructions for each account and asset reported; convert to US dollars using the end of the taxable year exchange rate and report in US dollars. Use periodic account statements to determine the maximum value in the currency of the account; convert to US dollars using the end of the calendar year exchange rate and report in US dollars.
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Report Of Foreign Bank And Financial Accounts (FBAR)

Every year, under the law known as the Bank Secrecy Act, you must report certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114.

Who Must File

A United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report:

  1. a financial interest in or signature or other authority over at least one financial account located outside the United States if
  2. the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

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Ephraim Moss, Tax Attorney

In a rather swift and harsh judgment, the Ninth Circuit Court of Appeals affirmed a lower court’s decision in favor of the IRS, which assessed an approximately $1.2 million penalty against a taxpayer for failing to disclose her financial interests in an overseas account.

The decision, U.S. v. Bussell, is noteworthy for two reasons. First, it shows the magnitude of penalty that can be reached, even with respect to an individual and a single foreign account and tax year (in this case, the relevant tax year was 2006). Second, it shows the type of taxpayer arguments that courts will likely reject when reviewing an FBAR penalty case. Read More