Since 1970, U.S. residents and citizens who maintained bank accounts in foreign countries have been required to disclose these holdings annually, currently using FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Please see our earlier Alerts here on this topic for more background. One of the practical (and critical) issues that Account Holders face is: What constitutes “an account” for reporting purposes? Thus, if an Account Holder holds ten accounts, perhaps under one central account number with a bank, should that be reported as ten accounts or as one account? This aspect is important because the various penalties for non-compliance are imposed on a per “violation” basis, not an annual or per FBAR basis.*
The recent case of U.S. v Bittner (CA 5 11/30/2021) highlights this issue. The IRS assessed Mr. Bittner $1.77 million in penalties for non-willful failure to file FBARs for five consecutive years, from 2007 to 2011, while he was a resident of Romania. In their calculation, the IRS applied the penalty to each unreported account. Given the ambiguity of the language in the regulations (and the size of the penalty), Mr. Bittner challenged the IRS in court. The court agreed with Mr. Bittner and subsequently reduced the assessed penalties to $10,000 (the maximum penalty for a non-willful violation during the period in question) for each annual unfiled FBAR, or $50,000 in total. The IRS disagreed with this decision and prevailed in an appeal when the Fifth Circuit Court of Appeals upheld the Treasury’s position on November 30, 2021, and re-imposed the $1.77 million in penalties on Mr. Bittner’s failure to file FBAR returns.
One of the learning opportunities from this case is the importance to understand what falls into the Treasury’s definition of a financial account, as the description is quite broad and includes the following:
- Bank accounts such as savings accounts, checking accounts, and time deposits
- Securities accounts such as brokerage accounts and securities derivatives or other financial instruments accounts
- Commodity futures or options accounts
- Insurance policies with a cash value (such as a whole life insurance policy). Depending on the policy, it might be challenging to assess the insurance policy’s cash value at any given point; nevertheless, it is still reportable.
- Mutual funds or similar pooled funds (i.e., a fund available to the general public with a regular net asset value determination and regular redemptions).
- Any other accounts maintained in a foreign financial institution. These accounts might include foreign pension accounts such as a Canadian Registered Retirement Savings Plan (RRSP), Mexican individual retirement accounts (Fondos para el Retiro), and Mexican Administradoras de Fondos para el Retiro (AFORE) and similar plans under the laws of other countries.
W.G. Observation: In our experience, when it comes to FBAR reporting, it can be confusing and tedious to determine at which level taxpayers must report. Account Holders often want to report a fewer number of accounts to simplify the compliance process. For example, an Account Holder could own a series of Fixed Deposits in a bank in India which assigns a separate account number to each Fixed Deposit. Or ownership in a foreign mutual fund company that treats the holdings in each fund as separate accounts under a “Folio” number unique to the customer. However, in these situations, where the proper level of reporting is unclear, we generally advise reporting at the lowest possible level (i.e. disclose the maximum number of accounts) to eliminate the situation the Account Holder faced in Bittner.
Of course, there is no “one size fits all” when it comes to FBAR reporting, given the many different types of accounts to be reported and different formats used by financial institutions worldwide. Also, the decision as to how to report different accounts is much more nuanced when filing an FBAR past its original due date or amending a previously filed FBAR. Taxpayers should consider the advice of a professional in these areas.
Contact your WG tax advisor if you have any questions or would like more clarity on this subject.
*In a separate case in the Ninth Circuit Court of Appeals (March 30, 2021), the court held that the penalties for the non-willful filing of FBAR accounts are assessed on a per form basis.
