Kelly Bullis: Supreme Court rejects IRS excess FBAR penalties

On the surface, most of you are going, “What is Kelly talking about?” Well over the years, the IRS has been slowly increasing its intrusive oversight into foreign related activities and using penalties in a terribly punishing manner to try to scare folks into compliance.

One such area is called a “Report of Foreign Bank and Financial Accounts” (FBAR). Basically, the IRS theory is that folks who have bank accounts offshore are hiding income and thus, the IRS has gone into full-blown aggressive attack mode to find all foreign bank accounts held by U.S. citizens.

They created a penalty structure that was beyond the level of encouraging participation and voluntary reporting, instead become confiscatory. Example, a widow in Florida who inherited a $2 million Swiss bank account from her late husband. She claimed that there was no unreported interest income, but she failed to file the FBAR, and the IRS found out. They ended up taking almost the entire $2 million in “penalties” and wanted prison time for the elderly widow.

Many organizations have been trying to get this issue before the U.S. Supreme Court to stop the IRS from abusing their powers and to be fairer. Well, they finally succeeded this year. In a 5-4 decision, the Supreme Court resolved a split between the Fifth and Ninth Circuits and held that maximum penalty of $10,000 for the non-willful failure to file an FBAR applies on a per-report, not a per-account, basis. The court found that neither Section 5314 nor Section 5321 of the Bank Secrecy Act, which impose the duty to file an FBAR and authorize the non-willful FBAR penalty, refer to “accounts” or their number but instead provide that a violation occurs when an individual fails to file a report consistent with the statute’s commands.

This court finding also weighed against the IRS position that reasonable cause for being late in filing an FBAR was not acceptable, and they were assessing the penalties for “non-willful” filings on almost everybody. Congress’ intent was to only punish those who didn’t file the FBAR on purpose, not by accident. Included in the non-willful penalties was a criminal punishment element that the IRS was trying to impose on accidental non-compliance. (Example the elderly widow in the above story.)

An interesting note was that Justice Barrett was one of the justices who voted against this opinion. Wow! She seems to lean toward supporting an over-reaching, heavy-handed IRS enforcement orientation rather than protecting accidental non-compliance citizens. Hmmm, this is disappointing and causes one to worry about her support of other future cases that come before the court in favor of government abusing citizens.

In summary, if you have an interest in a foreign bank account, make sure you file the annual FINCIN 114 form (which is how you comply with the FBAR requirements). Seek out professional help on this, you do NOT want to fall into non-compliance, even if the Supreme Court says the IRS has to be fairer in assessing penalties for failing to do this.

Have you heard? Psalm 27:3 says, “Though an army should encamp against me, my heart shall not fear. Though war should rise against me, even then I will be confident.”

Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com. Also on Facebook.