Category Archives: FBAR

Part 7: US Supreme Court Denies Toth Cert Petition. Justice Gorsuch Invites Lower Courts To Consider Constitutionality of FBAR Penalties

Prologue – Before The Supreme Court – The Background To The Toth FBAR Case

This Is Post 7 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

Historically the strength of America has been found in its moral authority. As President Clinton once said:

“People are more impressed by the power of our example rather than the example of our power…”

The FBAR penalty imposed on Ms. Toth is an example of the legal power to impose penalty and NOT an example of the restraint on power and the application of law in a just way. I have heard it said that when a person (and by extension country) loses its character it has lost everything.

The Story Of Monica Toth – Three Perspectives

Perspective 1: The story of Ms. Toth’s encounter with Mr. FBAR as described by Justice Gorsuch in his dissent:

In the 1930s, Monica Toth’s father fled his home in Germany to escape the swell of violent antisemitism. Eventually, he found his way to South America, where he made a new life with his young family and went on to enjoy a successful business career in Buenos Aires. But perhaps owing to his early formative experiences, Ms. Toth’s father always kept a reserve of funds in a Swiss bank account. Shortly before his death, he gave Ms. Toth several million dollars, also in a Swiss bank account. He encouraged his daughter to keep the money there—just in case.

Ms. Toth, now in her eighties and an American citizen, followed her father’s advice. For several years, however, she failed to report her foreign bank account to the federal government as the law requires. 31 U. S. C. §5314. Ms. Toth insists this was an innocent mistake. She says she did not know of the reporting obligation. And when she learned of it, she says, she completed the necessary disclosures. The Internal Revenue Service saw things differently.

Pursuant to §5321, the agency charged Ms. Toth with willfully violating §5314’s reporting requirement and assessed a civil penalty of $2.1 million—half of the balance of Ms. Toth’s account—plus another $1 million in late fees and interest.

Perspective 2: The issue in the Toth case as described in a September 20, 2022 post:

The penalty imposed on Ms.Toth was dependent on a finding of “willfulness”. “Willfulness” is a question of fact to be determined by the court. In the Toth case the District court deemed Ms. Toth to be “willful” as a court imposed sanction. There was no independent evaluation of the facts to determine whether she was “willful”. Absent an independent evaluation of the facts, can there ever be a finding of willfulness necessary to support the 50% account penalty?

Perspective 3: The August 26, 2022 PETITION FOR A WRIT OF CERTIORARI to the Supreme Court of The United States described the issue as follows:

QUESTION PRESENTED

The Bank Secrecy Act and implementing regulations require U.S. persons to file an annual report — called an FBAR — if they have foreign bank accounts containing more than ten thousand dollars. The maximum civil penalty for willfully failing to file the report is either $100,000 or half the balance in the unreported account, whichever sum is greater. 31 U.S.C. § 5321(a)(5)(C)-(D). Using this formula, the government imposed on petitioner a civil penalty of $2,173,703.00.

The question presented is whether civil penalties imposed under 31 U.S.C. § 5321(a)(5)(C)-(D) — penalties that are avowedly deterrent and noncompensatory — are subject to the Eighth Amendment’s Excessive Fines Clause.

Eighth Amendment Cruel and Unusual Punishment

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

The indisputable facts include (but are not limited to) that, Mr. FBAR is being used to confiscate approximately two million dollars of a Swiss Bank account with a balance of approximately four million dollars. The account was owned by an 82 year old woman and was funded by money received from her father in Argentina. The account was initially funded by money that was NOT and never was subject to US taxation. The penalty was based on the penalty for failing to file an FBAR. In addition, the necessary condition of “willfulness” was based on a court sanction and NOT on an independent evaluation of the facts.

These facts resulted in Ms. Toth’s encounter with Mr. FBAR in the penalty zone!

The Supreme Court Response – January 23, 2023:

I had the opportunity to discuss the decision in a podcast with Dubai based lawyer Virgina La Torre Jeker.

On January 23, 2023 the Supreme Court of the United States (Justice Gorsuch dissenting) denied the cert petition. In other words, the court declined to consider whether Ms. Toth’s 2 million willful civil FBAR penalty, based on a 4 million Swiss bank account balance, violated the “Excessive Fines” clause of the eighth amendment. (The effect of the court’s decision to NOT hear the case means that the US government is now – through the law of FBAR – in a position to confiscate two million from Ms. Toth. But,”It’s The Law”.)

More broadly and abstractly, the refusal to grant the cert petition means that the court refused to hear the case. The court’s refusal to hear the case is NOT equivalent to a ruling that civil willful FBAR penalty is constitutional. It means only that the Supreme Court of the United States will NOT be the court (at least as of January 23, 2023) to decide the issue. In his dissent Justice Gorsuch reinforces this point (and invites lower courts to consider the issue) by writing:

For all these reasons, taking up this case would have been well worth our time. As things stand, one can only hope that other lower courts will not repeat its mistakes.

Nevertheless, the court’s refusal to hear the Toth case will likely be interpreted:

– by the IRS (and other government agencies) as a license to continue a growing penchant to impose punitive FBAR penalties in general and engage in civil forfeiture in particular

– by the public as a continuing signal that there is a clear distinction between the interpretation of law and the application of justice and never shall the twain meet

– by the legal profession that the penalties under Title 31 are a subset of civil forfeiture penalties in general

– by the international community as further confirmation that the United States is a country lacking proportionality between violations of the law and the penalties imposed

Interestingly and significantly Justice Gorsuch penned a vigorous dissent*. In this dissent he took the time to describe the facts, describe the history of penalty in the United States and to explain why the court should have agreed to hear the Toth appeal. Justice Gorsuch appeared to rely on an amicus curie brief filed by California law professor Beth A. Colgan**. Excerpts from both are included as Appendixes *A and **B to this post.

One is left with the impression that:

Justice Gorsuch is an island of justice and sanity in an ocean of unfairness, injustice and insanity.

The world eagerly awaits the Supreme Court’s decision in the Bittner FBAR case!

John Richardson – Follow me on Twitter @Expatriationlaw

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11 Key Moments In The Supreme Court’s Engagement During The Bittner #FBAR Fundraiser Argument

Introduction

On November 2, 2022 the Supreme Court of the United States heard the appeal in the case of:

ALEXANDRU BITTNER, Petitioner, v. UNITED STATES, Respondent

On November 2, 2022 the Supreme Court Of The United States heard the Bittner case. The issue was whether in the context of a non-willful FBAR penalty:

1) The government is restricted to imposing one penalty based on the failure to file one FBAR; or

2) The government is authorized to impose one non-willful penalty for each of the accounts that should have been reported on the single FBAR form.

For example, let’s imagine that a US citizen has ten accounts that are “foreign” and he fails to file an FBAR form. Is the penalty based on the failure to file the form itself (one form means one $10,000 penalty)? Or may the government impose a penalty based on the failure to disclose each of the accounts on the FBAR form (10 times $10,000 = $100,000)?

Mr. Bitter is/was a dual US Romanian citizen who was living in Romania during the years that the FBAR penalties were imposed. According to the closing comments of his lawyer, Mr. Bittner (while living in Romania) had filed US tax returns for years that he had a business connection to the United States (apparently investing in a relative’s business in California). In other words, there is some evidence that Mr. Bittner was not fully aware that as a US citizen, his US tax and reporting obligations applied even when he did not live in the United States. In any case, Mr. Bitter argues that he should have received one $10,000 penalty for each of the five years ($50,000). The government imposed penalties of 2.7 million dollars based on a failure to report 52 accounts.

On Wednesday November 2, 2022 the Supreme Court of the United States heard argument on the “per account vs. per form” issue.

A transcript of the arguments is here:

http://citizenshipsolutions.ca/wp-content/uploads/2022/11/21-1195_5i36.pdf

A post describing the background and some initial discussion is here.

The briefs are available here.

Purpose of this post

The purpose of this post is to identify the questions and dialogue with counsel that suggest which areas the Justices found most important, interesting and troubling. Although one cannot predict the outcome, the dialogue suggests the following three broad themes and areas of concern:

First: Many of the Justices had difficulty agreeing (based on the plain text of 5314) with the Government’s claim that it can impose a separate FBAR penalty based on and only on a failure to report each account. Justices Jackson, Gorsuch and Thomas appeared to be the strongest advocates of this position. (Justices Kagan and Sotomayor comprised the most vocal opposition.)

JR Comment: The issue is whether the Justices will decide the case based on what the statute actually says (which favors the per account interpretation) or based on what they think Congress “might have intended” in the complete legislative scheme. The legal arguments for the “per form” penalty were compelling.

Second: A number of the Justices were clearly troubled by the their view that the “per form” penalty would mean that all non-willful FBAR penalty violators would be assessed penalties based on the “form”. Basing the penalty on and only on single form, would mean that a $10,000 penalty would be the maximum non-willful penalty regardless of the facts. Should a person who fails to report one simple checking account be assessed the same penalty as someone with millions of dollars and multiple accounts? Justices Roberts and Kagan seemed particularly focussed on this issue. (See the audio clip of Justice Roberts below.)

JR Comment: Interestingly the hearing did not discuss (in the question and answer) that non-willful violators can be assessed ZERO penalties. My impression was that the argument proceeded on the basis that the $10,000 penalty was the default penalty for the failure either file the form or report the account. The default penalty is NOT $10,000. The language of 5321(1)((5) includes: “Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000. Neither the assessment of penalties NOR the $10,000 penalty is automatically assessed. My point is that the statute does allow for the calibration of penalties based on the facts of the case.

Third: The court expressed concern over whether “reasonable cause” really was a defence to a civil non-willful penalty assessment. Presumably if “reasonable cause” were a defence, it would serve the purpose of appropriately calibrating penalties. See the clips of Justices Alito, Gorsuch and Jackson below. The concern appeared to be: Does the “reasonable cause” defence work in practical application?

JR Comment: Does the existence of “reasonable cause” make it easier for the Justices to rule that a “per account” penalty may be permitted? Alternatively were the Justices simply concerned by the draconian potential of the penalties?

These are the three “pieces of the puzzle” that I expect will inform the decision.

The complete audio of the hearing is available here:

And a version from C-span (that picks up the audio from some protestors) is here:

https://www.c-span.org/video/?523324-1/bittner-v-united-states-oral-argument

I have included the statutory provision as *Appendix A below.

I have included the regulations as **Appendix B below.

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November 2, 2022 Supreme Court FBAR Case: ALEXANDRU BITTNER, Petitioner v. UNITED STATES Respondent – No. 21-1195

Here is the audio recording of the November 2, 2022 Bittner FBAR hearing …

On November 2, 2022 the Supreme Court Of The United States heard the Bittner case. The issue was whether in the context of a non-willful FBAR penalty:

1) The government is restricted to imposing one penalty based on the failure to file one FBAR; or

2) The government is authorized to impose one non-willful penalty for each of the accounts that should have been reported on the single FBAR form.

For example, let’s imagine that a US citizen has ten accounts that are “foreign” and he fails to file an FBAR form. Is the penalty based on the failure to file the form itself (one form means one $10,000 penalty)? Or may the government impose a penalty based on the failure to disclose each of the accounts on the FBAR form (10 times $10,000 = $100,000)?

Mr. Bitter is/was a dual US Romanian citizen who was living in Romania during the years that the FBAR penalties were imposed. According to the closing comments of his lawyer, Mr. Bittner (while living in Romania) had filed US tax returns for years that he had a business connection to the United States (apparently investing in a relative’s business in California). In other words, there is some evidence that Mr. Bittner was not fully aware that as a US citizen, his US tax and reporting obligations applied even when he did not live in the United States. In any case, Mr. Bitter argues that he should have received one $10,000 penalty for each of the five years ($50,000). The government imposed penalties of 2.7 million dollars based on a failure to report 52 accounts.

On Wednesday November 2, 2022 the Supreme Court of the United States heard argument on the “per account vs. per form” issue.

The above podcast contains the audio file of the live arguments.

A transcript of the arguments is here:

http://citizenshipsolutions.ca/wp-content/uploads/2022/11/21-1195_5i36.pdf

A recording from C-span is here:

https://www.c-span.org/video/?523324-1/bittner-v-united-states-oral-argument

The following twitter thread reflects my impressions while listening to the arguments …

https://threadreaderapp.com/thread/1587807427327655937.html

Earlier podcasts discussing this case are included as an *Appendix to this post.

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John Richardson – Information Session – London, UK – Thursday Oct. 13/22 – 19:00 – 21:00

Attention!! Date, time and location updated!! – Thursday Oct. 13/22 – 19:30 – 21:30 – New location! See here.

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John Richardson – Information Session – London, UK – Thursday Oct. 13/22 – 19:00

What: John Richardson informal information and discussion session for those impacted by US extraterritorial overreach

When: Thursday October 13, 2022 – 19:00 – 21:00

Where: Pret A Manger – Directly Across From Russell Square Tube (careful to choose the correct Pret)
40 Bernard Street, London, WC1N 1LE
https://www.pret.co.uk/en-GB/shop-finder/l/london/40-bernard-street/284

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Podcast: In FBAR We “Trust” Part 4 – When ”Beneficial Ownership” Without Legal Title Constitutes A Financial Interest And Triggers An #FBAR Requirement

Introduction

This is the fourth of a series of four posts exploring some of the more difficult and “interesting” areas of (possible) FBAR obligations.The first post explains the FBAR filing obligations of trusts. The second post explains when individuals may have to file an FBAR because of their relationship to a trust. The third post explains how/why one may be required to file an FBAR based on control of an account rather than ownership of the account. This fourth post continues the discussion of when beneficial ownership without legal ownership triggers an FBAR obligation. The four posts are based on Podcasts with US tax lawyer Virginia La Torre Jeker.

Podcast 1: February 23, 2002FBAR Obligations Attaching To A Trust

Podcast 2: March 4, 2022FBAR Obligations Attaching To People Because Of Their Relationship To A Trust

Podcast 3: May 25, 2022Looking For Mr. FBAR – A New Sighting – ”exercised control over and had access to the account”

Podcast 4: September 29, 2022When ”Beneficial Ownership” Constitutes A Financial Interest And Triggers An FBAR Requirement

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Podcast: In FBAR We “Trust” Part 2 – Obligations Attaching To People Associated With A Trust

Introduction

This is the second of a series of four posts exploring some of the more difficult and “interesting” areas of (possible) FBAR obligations.The first post explains the FBAR filing obligations of trusts. This second post explains when individuals may have to file an FBAR because of their relationship to a trust. The third post explains how/why one may be required to file an FBAR based on control of an account rather than ownership of the account. The fourth post continues the discussion of when beneficial ownership without legal ownership triggers an FBAR obligation. The four posts are based on Podcasts with US tax lawyer Virginia La Torre Jeker.

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Podcast: In FBAR We “Trust” Part 1 – Obligations Attaching To A Trust Itself

Introduction

This is the first of a series of four posts exploring some of the more difficult and “interesting” areas of (possible) FBAR obligations.This first post explains the FBAR filing obligations of trusts. The second post explains when individuals may have to file an FBAR because of their relationship to a trust. The third post explains how/why one may be required to file an FBAR based on control of an account rather than ownership of the account. The fourth post continues the discussion of when beneficial ownership without legal ownership triggers an FBAR obligation. The four posts are based on Podcasts with US tax lawyer Virginia La Torre Jeker.

Podcast 1: February 23, 2002FBAR Obligations Attaching To A Trust

Podcast 2: March 4, 2022FBAR Obligations Attaching To People Because Of Their Relationship To A Trust

Podcast 3: May 25, 2022Looking For Mr. FBAR – A New Sighting – ”exercised control over and had access to the account”

Podcast 4: September 29, 2022When ”Beneficial Ownership” Constitutes A Financial Interest And Triggers An FBAR Requirement

Podcast 3: May 22, 2022 – When FBAR Obligations May Attach Without Signing Authority Over An Account
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Podcast 1

February 23, 2022 – Participants Include:

Virginia La Torre Jeker – @VLJeker

John Richardson – @Expatriationlaw

Prologue – Report Early! Report Often! Report Everything! Keep A Record Of What You Report!

In October of 2018, Virginia and I went “Looking For Mr. FBAR.” During the last three years we have uncovered many clues, we have learned many things, but it’s clear that we have not yet located Mr. FBAR. Virginia has written about many of her “sightings” in a series of “FBAR posts“. I have also written a number of posts documenting the various adventures of Mr. FBAR.

Mr. FBAR is elusive. He is is simultaneously not anywhere, but everywhere. There is no weapon in the US arsenal of forms that has created such fear and uncertainty. He has even threatened certain visitors to the United States for the failure to file an FBAR.

Legal Authorization

The statutory authorization for Mr. FBAR is found in 5314 of the Bank Secrecy Act. Most of the substantive law is found in FBAR Treasury Regulations and the IRS FBAR instructions. It’s important to note that Mr. FBAR lives in Title 31 (Bank Secrecy Act) which is different from Title 26 (Internal Revenue Code).

Mr. FBAR And The Filing Obligations Of Trusts

This podcast is a discussion of how Mr. FBAR impacts “trusts”. When is a trust a United States person? When must a trust file an FBAR to report the “financial accounts” of a related purpose of entity?

Part 6: Mr. FBAR’s Civil Penalty – Does 31 USC 5321(a)(5) Authorize The Imposition Of ANY Civil Penalty For Failure To File An FBAR?

This Is Post 6 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

Mr. FBAR Visits The Supreme Court Of The United States!

But, maybe the issue is whether a civil FBAR penalty can be imposed at all instead of how much of a penalty can be imposed?

All of which is explained in the following video discussion

Conclusion:

The existing statutory scheme 31 USC 5321(a)(5) combined with 31 USC 5314 does NOT authorize the imposition of a civil penalty on an individual for the failure to file an FBAR prescribed by 31 C.F.R. § 1010.350. Furthermore, the original 5321(a)(5)created in 1986 is written in the same way and fails to authorize the civil FBAR penalty for the same reasons.

For more extensive analysis and parsing of the statutes read on …

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Part 5: Mr. FBAR’s Civil Penalty – 5321(a)(5): Bittner – Maximizing The Penalty By Imposing It On Each Account

This Is Post 5 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

As previous posts have described, the threshold question in an FBAR civil civil penalty case governed by 5321(a)(5), is whether the violation is “willful” or “non-willful”. If “non-willful” the penalty is limited to $10,000 (appropriately adjusted for inflation). If Willful” a much higher penalty regime – the greater of $100,000 USD or 50 percent of the account balance – applies. Given the potential for FBAR penalties to be a significant “fundraiser”, the government has clear incentives to argue for “willfulness”. In Schik we are reminded that “willfulness” is a question of fact which the government must prove by a “preponderance of the evidence standard”. In Toth we saw the government greatly assisted by a judicial sanction that deemed Ms. Toth to be willful. The most egregious aspect of Toth was that the government was not even required to meet its factual burden of proof. In Bittner the government was stuck with a factual finding of non-willfulness.

Q. How can the government maximize FBAR penalties in the context of non-willfulness?

A. By imposing the FBAR penalty on each unreported account rather than on the failure to file the FBAR itself.

Such is the context of Bitter where the government:

First, imposed a $10,000 penalty on each individual account; and

Second, repeated the process for five years resulting in approximately 2.7 million in FBAR penalties.

Interestingly, the effect of this approach was that the Government could assert FBAR penalties that exceeded the maximum penalties authorized under the 5322 criminal penalty provision. Why would the government take this approach? The answer comes from the last paragraph of the Solicitor General’s brief filed in the Bittner petition for certiorari.

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