Earlier this year, the IRS was handed yet another defeat in front of the Supreme Court, which found that its interpretation of statute governing reporting of foreign financial accounts was wrong. The IRS is handling its latest judicial rebuke in the worst way possible — with a sucker punch to taxpayers who make honest mistakes.
Under the Bank Secrecy Act, American residents and citizens with foreign bank accounts are required to file a Foreign Bank Account Report (FBAR) each year. Taxpayers who fail to do so incur fines.
One such taxpayer was Alexandru Bittner, a Romanian-American immigrant and dual citizen. Bittner was unaware of his full FBAR obligations for five years between 2007 and 2011, reporting only information on his largest foreign bank account. In 2011, he hired a new accountant, and reported full information on 61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011.
The law authorized the IRS to fine Bittner $10,000 for non-willful delinquency. But the IRS decided to apply this $10,000 fine not per report that Bittner incompletely filed, but per account. The difference was a significant one — whereas applying the fine on a per-report basis would have cost Bittner $50,000 for five incompletely filed FBARs, the IRS decided to apply the fine per account as well. Under the IRS’s interpretation, Bittner owed an absurd $2.72 million fine.
In Bittner v. United States, the Supreme Court decided in favor of Bittner. But while the Court decided on the basis of statutory interpretation, the Eighth Amendment prohibition against “excessive fines” would have been a better basis for the decision.
After all, the IRS never claimed that Bittner made any willful effort to hide any assets, he simply misunderstood the law. A $2.72 million fine for what even the IRS never pretended was anything other than an honest mistake is the very definition of “excessive.”
Nevertheless, in the face of this entirely reasonable Court decision, the IRS is retaliating against future taxpayers who make similar honest mistakes. While the IRS can no longer attempt to apply FBAR fines by account instead of by report, it is eliminating mitigation provisions for future non-willful violations.
In other words, while Bittner faced the maximum $10,000 FBAR penalty, the IRS had regulatory procedures for reducing fines for smaller accounts, provided the violations were non-willful. Previously, the fine could have been as low as $500 for non-willful FBAR violations.
In direct response to its loss in Bittner, however, the IRS is done with leniency. The fine will now be $10,000 for non-willful FBAR violations regardless of mitigating circumstances.
While petulant, this could have real consequences for dual citizen taxpayers. While Alexandru Bittner was happy to pay $50,000 rather than $2.72 million, a $10,000 fine could be catastrophic to many average taxpayers. The fact that the IRS is now subjecting taxpayers who misunderstand or are unaware of their FBAR reporting obligations to this fine is exactly why the Eighth Amendment should have been the Court’s lodestar in Bittner.
It’s also yet another example of the IRS’s increasingly combative and aggressive approach towards taxpayers, only encouraged by Congress’s recent budget boost for the IRS’s enforcement accounts. Sending the IRS after taxpayers like an attack dog has consequences.
The IRS is increasingly acting like a rogue agency, and “tax gap”-obsessed legislators are not doing nearly enough to rein it in. Until they do, taxpayers will be the ones paying the price.
