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The Supreme Court Reviews Penalties For Running Afoul Of FBAR Law

Last week, the US Supreme Court heard oral arguments in a case over how much in penalties the US government can impose on citizens who fail to report to their foreign financial accounts of $10,000 or more. Beyond the immediate legal question, the case, Bittner v. the United States, raises important questions about how the law should be updated. 

The requirement to file a Foreign Bank Account Report (FBAR) was included in The Currency and Foreign Transactions Reporting Act of 1970 in an effort to reduce crimes such as tax evasion and money laundering.

It applies to US citizens and residents who have financial interest in, or authority over, foreign financial accounts with a value of at least $10,000, even if the accounts exceed the limit for a single day. And the law set steep penalties:  $100,000 or half the value of the account, whichever is greater, for a willful violation and $10,000 for non-willful violations. Subsequent laws adjusted them for inflation and they are currently $144,886 and $14,489, respectively.

While the law applies to only a small number of people, many of whom live outside the US, it can cause huge problems especially for people with relatively small accounts who are not up on the law.  

Unlike the penalties, the filing threshold hasn’t been indexed for inflation: In today’s money, that $10,000 threshold would be about $75,000. As a result, far more people are covered now, including many of whom may not even be aware they are required to file.

Some people may not be aware of the law. Others may not be aware that they have a requirement to file. For example, if someone has their own foreign account and signatory authority on a parent’s account, they may not know the value of the combined accounts momentarily slipped over the threshold.

So-called accidental Americans may not even be aware that the US government considers them citizens. For example, people born in the US, or whose parents are both citizens fall into this category even if they or their parents never lived here.

The dispute before the Supreme Court involves the size of the penalties for non-willful failure to report.  The petitioner, Alexandru Bittner, failed to report several dozen accounts between 2007 and 2011. Bittner argued the maximum penalty should be $50,000, or $10,000 for the combined accounts for each of the five years. The IRS assessed a penalty of $10,000 per account per year, or $2.72 million.

One argument for penalties of such incredible magnitude is that they deter criminal behavior. But that only works if people are aware of the filing requirements. These steep penalties also provide a strong disincentive for people to come clean once they realize they should have reported. Even with willful violations, evidence suggests that certainty of punishment is a more effective deterrent than high penalties.

These steep penalties also distort people’s behavior. They might encourage people to maintain domestic accounts and transfer funds, even if it otherwise makes no sense. People might also carefully monitor their foreign accounts to ensure their total value stays below the filing threshold. Alternatively, they may needlessly file an FBAR or pay to hire a professional to file on their behalf.

Whatever the Supreme Court decides, Congress could help by reforming the law, including indexing the threshold for inflation and clarifying who must file and how the penalties should be assessed.

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