ACTEC’s Supreme Court Amicus Brief in Alexandru Bittner v. United States
“ACTEC’s Supreme Court Amicus brief in Alexandru Bittner v. United States,” that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Toni Ann Kruse, ACTEC Fellow from New York. On August 16, 2022, the American College of Trust and Estate Counsel submitted an educational amicus brief in Bittner v. United States to the Supreme Court. ACTEC Fellow Suzanne Shier, from Chicago, will offer an update on the case. Welcome, Suzanne.
Thank you, Toni Ann. $50,000 or $2.72 million, those are the penalty amounts for the non-willful failure to timely file to report foreign financial accounts at issue in U.S. v. Bittner to be decided by the Supreme Court. The question is whether the penalty is computed per year, per report, or per year per foreign financial account. A U.S. person with a financial interest in or signatory authority over a foreign financial account is required to file a Foreign Bank and Financial Account Report, FBAR, each year.
The reporting obligation extends to many types of filers and accounts, not just individuals with foreign bank accounts. Who is a U.S. person for purposes of filing? The U.S. person subject to reporting requirements include U.S. citizens, wherever they live; foreign persons residing in the U.S., regardless of their citizenship; and entities organized under the law of a state of the United States or the District of Columbia, including partnerships, limited liability companies, corporations, and trusts. Which accounts are reportable accounts?
FBAR Reportable Accounts and Filing Requirements
Accounts in a foreign country required to be reported include bank accounts, securities accounts, insurance and annuities with cash value, brokerage and commodities accounts, mutual funds, and ETFs. Filing is required if a U.S. person has a financial interest in or has signatory authority over foreign financial accounts and access of the aggregate of $10,000 in value at any time during the calendar year. The measure is the value of the account, not income from the account.
Presently, the filing due date coincides with the filing due date for individuals, April 15th, with an automatic extension to October 15th – October 17th in 2022. The penalty for a non-willful failure to timely file a complete FBAR is $10,000. It states the $10,000 non-willful penalty amount bears a reasonable relationship to the $10,000 filing threshold, at least if it’s not exceeding the filing threshold. However, there’s more to this story, much more. First, the filing requirement is an annual filing requirement, thus the non-willful failure to report an account for multiple years can result in a failure to file penalty for each year an account is not reported, up to six years. Second, the Internal Revenue Service typically applies the non-willful penalty per account and per year, not per failed FBAR filing per year. Thus, with the IRS’s approach, there can be a significant multiplier effect. This is the specific issue before the Supreme Court in Bittner.
FBAR Filing and Alexandru Bittner
Mr. Bittner, an immigrant from Romania to the U.S., became a naturalized U.S. citizen while also retaining his Romanian citizenship. He returned to Romania where he established and invested in numerous business enterprises and then ultimately returned to the U.S. Mr. Bittner was unaware of the FBAR reporting requirements. Once he became aware of them and retained an accountant familiar with the FBAR reporting requirements, he eventually filed FBAR reports for five years covering numerous foreign personal and business accounts, albeit late. In Bittner, the per year and per report non-willful penalty is $50,000. If the per year and per account method is used, the non-willful penalty is $2.72 million due to the number of accounts involved.
Finally, there’s a further multiplier effect when more than one person is required to file an FBAR for the same foreign financial account. This is a common situation in typical personal, financial, and wealth planning scenarios. For example, consider a principal and agent. If a U.S. person, the principal, names another U.S. person as agent under a financial power of attorney and the principal has foreign financial accounts, both the principal and the agent are required to file FBAR reports subject to the aggregate $10,000 reporting threshold.
FBAR and Financial Power of Attorney Filing Examples
Consider an agent parent abroad. Elizabeth is a U.S. citizen living in Illinois. Elizabeth does not have any foreign financial accounts. Elizabeth’s aging mother, Martha, is a dual U.S. and Canadian citizen residing and living in Canada. Marth named Elizabeth the agent under a financial power of attorney for all of her property, including her bank and brokerage accounts in Canada.
If the aggregate value of Martha’s accounts in Canada exceeds $10,000 at any time during the year, both Martha and Elizabeth have FBAR reporting obligations and will both be subject to penalties if they fail to file. Consider an adult child working abroad. Elizabeth’s unmarried adult son, Henry, is a U.S. citizen living and working in London. Henry also named Elizabeth his agent under his financial power of attorney for all of his property, including bank and brokerage accounts he opened in London. If the aggregate value of Henry’s accounts in London exceeds $10,000 at any time during the year, both Henry and Elizabeth have FBAR reporting obligations and will both be subject to penalties if they fail to file. Next, consider grantors, trustees, and beneficiaries. If a grantor establishes a trust which holds a foreign financial account, the grantor, each trustee, and certain beneficiaries may have FBAR reporting obligations for the same account held by the trust.
The grantor will have reporting obligations if the grantor is treated as the owner of the trust for income tax purposes under the grantor trust income tax rules. The trustee or trustees will have reporting obligations as the holder(s) of the legal title to the foreign financial account. Each beneficiary with a present financial interest in more than 50% of the assets in the trust, or who receives more than 50% of the current income for the trust, is required to file an FBAR. There is, however, an exception for a beneficiary. If the U.S. trustee or U.S. agent of the trustee filed, all reporting is subject to the aggregate $10,000 reporting threshold.
Let’s consider another example. Charles, a U.S. citizen and resident, established a gift trust for his daughter, Charlotte, also a U.S. citizen and resident. Mainstreet USA Trust Company and Charles’ wife, Helen, are the trustees. The trust is irrevocable, but Charles is treated as the owner of the trust for income tax purposes under the grantor trust income tax rules.
The trust holds two foreign financial accounts, $6,000 each, $12,000 in the aggregate. Charles, as grantor, has a FBAR reporting obligation, and Mainstreet USA Trust Company and Helen, as trustees and legal title holders, each have FBAR reporting obligations. Charlotte should not be required to report unless the others do not report. If Charles, Mainstreet USA Trust Company, Helen, and Charlotte each non-willfully fail to timely file foreign bank account reports under the IRS calculation, the penalties related to the $12,000 accounts, for 1 year, may total $80,000.
Two accounts, four failed filers, $10,000 each. If the oversight continues for five years, the penalties may total $400,000. Two accounts, four failed filers, five years, $10,000 each. In addition to the multiplier effect with financial powers of attorney and trusts, changes in accounts, agents, trustees, and beneficiaries can also give rise to changing FBAR filing requirements from year to year. The consequences of the ruling of the court in the Bittner case are relevant for every U.S. person with a foreign reportable financial account. And the Bittner case is a reminder to annually review FBAR filing requirements. Thank you so much for your time today.
Toni Ann: Thank you, Suzanne, for this very important discussion of Bittner v. United States. We appreciate your time.
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