Crime-Punishment Mismatch
Astonishing penalties for FBAR filing misdeeds
This century-old barber’s strop was a fixture in my childhood home, just as it had been in my father’s childhood home.
My grandfather and my father ran, in turn, a small-town general store established in 1908. The Shapleigh Hardware Co, whose name is stamped on the strop’s handle, was a major wholesaler of theirs for more than 50 years.
Strops like this were attached to the side of barber chairs. Before starting a shave, the barber would pull the belt taut using one hand on the handle. With the other, he’d draw a handled straight razor back and forth at an angle over the leather to sharpen it.
The above strop had a corrective purpose in my home: to scare my brother and me into good behavior. We had been told that my grandfather used the strop to punish his sons by strapping them on the butt for extremely bad behavior.
My parents never used the “strap,” but we feared it.
FBAR’s strop
An FBAR, if you didn’t know, is the Foreign Bank Account Report form that is required of US citizens by the US Department of Treasury.
It must be filed for each year in which the sum of the maximum yearly balances in all of one’s non-US accounts exceeds $10,000.
The FBAR is irrelevant for almost all citizens living in the US, but highly relevant for expats. Like my family’s strop, the FBAR represents a threat to expats.
How could a bureaucratic form be analogous to the strop? If you behave yourself by filing “a complete and correct FBAR” on time, nothing happens.
Misbehave by not filing a correct timely FBAR? You face potentially devastating financial penalties.
About the penalties
There are various penalties for failing to file a timely FBAR. Most are civil, and some criminal. Criminal penalties, which are extremely rare, can include prison with fines, but almost all FBAR penalties involve financial penalties.
FBAR regulations specify that a penalty of up to $10,000 can be levied per “occurrence.” This amount has been adjusted for inflation over the years, so it's now about $15K per occurrence. How are penalties triggered? How bad are they?
Assume that you didn’t file because you didn’t know about FBARs (there is a statute of limitations, so only the most recent 5 years matter). What could your FBAR penalty be if you hadn’t filed for the last 5 years?
You can be fined up to $10,000 for each occurrence. The exact amount is up to the IRS agent handling your FBARs.
But what’s an occurrence? This has been legally in dispute. Does an “occurrence” refer to each account each year? Or to the entire FBAR form for a particular year?
This distinction makes a huge difference for the size of the overall penalty. If an occurrence is failing to report the entire form for a given year, the possible fine could be up to $75,000 ($15K x 5 years).
If an occurrence is failing to report a particular account each year, the possible fine could be $375,000 ($15K x 5 accounts x 5 years).
Occurrence is finally defined
In February 2023 the US Supreme Court made a choice between an account and a form definition of occurrence. It was a case of a dual US-Romanian citizen named Bittner, who was delinquent in filing FBARs over 5 years.
From a form perspective, he had filed late for 5 years (1 form per year) and should pay up to a $50,000 fine (not counting inflation). This is what Bittner argued for; it was waaay better than the alternative favored by the IRS.
From an account perspective, Bittner had reported on 272 accounts and should pay up to a $2.72M fine (yes, the M means million). This was the penalty levied by the IRS on Mr. Bittner!
Bittner challenged the ruling, which eventually reached the US Supreme Court. The Court ruled 5-4 in Bittner’s favor, and he had to pay a $50K fine.
This “happy” outcome reveals the stunning possible consequences for failing to file FBARs on time. $50K is far better than $2.7M, but it is still terrible. Apparently the US Government really wants to know where expats keep their money.
The FBAR seems like a needless bureaucratic chore when you do it. That judgment seems justified, because once it's done, nothing happens.
However, the possible financial consequence of non-compliance, or even late compliance, is the strop hanging on the wall.
Due later than you think
I’ll discuss more about penalties and related FBAR issues in my upcoming posts.
Although the deadline for FBAR filing is April 15, you're allowed an automatic extension to October 15 (no request for an extension is needed).
If you’ve never filed an FBAR or a US tax return, filing one will enter you into the US tax system, which is a step with lifelong consequences.
If your citizenship status is in any way unclear, you should get legal advice from a lawyer with citizenship and taxation expertise before proceeding with a first-time filing.