Reporting foreign accounts is more important than ever

Supreme Court ruling creates good AND bad news. The IRS is aggressively pursuing foreign reporting compliance, including the levying of fines and penalties even in situations where a taxpayer makes an inadvertent oversight.

In a recent case, the IRS assessed a $2.72 million penalty to Alexandru Bittner, a Romanian-American immigrant and dual citizen who lived overseas, had no U.S. tax obligation, but was unaware that even if not living in the U.S., still needed to report all foreign accounts annually on a U.S. tax return. But a recent U.S. Supreme Court ruling knocked this fine down to $50,000. Here’s what happened.

Background: Bittner v. United States, 21-1195 (2023)

Bittner was a dual citizen living abroad, and was unaware of his U.S. reporting obligation because he had no U.S. income. When he realized he needed to file a report of foreign bank and financial accounts (FBAR) for tax years 2007 through 2011, Bittner reported only his largest foreign bank account to the IRS as part of his annual tax return filing. After hiring a new accountant in 2011, Bittner learned he should have reported ALL his foreign accounts to the IRS. He subsequently reported all the omitted accounts, 272 in total.

The law imposes a $10,000 fine for non-willful delinquency, which Bittner interpreted as $10,000 per report. Since there were 5 tax returns over 5 years with incomplete foreign account information, Bittner expected his fine to be $50,000. The IRS, though, fined Bittner $10,000 PER ACCOUNT. The total was a staggering $2.72 million for an accidental oversight that was immediately fixed.

The U.S. Supreme Court ruled in favor of Bittner, stating that the law’s intent was to assess a $10,000 fine per missing report. Historically the IRS had regulatory procedures put in place that reduces the $10,000 fine to $500 for non-willful violations. But now a July 6, 2023, memo instructs all field agents to delete the lower $500 fine and instead levy the $10,000 for all non-willful violations. The implication is that the IRS lost the case but sees the Supreme Court ruling as an opportunity to effectively penalize everyone to a higher degree for honest omissions.

The lesson for everyone. File required reporting if you have foreign accounts. This is especially true for dual citizens who no longer live in the United States. It appears that the IRS will continue its aggressive enforcement not just for FBAR reporting, but for all foreign-related assets and income. And despite this Supreme Court victory, most previous lower court rulings in FBAR-related matters have sided with the IRS.

So if you have any assets in a foreign country or have foreign bank accounts or other institutions, be sure you are reporting these assets correctly and call immediately should you have any questions or concerns.

One of my primary objectives is to help you achieve your financial goals through a holistic approach that is tax-efficient in my wealth management and tax resolution practice. For more information, visit www.fredtfoxiii.com.

Fred T. Fox III is a Lawton native who owns his own business.