United States

Individual petitions Supreme Court to challenge FBAR penalty

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Penalties for failing to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (formerly TD Form 90-22.1, and more commonly known as an FBAR) are among the most severe tax penalties. Letantia Bussell found this out the hard way, when the IRS imposed a penalty of $1 million for willful failure to report a swiss bank account on an FBAR. After losing in both federal district court and the Ninth circuit court of appeals, Ms. Bussell now seeks to have the U.S. Supreme Court overturn this penalty, primarily on the grounds that it is an unconstitutionally excessive fine (see the petition here).

When willfulness is not present, the penalty for failing to report a reportable foreign bank or financial account is $10,000 per account. However, upon a willful failure to file, the penalty skyrockets to the greater of $100,000 or 50 percent of the maximum value in the account during the year. Since each year is a separate violation, multiple years of willful failures to file FBARs could result in penalties that exceed the full amounts held in the account.

In her petition for Supreme Court review of the lower court determinations, Ms. Bussell asserts that this penalty is grossly disproportionate to the harm her failure caused to the public, and therefore unconstitutional under the 8th Amendment, particularly since the government never claimed that the failure to file the FBAR was related to an underpayment of income tax. Ms. Bussell also highlights that the funds in question were already discovered as part of a previous criminal tax case against her, for which she has already paid significant fines and forfeitures, and served time in prison.

In addition to her claim that the penalty is unconstitutional, Ms. Bussell also asserted that information used in assessing the penalty against her was improperly obtained, based on the terms of the U.S.-Switzerland Income Tax Treaty. Specifically, she claims that since no tax underpayment was alleged, that the provisions in the treaty allowing for the disclosure of account information to the U.S. government did not apply.

Of course, most certiorari petitions to the Supreme Court are denied, and as such, the questions raised in Ms. Bussell’s petition may remain unanswered. Nevertheless, her case should serve as a stark reminder of the consequences of failing to comply with FBAR reporting requirements, particularly  where the IRS aggressively pursues willful failure to file penalties. See related FBAR tax blog for more information.

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