Supreme Court Issues Taxpayer-Favorable Decision Regarding FBAR Penalties
On February 28, 2023, the U.S. Supreme Court released its decision in Bittner v. United States, which was taxpayer friendly. Specifically, the court sided with Bittner, ruling that the penalty for nonwillful violations associated with a missed or late-filed Report of Foreign Bank and Financial Accounts (FBAR) accrues on a per-report, and not a per-account, basis. As noted in a previous FORsights™ article released in July 2022, the court agreed to hear Bittner to answer a question among courts over how to calculate the penalty for nonwillful violations of FBAR filing rules.
Given the increased issuance of penalties for FBAR filing violations since 2008, the result from Bittner will likely provide relief to a number of taxpayers that commit nonwillful violations of the FBAR filing rules, such as filing late or forgetting to file.
The Bank Secrecy Act of 1970 (BSA) created 31 U.S.C. Section 5314, which establishes a U.S. taxpayer’s legal duties under the BSA, and 31 U.S.C. §5321, which outlines the penalties that follow for failing to discharge those duties. Section 5314 imposes a duty on certain U.S. taxpayers to keep records and file reports when they maintain a relationship with a foreign financial agency. This section also empowers the Secretary of the Treasury (Secretary) to prescribe the way and the extent to which reports must be filed, such as by establishing the FBAR filing rules. Section 5321 authorizes the Secretary to impose a civil penalty of up to $10,000 for any nonwillful violation of Section 5314, including the FBAR filing rules.
According to Bittner, Alexandru Bittner immigrated to the U.S. from Romania in 1982. He later became a naturalized citizen before returning to Romania in 1990, where he launched a successful business career. Like many dual citizens, he did not appreciate that the FBAR filing rules required him to keep the government apprised of his foreign bank accounts even while living abroad. Shortly after returning to the U.S. in 2011, Bittner learned of his reporting duty, engaged an accountant, and submitted FBARs for 2007–2011 covering 272 accounts.
The IRS initially fined Bittner $2.72 million, or a $10,000 penalty per account. A U.S. district court in Texas ruled that the appropriate penalty was $50,000, or a $10,000 penalty per report. However, the U.S. Court of Appeals for the Fifth Circuit reversed the district court’s decision and reinstated the $2.72 million penalty. In February 2022, Bittner appealed this penalty interpretation for nonwillful FBAR violations and in June 2022, the U.S. Supreme Court agreed to hear the case.
Supreme Court Decision
On February 28, 2023, the U.S. Supreme Court sided with Bittner and held that the penalties for nonwillful FBAR violations accrue on a per-report basis rather than a per-account basis. As such, the appropriate penalty for Mr. Bittner was $50,000 instead of $2.72 million for his nonwillful FBAR violations.
Two additional components of the Bittner case are worth noting. First, although the case concerns a penalty for nonwillful violations, the court does not clarify what legal standard determines whether a taxpayer’s violation of the FBAR filing rules is willful versus nonwillful. Second, the Court does clarify which type of willful violation triggers a penalty on a per-account basis rather than a per-report basis, which is summarized below.
|Type of Willful Violation||Maximum Penalty||Basis|
Willful failure to report either the existence of an account, or any identifying information required to be provided with respect to that account.
31 U.S.C. §5321(a)(5)(D)(ii).
|Either $100,000 or 50% of the balance in the account at the time of the violation (whichever is greater).||Per-Account|
Any other willful failure.
31 U.S.C. §5321(a)(5)(C)(i)(I).
The result of this case is expected to be seen positively by taxpayers, specifically a number of taxpayers that have seen penalties levied on a per-account basis. FORVIS is ready to assist taxpayers that have received such penalties or answer questions regarding FBAR filings.
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