Supreme Court Rules Non-Willful FBAR Penalties are Calculated on a Per Report Basis
On February 28, 2023, in a significant tax case, Bittner v. US, the U.S. Supreme Court held that a U.S. person who fails to file his or her FBAR on a non-willful basis only is subject to a single penalty on the failure to file the FBAR, and not subject to multiple penalties based on the number of unreported foreign accounts.
Under the Bank Secrecy Act, a U.S. person who has a financial interest in one or more foreign financial accounts with an aggregate value greater than $10,000 is required to report the foreign accounts on Form FinCEN 114, commonly known as a “Foreign Bank Account Report” or “FBAR.” A U.S. person who fails to file an FBAR in a non-willful manner is subject to a civil penalty of $10,000 (adjusted for inflation, and adjusted, for example, to $14,489 for 2022). However, it had been unclear whether the penalty for a non-willful failure to file was based on the taxpayer’s failure to the file the FBAR report itself (regardless of the number of accounts), a position held by the Ninth Circuit in US v. Boyd, 991 F.3d 1077 (9th Cir. 2021), or whether the penalty should be assessed on each account that was unreported, a position taken by the Fifth Circuit in US v. Bittner, 19 F.4th 734 (5th Cir. 2021). Due to these conflicting holdings, the U.S. Supreme Court granted certiorari in the appeal of Bittner.
In Bittner, Alexandru Bittner failed to report 272 foreign accounts during the 2007-2011 tax years. The IRS assessed a $10,000 penalty per account, which resulted in a $2.72 million penalty. Bittner argued that the $10,000 penalty should be applied to each year he failed to file an FBAR and therefore the maximum penalty should be $50,000 (ie, one penalty for each tax year).
The Supreme Court’s opinion, authored by Justice Neil Gorsuch (following a 5-4 vote), agreed with Bittner’s position that he was only subject to a penalty for each FBAR he had failed to file, and not for each account he failed to report. The rationale for the ruling was that the plain language of IRC §5321 (which addresses FBAR civil penalties) addresses the duty to file reports, not of individual accounts or their numbers.
As a result of the ruling, those who have failed to timely file an FBAR in a non-willful manner are relieved from the punitive fines that were being assessed by the IRS. If you have made payment for non-willful FBAR penalties on a per-account basis, it is important to file a suit for refund within the applicable statute of limitations.
It should be noted, however, that the Supreme Court’s Bittner decision is only applicable to non-willful penalties. If the taxpayer is found to have failed to file an FBAR willfully, the penalties are assessed on the greater of 50% of the account balance or $100,000 (adjusted for inflation).
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.