Client Alert: SCOTUS Holds in Favor of Taxpayer on Contested Issue of Foreign Bank Account (FBAR) Non-Willful Penalties
Date: March 3, 2023
FBAR Requirements: Pursuant to the U.S. Bank Secrecy Act (“BSA”) (31 U.S.C. § 5314 et seq.),U.S. persons, individuals and companies, are required on a calendar basis to report each year to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) all financial interests in and signature authority over foreign financial accounts on FinCen Form 114 Foreign Bank Account Reports (“FBARs”). The FBAR filing threshold is triggered upon having account assets exceeding $10,000 USD in the aggregate at any time during the calendar year. The deadline for filing FBARs is April 15 with an automatic extension to October 15 each year.
FBAR Penalties for Non-Compliance: Failure to comply with FBAR requirements can result in penalties which may be severe. It is important to note that the U.S. Internal Revenue Service (“IRS”) administers the imposition of FBAR penalties for a person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation (for non-willful conduct.) If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. Specifically, as discussed in further detail below, a person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. See 31 U.S.C. section 5321(a)(5). Willful violations may also be subject to criminal penalties under 31 U.S.C. section 5322(a), 31 U.S.C. section 5322(b), or 18 U.S.C. section 1001.
The Bittner Case, its Holding and Outcome
Summary of Bittner Holding: On February 28, 2023, the U.S. Supreme Court (“SCOTUS”) in a 5-4 decision held in Bittner v. United States that the maximum penalty under the BSA for non-willful failure to report financial interests and/or signature authority in foreign financial accounts applies on a per-report basis, rather than a per-account basis. This is a break-through because, as discussed above, under the BSA the IRS is permitted to impose a penalty on any person “who violates or causes any violation of” the statute. As hinted to above, non-willful civil penalties under the statute are set at $10,000, while willful violations carry a $100,000 (or $144,886 penalty range as adjusted for inflation) or up to half the balance in the account.
Bittner’s Facts: In Bittner, the taxpayer, Alexandru Bittner, a dual Romanian-US citizen, had dozens of foreign accounts (272 to be exact), and was living overseas. He was unaware of the BSA’s filing requirements and failed to file FBARs for five consecutive annual reports. Mr. Bittner eventually filed new and corrected FBARs once he became aware of his BSA filing obligations. However, when it came to imposing penalties, the IRS took the view that the $10,000 non-willful violation penalty applied to each of his 272 accounts.
Procedural Ballot and the Lower Appellate Courts: Leading up to SCOTUS, the U.S. Court of Appeals for the Fifth Circuit, in Bittner on the non-willful penalty issue turned the tables on the taxpayer by agreeing with the IRS that the BSA penalty was properly imposed on an account-per-account basis, and this was contrary to a previous stance on this issue ruling that the penalty was on an FBAR or form basis by the U.S. Court of Appeals for the Ninth Circuit.
SCOTUS Holding and the End Result: SCOTUS overturns the Fifth Circuit Bittner ruling, holding, as discussed above, that a non-willful violation of the BSA FBAR requirements equates to failing to file annual FBARs, rather than a failure to file an FBAR for each individual account that a taxpayer may have an interest or signature authority in. Mr. Bittner under this SCOTUS decision is therefore only subject to a $50,000 penalty, or $10,000 for each year he did not file or complete an FBAR, rather than the $2.72 million penalty initially imposed by the IRS (i.e., $10,000 for each of his 272 accounts not initially disclosed).
The logic behind Bittner is important. The majority opinion in Bittner first looked to the language and its construction of the BSA provisions at issue. In doing so, the majority found that because Congress used the “per-account” definition in other parts of the BSA, but not when discussing the penalty for non-willful violations, this meant Congress did not intend for non-willful violations to be penalized on a per account basis. In this vein, the Court found other guidance issued by the federal government through warnings, fact sheets, and instructions where failure to file a report was a single violation for a non-willful violator with a penalty of only $10,000. The Court then noted that based on the drafting of the BSA provisions, Congress was far more concerned with getting the necessary information from the FBARs to assist the federal government with certain investigations, not with penalizing non-willful mistakes. Finally, the Court goes on to explain that the per-account interpretation of the BSA provisions could create anomalies (or inequities) where willful violators would be subject to smaller penalties than non-willful violators. Ambiguity in a statute related to penalties is construed against the government under the doctrine of lenity.
Interestingly, the dissent, authored by Justice Coney Barrett, who was joined by Justices Thomas, Sotomayor and Kagan, argued that the statutory language of the BSA implies that FBAR violations should be penalized on a per-account basis. Specifically, the dissent argues that BSA § 5314 indicates that the reporting requirement should attach to each individual account since the statute requires a U.S. person to file an FBAR when there is a relation with a foreign financial agency, or an account. In contrast to the majority, the dissent further argues that the “per-account” language in other provisions within this BSA section should also apply to non-willful penalties. Finally, the dissent argues that the BSA differentiates between the form used to report the foreign accounts and the actual FBARs themselves, stating that this shows that the penalty should apply to each report (or account disclosure), not the annual FBAR form.
Several taxpayer friendly Amicus Briefs were submitted that aided in the decision, arguing that there was no indication that Congress wanted to maximize penalties for every non-willful mistake, but rather, the point of these penalties was to make sure FBARs were filed to supply the government with information for any relevant investigations. Additionally, these briefs argued that when the government commenced enforcing the BSA FBAR penalties, many tax professionals were not aware of the FBAR filing obligations or the potential magnitude of penalties that could be imposed on a taxpayer for non-compliance with the FBAR BSA obligations. Thus, the briefs argued it would be unreasonable to think ordinary taxpayers would know about the FBAR requirements and thus it violated the Due Process clause to subject them to such large penalties.
Why This is Important and What You Should Look For:
- This SCOTUS taxpayer friendly decision provides a clear guideline on how the BSA’s FBAR requirements and penalty provisions should be interpreted. Penalties for non-willful FBAR violations should be imposed on a per-report basis rather than a per-account basis.
- The SCOTUS decision provides clarity as to imposition of non-willful BSA civil penalties.
- Taxpayers and their tax advisors and preparers need to still take caution. There are other cases that are being reviewed that involve willful and criminal behavior in this area. Thus, when in doubt, IT IS BETTER TO OVER DISCLOSE ON THE FBAR.
- Additionally, because Bittner only addresses civil non-willful penalties, this DOES NOT MEAN or should be understood to mean that alleged willful BSA violations may not carry penalties that are imposed on a per-account basis; quite the contrary (this is a very real risk).
- Furthermore, this decision may incentivize the IRS to see to impose more willful penalties. The IRS has often sought to impose willful penalties in cases where the taxpayer did not have specific intent to not report, but was “willfully blind.” The taxpayer in Bedrosian v. United States (3rd Circuit) has petitioned for certiorari and it will be interesting to see whether SCOTUS takes up this companion case to clarify the standard for imposing willful penalties.
- In any event, it is important that taxpayers with any foreign assets or income comply with the complex and myriad information reporting requirements of the US tax system.
For more information on BSA, as well as corporate and individual related tax matters, you may contact any of the following members of the Whiteford Tax & Corporate practice:
Mario A. de Castro
Elizabeth J. Atkinson
MaryEllen Willman
Herman B. Rosenthal
Eric A. Vendt
Jordan M. Halle
Jessica M. Gorsky
Claire Allenbach
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.