In 2021, two Circuit Court of Appeals, held diametric positions regarding penalties for taxpayers who non-willfully failed to file a Report of Bank and Financial Accounts (FBAR): The Ninth Circuit concluded that the penalty was $10,000 per untimely filed FBAR, while the Fifth Circuit concluded that the penalty was $10,000 per account on each untimely filed FBAR. On February 28, 2023, the Supreme Court resolved this conflict, ruling that the penalty is calculated on a per-form basis, rather than a per-account basis.
In a major win for a taxpayer, the United States Supreme Court released its opinion in Bittner v. United States this week, holding that a $10,000 penalty for failure to file a Report of Foreign Bank and Financial Accounts (FBAR) accrues on a per-report basis, not a per-account basis. The Court's holding reduced the taxpayer's penalty from $2.72 million to $50,000. This outcome greatly lessens the potential penalty taxpayers with foreign financial accounts might face if they have not properly reported those accounts.
In 2011, petitioner-taxpayer, Alexandru Bittner, became aware he had failed to timely file FBARs for his foreign financial accounts for the tax years 2007 through 2011. Ultimately, he filed five late FBARs reporting a total of 272 accounts.
Under the Bank Secrecy Act (BSA) and accompanying regulations, taxpayers with foreign bank accounts must file yearly FBARs. If a taxpayer non-willfully fails to file an FBAR, a penalty may be assessed which “shall not exceed $10,000.” BSA § 5321(a)(5)(B)(i). When the government reviewed Mr. Bittner's accounts, it applied a non-willful violation penalty of $10,000 per account, which, with 272 accounts untimely reported, resulted in a penalty of $2.72 million.
Mr. Bittner contested the government's penalty amount. He asserted that a penalty should be applied on a per-form basis, meaning this his penalty was $50,000 (i.e., one penalty for each of the five forms he failed to timely file). When Mr. Bittner's case reached the Fifth Circuit, the Court of Appeals sided with the government, holding that the penalty is determined on a per-account basis.
Prior to the Fifth Circuit's decision in Mr. Bittner's case, the Ninth Circuit, in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), held that the penalty should be applied on a per-form basis. Because the two circuit courts held opposing positions, the Supreme Court agreed to hear Mr. Bittner's case.
In a 5-4 decision, the majority held in favor of Mr. Bittner. In reaching its conclusion, the Court reasoned that, because the BSA provides that in certain circumstances penalties for willful failure to file an FBAR can accrue on a per-account basis, the lack of per-account language with regards to non-willful penalties indicated that Congress did not intend the penalties for non-willful violation to accrue on a per-account basis. The Court further noted that, in the past, the government had consistently stated non-willful failure to file FBAR penalties, “cannot exceed $10,000” and that at no time “did [it] announce its current theory.” Lastly, the Court outlined potential inconsistencies that could occur by applying penalties on a per-account basis. Notably, one inconsistency the Court noted is the potential that those who willfully fail to file an FBAR may have a lesser penalty than an individual who was non-willful. For example, the Court explained that if a taxpayer non-willfully failed to report 12 foreign financial accounts, under the government's theory the taxpayer would have a penalty of $120,000. However, if a taxpayer willfully failed to report one account, the maximum penalty under the BSA would be capped at $100,000. With these arguments in mind, the Court held that “[b]est read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.”
Overall, the win for Mr. Bittner is a win for taxpayers with foreign bank accounts, as they can feel more confident that inadvertent errors are unlikely to result in millions of dollars of penalties. If you have further questions regarding the information in this article, please contact the authors or your Crowell representative.
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