Supreme Court’s Non-Willful FBAR Holding Allows Taxpayers to Sleep at Night
Supreme Court’s Non-Willful FBAR Holding Allows Taxpayers to Sleep at Night
During 2021, two different Appeals courts in the United States heard cases with similar fact patterns on a sensitive tax issue but held completely opposite decisions. Specifically, the Fifth and Ninth Circuits both ruled on cases dealing with taxpayers that had failed to file Reports of Foreign Bank and Financial Accounts (FBARs) and had been assessed “non-willful” penalties by the IRS. The Ninth Circuit held that the IRS penalties should be assessed on a “per-return” basis whereas the Fifth Circuit disagreed and held that penalties should be assessed on a “per-account” basis. The difference between these rulings from a dollar standpoint was enormous for the taxpayers involved. Given the split between the Circuits, the Supreme Court stepped in and resolved this “Circuit split” – Bittner v. United States.[1] The Supreme Court agreed with the Ninth Circuit and held that “non-willful” FBAR penalties are to be assessed on a “per-return” basis not on a “per-account” basis. This holding could mean a difference of millions of dollars in penalties for taxpayers that have late-filed FBAR’s.
Background
As part of the Bank Secrecy Act (BSA),[2] every U.S. person with a financial interest in, or signature or other authority over, one or more foreign financial accounts with an aggregate value of more than Ten Thousand Dollars ($10,000) must annually report the foreign financial account to the Treasury Department. Individuals file an FBAR to report the foreign financial account.[3] Generally, the FBAR is due on April 15th,[4] and it is filed with FinCEN, or the Financial Crimes Enforcement Network. Failure to file the FBAR can result in a penalty. The penalties can be steep, depending on whether the failure to file the FBAR was willful or non-willful.
In March 2021, the Ninth Circuit held that the penalty for a non-willful failure to file an FBAR was assessed on a per return basis in the United States v. Boyd.[5] Jane Boyd was an American citizen who held thirteen (13) accounts in the United Kingdom. Ms. Boyd filed FBARs related to these accounts late. The Ninth Circuit held that the BSA authorized only one non-willful penalty when an untimely but accurate FBAR is filed, no matter the number of accounts.
At the end of 2021, the Fifth Circuit disagreed with the Ninth Circuit and held that the non-willful penalty is to be assessed on a per account basis in United States v. Bittner.[6] Agreeing with Mr. Bittner, the district court found Mr. Bittner’s non-willful failure to file five (5) FBARs amounted to Ten Thousand Dollars ($10,000) per return for a total of Fifty Thousand Dollars ($50,000). The Fifth Circuit reversed the district court’s holding and Mr. Bittner was assessed Two Million Seventy-Two Thousand Dollars ($2,720,000) for his non-willful failure to report 272 foreign financial accounts over five (5) FBARs. Displeased with the Fifth Circuit’s holding, Mr. Bittner appealed to the Supreme Court. Given the split between the Ninth and Fifth Circuit, the Supreme Court granted Certiorari.
Facts
In the 1980s, Mr. Bittner moved to the United States, and he eventually became a United States citizen. In the 1990s, Mr. Bittner returned to his home country, Romania. Through diligence and hard work, Mr. Bittner became a very successful businessman generating over $70 million in income which was deposited in various foreign accounts. In fact, Mr. Bittner had at least fifty (50) various foreign accounts. In 2011, Mr. Bittner returned to the United States. Upon discovering the duty to file FBARs, he hired an accountant and filed delinquent FBARs for 1996 through 2010. Unfortunately, the late filed FBARs failed to address approximately twenty-five (25) of Mr. Bittner’s accounts. When notified by the government of the deficiency, Mr. Bittner retained a new accountant who helped him file corrected FBARs. The government asserted Mr. Bittner was liable for the penalties based on each of the dozens of accounts he failed to report each year rather than on the single form he failed to file each year. The government’s argument focused on the idea that the FBAR penalty language consistently described a violation as something that is “account specific”. As a result, he faced Two Million Seventy-Two Thousand Dollars ($2,720,000) in FBAR penalties for his five (5) years of non-willful violations rather than Fifty Thousand Dollars ($50,000).
Supreme Court’s Ruling
On February 28, 2023, the Supreme Court in a 5 to 4 decision reversed the Fifth Circuit and held that the BSA’s Ten Thousand Dollar ($10,000) maximum penalty for the non-willful failure to file a FBAR should be calculated per report and not per account. Justice Gorsuch authored the opinion for the court.[7]
The majority noted that Section 5314 of title 31 of the U.S. Code doesn’t reference accounts or even the number of foreign accounts held, but simply the legal duty to file FBARs that must include certain kinds of information. Section 5321 of title 31 of the U.S. Code establishes civil penalties for non-willful FBAR violations. It states that the Treasury may impose a civil penalty on a person who violates the FBAR filing requirements and such penalty shall not exceed Ten Thousand Dollars ($10,000). In the event of a willful violation of Section 5314, the maximum penalty imposed is the greater of One Hundred Thousand Dollars ($100,000) or fifty percent (50%) of the balance in the account at the time of the violation. Since Congress explicitly authorized per account penalties for certain willful violations, the majority found the fact that Congress did not with regard to non-willful violations supported the Ten Thousand Dollar ($10,000) penalty per report finding. Further, if the non-willful penalty was applied per-account as the government asserts, the Supreme Court noted that this may subject willful violators to lower penalties than non-willful violators.
The majority noted that in past guidance (proposed rules, fact sheets, instructions) issued by the government, the government represented that the non-willful penalty was one Ten Thousand Dollar ($10,000) penalty. The Court states, “here, the government has repeatedly issued guidance to the public at odds with the interpretation it now asks us to adopt. And surely that counts as one more reason yet to question whether its current position represents the best view of the law.” The government’s past guidance was viewed by the Supreme Court as further support for the per-form approach.
The Supreme Court’s holding provides penalty assessment clarity for taxpayers with non-willful FBAR violations.
[1] 21-1195.
[2] 31 USC § 5314.
[3] The FBAR requires individuals with less than twenty-five (25) foreign accounts to provide details about each account, but those who have twenty-five (25) or more accounts need only check a box and disclose the total number of foreign accounts.
[4] Unless April 15th falls on a weekend or holiday, which is the case this year, making the FBAR due on April 18th.
[5] 991 F. 3d 1077 (9th Cir 2021).
[6] 19 F. 4th 734 (CA5 2021).
[7] Justice Gorsuch delivered the opinion except as to Part II–C. Justice Jackson joined the opinion in full, with Chief Justice Roberts, and Justices Alito and Kavanaugh joining except for Part II-C. Justice Barrett filed a dissenting opinion with Justices Thomas, Sotomayor, and Kagan.