U.S. Supreme Court rules against the IRS on critical FBAR issue
The Bank Secrecy Act (BSA) clause that has divided two federal courts of appeal received fresh guidance from the U.S. Supreme Court. The 5-4 decision in Bittner v. U.S. is good news for Americans who “non-willfully” fail to report specific foreign bank and financial accounts on what is commonly known as an FBAR. FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.
FBAR reporting requirement
The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. “U.S. person” means citizen, resident, corporation, partnership, limited liability company, trust, or estate.
According to applicable legislation, those with less than 25 accounts in a given year must report information about each account. Filers with 25 or more accounts should supply the number of accounts and a few other basic details. Specifying each account or offering additional information is unnecessary. FBARs are typically due on April 15. However, you may receive an automatic extension to October 15 if you miss the deadline.
A willful violation of the requirement is punishable by a civil fine of up to $100,000 or 50% of the account in question under the BSA. A clause establishes a $10,000 maximum fine for a non-willful violation of the filing obligation (with an exception for reasonable cause). Penal sanctions may also be applied.
FBAR violations at issue
Alexandru Bittner, a dual citizen of Romania and the United States, filed the matter before the Supreme Court. He claimed in his testimony that after returning to the U.S. in 2011, he became aware of the reporting requirements. Bittner then delivered the necessary yearly reports for the years 2007 through 2011.
The IRS deemed his FBARs insufficient because they omitted several crucial accounts. After that, Bittner sent updated reports with data for each of his accounts. The IRS decided the penalty to be $2.72 million — $10,000 for each of the 272 accounts reported in five FBARs — even though it did not question the accuracy of the new filings or establish that his prior omissions were deliberate.
Bittner sued to challenge the fine, claiming that it only applied to individual reports, not accounts. As a result, he should have paid only $50,000 in penalties for his non-willful infractions. The Fifth Circuit Court of Appeals overturned the trial court’s decision and sided with the Internal Revenue Service. On the other hand, the Ninth Circuit determined in U.S. v. Boyd that the BSA only permitted “one non-willful penalty when an untimely, but accurate, FBAR is filed, regardless of the number of accounts” in 2021. The Supreme Court would then have to decide the case.
High Court’s ruling against the IRS
Bittner interpreted the BSA’s penalty clause for FBAR infractions, and the Supreme Court agreed. Several sources corroborated this conclusion.
For instance, the Court pointed out that certain willful infractions were subject to per-account sanctions, which Congress had expressly approved. The Court typically interprets the discrepancy in language as indicating a change in meaning when Congress uses specific vocabulary in one section of a statute but omits that language from another. In other words, if such was Congress’ intention, it was clear that it knew how to link fines to account-level data.
The Court also emphasized several IRS fact sheets and instructions for older FBAR versions. According to the Court, these allusions gave the impression to the general public that failing to file a report constitutes a single infraction subjecting a non-willful violator to a single $10,000 fine. The Supreme Court emphasized that this advice was informative, not “controlling” or conclusive.
Implications for taxpayers
The decision of the Supreme Court dramatically lowers taxpayers’ possible financial exposure for negligence-related FBAR reporting requirements violations. The reports frequently include information on many accounts, so the IRS’s interpretation might have resulted in fines of up to $10,000 for a single infraction.
The Court further noted that, regardless of how minor the errors or the value of the accounts were, a person with merely three accounts who made non-willful mistakes while supplying account-specific facts might be subject to a $30,000 fine. Yet, a person with 300 bank accounts would be at significantly lower risk because of the requirement to provide the correct number of accounts and no other information. Similarly, failing to declare a single account with a balance of $10 million would result in a $10,000 fine. Meanwhile, failing to report a dozen accounts with a combined value of $10,000 would result in a $120,000 fine.
It’s crucial to remember that the Supreme Court’s decision only applies to unintentional failures to file. Penalties for known, purposeful, reckless infractions or the result of willful blindness are not subject to the per-report cap. Instead, they apply on a per-account basis with pricey repercussions.
Taxpayers who have unintentionally breached the BSA’s filing requirement should find relief due to the Supreme Court’s decision in Bittner. However, it did not eliminate any ambiguity regarding FBAR fines. For instance, the Court did not consider whether fines for violations of the BSA’s recordkeeping requirements are decided on a per-account basis or based on the mens rea (level of intent) on the taxpayer’s part that the IRS must prove to levy a non-willful penalty. Contact our RRBB accountants and advisors to help you avoid these questions by ensuring you comply with your FBAR obligations.
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