The recent U.S. Supreme Court ruling in Bittner v. United States (No. 21-1195 (U.S. Feb. 28, 2023)) significantly impacts U.S. taxpayers with “undisclosed” offshore bank and other financial accounts. Under the Bank Secrecy Act (the “BSA”), U.S. persons that own interests in (or have certain authority with respect to) foreign bank or financial accounts with a balance in excess of $10,000 at any time during the year generally must disclose the existence and balance of such accounts to the U.S. government. This disclosure, a Report of Foreign Bank and Financial Accounts (commonly known as an “FBAR”), does not report an actual tax liability, but serves as an information return.
The IRS historically has taken the view that a separate non-willful civil penalty of $10,000 may be assessed for each offshore bank account that is not reported (as opposed to a single $10,000 penalty for failure to file the FBAR form itself). Tax practitioners have argued strenuously that the statutory language permits the imposition of only one $10,000 nonwillful penalty per unfiled FBAR, and not $10,000 per offshore account that should have been disclosed thereon.
In the case of Mr. Bittner, the IRS asserted a non-willful penalty in the amount of $2.72 million, covering a period of five years (2007-2011) based on a “per account” calculation. Mr. Bittner argued that the penalty should be $50,000 ($10,000 for each year the FBAR form was not filed). After Mr. Bittner prevailed at the district court level, the Fifth Circuit Court of Appeals overturned the decision in favor of the government. This result conflicted with that reached in other circuits and the U.S. Supreme Court agreed to resolve the discrepancy.
The Supreme Court delivered a 5-4 decision in favor of Mr. Bittner, resolving that the non-willful penalty applies on a per-FBAR basis. For Mr. Bittner, that means the proper penalty is $50,000, not $2.7 million. This result is not only supported by the statute, as the Court found, but sensible—after all, it is a “non-willful” penalty, and $2.7 million seems extraordinary in the absence of intent.
Bottom Line: U.S. persons subject to FBAR reporting that “non-willfully” fail to meet their obligation can now rest assured that only a $10,000 per-report penalty may be imposed. For taxpayers that have recently paid a non-willful penalty determined on a per-account basis in excess of the penalty that could have been imposed on a pre-FBAR basis, a refund opportunity may exist. See full article here.
“Justice will not be served until those who are unaffected are as outraged as those who are.” – Benjamin Franklin