The U.S. Supreme Court limits penalties for non-willful FBAR violations, bringing years of dispute between taxpayers and the IRS to a close. However, questions remain as to how far this ruling may reach.
The recent U.S. Supreme Court ruling in Bittner v. United States significantly impacts U.S. taxpayers with “undisclosed” offshore bank and other financial accounts. Under the Bank Secrecy Act (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.1 This disclosure, a Report of Foreign Bank and Financial Accounts — commonly known as a FBAR — does not report an actual tax liability. Instead, the FBAR essentially reports the existence of, and interests in, such accounts. The FBAR is intended to assist the U.S. federal government in identifying U.S. persons who have money in offshore accounts that may be sourced from unreported taxable transactions or that earn income that is not reported for U.S. income tax purposes. Though the BSA is not contained within the Internal Revenue Code, the Internal Revenue Service (IRS) was delegated FBAR reporting enforcement authority in 2003.2 In other words, the IRS has been tasked with policing FBAR compliance.
Notwithstanding that offshore bank accounts described in the popular press often belong to wealthy U.S. individuals who have engaged in tax evasion — the likely overwhelming number of offshore accounts that are reported (or unreported) each year have their genesis in much less sensational fact patterns. For example:
- Persons who are first-generation — or even second-generation — U.S. citizens may inherit funds held in foreign banks from their non-U.S. parents,
- Persons who become U.S. residents — perhaps with no intention to permanently reside in the U.S. — may maintain foreign bank accounts in their “home” country,
- Persons who have dual citizenship status but live outside the U.S. and have minimal U.S. ties may have offshore bank accounts, and
- Persons involved in small or medium size business conducted overseas may hold foreign currencies in offshore bank accounts. Each of these situations has led to thousands of FBAR disputes with the IRS, and in many instances, the taxpayer has never heard of an “FBAR.”
Because FBAR reporting is a self-reporting system, significant fines and penalties exist for failing to timely and properly file the form. Specifically, civil penalties for failing to file an FBAR follow a two-tiered system, depending on whether the failure is determined to be “non-willful” or “willful.” For a non-willful violation, the statute indicates that a monetary penalty of $10,000 may be imposed on the taxpayer.3 For a willful violation, the monetary penalty increases to the greater of (a) $100,000 per violation, or (b) 50% of the unreported account balance.4
Experience has shown that foreign banks often divide deposited funds into multiple accounts or even sub-accounts. Thus, a taxpayer who may have $15,000 on deposit could in fact have those funds in three or four separate “accounts.” The IRS has historically taken the view that the non-willful civil penalty regime supports the IRS enforcing a separate $10,000 penalty for each offshore bank account that is not reported — as opposed to a single $10,000 penalty for failure to file the FBAR itself. Tax practitioners have argued strenuously that the statutory language permits the imposition of only one $10,000 non-willful penalty per unfiled FBAR and not $10,000 per offshore account that should have been disclosed on the FBAR.
The Bittner Decision
That is the specific issue addressed by the U.S. Supreme Court in Bittner v. United States.5 On examination, the IRS asserted a non-willful penalty against Mr. Bittner in the amount of $2.72 million, covering a period of five years (2007-2011) based on a “per account” penalty calculation. Bittner argued that the penalty should be $50,000. That is, $10,000 for each year the FBAR itself (i.e., the report) was not filed. After Bittner prevailed at the trial court level6, the Fifth Circuit Court of Appeals overturned the trial court’s determination, holding in favor of the government.7 In contrast, the Ninth Circuit Court of Appeals recently sided with a taxpayer asserting that the non-willful penalty is limited to one $10,000 penalty per unfiled FBAR (i.e., per report).8 Thus, the appellate courts issued conflicting decisions, and, as a result, the U.S. Supreme Court agreed to resolve the discrepancy.
As distilled in the majority opinion, the sole question in Bittner was “does the BSA’s $10,000 penalty for non-willful violations accrue on a per-report or a per-account basis?”9 Applying common rules of statutory construction, the court delivered a 5-4 decision in favor of Bittner, holding that the non-willful penalty applies on a per-FBAR basis (i.e., a per-report basis). For Bittner, that meant 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.
Implications of the Case
U.S. persons subject to FBAR reporting that “non-willfully” fail to meet their FBAR filing obligation can now rest assured that only a single $10,000 per-report penalty may be imposed. For taxpayers who 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-report basis, a refund opportunity may exist.
Unfortunately, this is not the end of disputes for taxpayers. At least anecdotally, it seems the IRS has increased the incidents of attempting to impose “willful” FBAR penalties, where, historically, the facts would have more likely supported the assessment of the non-willful penalty. That phenomenon is further exacerbated by courts accepting that mere reckless behavior may constitute a willful FBAR violation.10 Thus, query whether Bittner in any way influences how the willful penalty should be calculated.
The court’s decision in Bittner only directly addresses non-willful penalties. As noted by the majority, one of the bases for determining that the non-willful penalty should be imposed on a per-report basis is the absence of the word “account” anywhere in the applicable non-willful statute.11 By contrast, the willful penalty specifically makes reference to an “account” in part of its penalty formulation. This difference led Justice Gorsuch to note that in the context of the willful penalty, “the law does tailor penalties to accounts.”12 However, the Justice further states that “the statute does so only for a certain category of cases that involve willful violations, not for cases like ours that involve only non-willful violations.”13
But the above dicta distinguishing willful violation penalties may not be nearly as important as how the Supreme Court reached its actual determination. The non-willful violation penalty is set forth in 31 U.S.C. 5321(a)(5)(B)(i). The statute provides a $10,000 penalty per violation, which the court in Bittner has determined means a single $10,000 penalty, per report. The willful violation penalty is set forth in 31 U.S.C. 5321(a)(5)(C)(i), and contains two prongs. In the case of a willful violation, the statute provides that: “the maximum penalty [under the non-willful violation penalty statute (i.e., $10,000)] shall be increased to the greater of (i) $100,000, or (ii) 50 percent of … the balance in the account at the time of the violation.”
Under this formulation, the IRS has frequently asserted that a willful violation allows a penalty equal to the greater of $100,000 per account, or 50% of the account balance at the time of the violation. The logic has been that if the non-willful penalty is properly calculated as the number of accounts multiplied by $10,000, the willful penalty should also be the number of accounts multiplied by $100,000. Because, however, the first prong of 31 U.S.C. 5321(a)(5)(C)(i) simply modifies the non-willful penalty language by replacing “$10,000” with “$100,000,” it is hard to argue, in light of the court’s reasoning in Bittner, that the first prong must be calculated on a per-account basis and not a per-report basis. If that logic applies to the willful violation penalty, the maximum penalty would be the greater of $100,000 per report or 50% of the account balance at the time of the violation.
That may well be a very natural extension of the Bittner case in the context of taxpayers facing willful FBAR penalties. If, for example, a U.S. person held 10 accounts with an aggregate account balance of $80,000, the IRS likely would assert, at least based on historical practice, a willful penalty equal to the greater of $1 million (10 accounts x $100,000) or $40,000 (50% of the aggregate balance). But based on the underpinnings of Bittner, there is a compelling argument that the first prong should be limited to $100,000 — therefore limiting the maximum potential penalty in this example to $100,000.
The Supreme Court did make clear that the willful penalty statute includes a reference to “account” and therefore the willful penalty and non-willful penalty differ in that regard. Nevertheless, the reference to “account” has nothing to do with the $100,000 prong of the willful penalty statute. Consequently, it is reasonable to treat Bittner as indicia of how the Supreme Court would rule on the question of, and perhaps, how the lower courts should interpret, the magnitude of the willful violation penalty that can be imposed going forward.
131 U.S.C. 5314.
2See Memorandum of Agreement Between FinCEN and the IRS (Apr. 10, 2003).
331 U.S.C. 5321(a)(5)(B).
431 U.S.C. 5321(a)(5)(C)(i) and (D)(ii).
5Bittner v. United States, No. 21-1195 (U.S. Feb. 28, 2023).
6United States v. Bittner, 469 F. Supp. 3d 709 (ED Tex. 2020).
7United States v. Bittner, 19 F.4th 734 (5th Cir. 2021).
8United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021).
9Bittner v. United States, No. 21-1195, slip op. at 4 (U.S. Feb. 28, 2023).
10See e.g., United States v. McBride, 908 F.Supp.2d 1186, 1204 (D. Utah 2012); United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311, at *4 (E.D. Va. Sept. 1, 2010), rev’d on other grounds, Williams, 489 Fed.Appx. 655.
11Bittner v. United States, No. 21-1195, slip op. at 5.
12Id. at 5 (emphasis in original).
13Id. at 7 (emphasis added).