On 28 February 2023, the US Supreme Court held that the USD 10,000 penalty for nonwillful failure to file an FBAR applies per form, not per account. The Court’s 5-4 decision in Bittner v. United States, 598 US ___ (2023), clarifies the penalty framework for taxpayers who need to regularize their US reporting obligations.
Taxpayers who are considering regularizing their US tax obligations for non-willful violations through Section 7121 closing agreements should review their submissions and penalty position, except in cases where a closing agreement is already approved by the Secretary and final.
The Bank Secrecy Act (BSA) requires US persons with a financial interest in or signature authority over non-US financial accounts to file an annual report commonly referred to as the “FBAR” (the Report of Foreign Bank and Financial Accounts). US persons satisfy this reporting obligation by e-filing FinCEN Form 114 (prior to 2013, the FBAR was filed on a paper form called Form TD F 90-22.1). Failure to file the FBAR can trigger civil and criminal penalties. The BSA imposes a maximum USD 10,000 penalty for “any violation” of the reporting requirement. The issue in Bittner was whether this penalty applied on a per-account or per-form basis; in other words, what exactly constituted a “violation” for purposes of the non-willful penalty.
Mr. Bittner was a dual-citizen of Romania and the United States, who learned of his BSA reporting obligations in 2011 after returning to the United States from Romania. The government deemed his late-filed reports deficient, and Mr. Bittner filed amended FBARs reporting all non-US financial accounts in which he had a financial interest or over which he had signature authority for 2007 through 2011. Mr. Bittner reported a total of 272 accounts for the five years. The IRS asserted penalties of USD 2.72 million on a per account basis (USD 10,000 for each of the 272 accounts that Mr. Bittner failed to report from 2007-2011). The question presented to the Supreme Court was whether this was a correct interpretation of the law.
Section 5321 of the BSA authorizes the IRS to impose a civil penalty of up to USD 10,000 for “any violation” of section 5314. Section 5314 provides that a violation occurs when an individual fails to file a report consistent with the BSA’s requirements.
The IRS argued that each separate account that was not reported on the FBAR constituted a violation. Accordingly, the IRS calculated the penalty due at USD 2.72 million, on a per-account basis. Mr. Bittner argued that the violation for purposes of the non-willful FBAR penalty was the failure to file the annual report itself. Under his position, the maximum penalty was USD 50,000.
In United States v. Boyd, 991 F.3d 1077, 1079 (9th Cir. 2021), the IRS argued that the non-willful penalty applies on a per account basis. The Ninth Circuit Court of Appeals rejected the IRS position and sided with the taxpayer in holding that the BSA authorizes only one non-willful penalty per form no matter the number of accounts reported on that form. The Fifth Circuit Court of Appeals agreed with the IRS’s position in Bittner, however, and upheld the imposition of the USD 2.72 million penalty calculated on a per account basis. The Supreme Court took the Bittner case to resolve the circuit split.
The Court held that the USD 10,000 non-willful penalty applies per report, not per account. The Court explained that Section 5314 of the BSA does not refer to accounts or their number in specifying what is a violation. It further reasoned that a taxpayer’s legal duty is the duty to file a report and therefore the violation relates to the failure to file the report properly.
The Court compared a situation in which an individual willfully fails to report and may face a maximum penalty of USD 100,000. Furthermore, if there is a willful failure to report the existence of an account or any required identifying information, then the maximum penalty is the greater of USD 100,000 or 50% of the balance in the account at the time of the violation. The Court reasoned that if Congress had intended for the non-willful penalty to apply on a per account basis it would have done so expressly, as it had done in the case of a certain willful penalties.
The Court also referred to IRS fact sheets and form instructions that were inconsistent with the government’s litigating position because they indicated that a failure to file an FBAR may result in a penalty of up to USD 10,000. IRS Forms, Instructions, Publications, FAQs and Fact Sheets are not binding authority and should not be relied upon by taxpayers. However, Justice Gorsuch, writing for the majority, explained that while non-precedential informal guidance is not binding, a court can consider inconsistency between the government’s current views and past views when weighing the persuasiveness of the current view.
Bittner resolves a significant question regarding the calculation of non-willful penalties under the BSA. The decision generally does not impact penalties for willful compliance failures. The IRS regularly pursues both willful and non-willful FBAR penalties. The standard for willfulness continues to evolve through case law. The IRS and some courts have taken the position that recklessness can give rise to a willful violation even where the taxpayer does not have actual knowledge of an obligation to file. See e.g., Kimble v. United States, 991 F.3d 1238 (Fed Cir. 2021). Bittner also may help to resolve other pending court cases and cases in IRS Appeals and examinations that involve non-willful FBAR penalties. For each case the resolution will depend on the facts and circumstances as well as the status of the case, for example if there was a court settlement or a signed and agreed IRS Form 866 (Agreement as to Final Determination of Tax Liability) or Form 906 (Closing Agreement on Final Determination Covering Specific Matters).
Taxpayers and tax preparers must exercise due diligence to ensure that taxpayers satisfy applicable reporting obligations and limit exposure to IRS penalties. Taxpayers who have compliance gaps should take steps to regularize their tax reporting immediately. Excessive delays in regularizing tax matters can weaken a taxpayer’s position that failure to comply was non-willful.
