Supreme Court to Review
Non-Willful FBAR Penalty Case

Supreme Court to Review Non-Willful FBAR Penalty Case:

On June 21, 2022, The U.S. Supreme Court agreed to resolve a dispute concerning the maximum applicable penalty for non-willful violations of the foreign bank account reporting statute. The Ninth and Fifth circuit courts are split on whether a $10,000 non-willful penalty applies “per-form” or “per account.”

Background

Under the Bank Secrecy Act, U.S. persons are required to report their ownership interests in certain foreign financial accounts on an annually filed Foreign Bank Account Report (“FBAR”). Willful failures to file an FBAR are subject to significant civil monetary penalties up to the greater of $100,000 or 50% of the highest balance in any unreported account.

Where an individual is found to have acted non-willfully, however, penalties are generally much less. The statute provides that in the case of non-willful violations the penalty “shall not exceed $10,000.”

Although the language in the statute may seem straight-forward, courts are divided on what constitutes a “violation” for purposes of the penalty. The government’s recent efforts to exceed the $10,000 penalty threshold are based on an argument that the non-willful penalty is calculated “per account” so that multiple $10,000 penalties may apply in a single year. That is, each unreported account constitutes a separate “violation” of the reporting requirement.

The Circuit Split

The Ninth Circuit, as well as several district courts, have held that the $10,000 penalty applies per form regardless of the number of accounts that should have been reported. In U.S. v. Boyd, 991 F.3d 177 (9^th Cir. 2021), the Appellate Court determined that “the statute, read with the regulations, authorizes a single non-willful penalty for the failure to file a timely FBAR.”

In U.S. v. Bittner, however, the Fifth Circuit, agreed with the government that multiple $10,000 penalties may be applied in a single year, in direct conflict with the Ninth Circuit’s conclusion in Boyd.

Alexandru Bittner was a dual U.S.-Romanian citizen who had maintained various bank accounts in Romania, Switzerland and Liechtenstein. While living in Romania, he was unaware of his U.S. filing obligations and had failed to file FBARs. After returning to the U.S., he hired a U.S. accountant who filed FBARs, listing only his largest account and omitting Mr. Bittner’s interest in dozens of other reportable accounts. Bittner hired a new CPA in 2013 who filed corrected FBARs listing all foreign bank account information and balances.

The IRS determined that Mr. Bittner’s FBAR non-compliance was non-willful but assessed $2.7 million in penalties based on each account that he failed to report over five years, ranging from 61 accounts in 2007 to 54 in 2011.

Bittner argued that any incorrect or unfiled FBAR constituted a single non-willful violation, not multiple violations based on the number of accounts held in any particular year, and that the maximum penalty allowed by the statute was $10,000 for each year of non-compliance.

Although the district court agreed with Bittner, the Fifth Circuit ultimately sided with the government, creating a circuit split on the issue and uncertainty for taxpayers. The Supreme Court agreed to hear Mr. Bittner’s case in the fall.

Resolution of the maximum penalty amount is potentially significant for individuals with unresolved foreign bank account issues.

McGuire Sponsel’s Global Business Services team can assist with any situations where FBAR reports haven’t been filed, including strategies, compliance assistance and other planning. If you have any questions about our team or any global business issue, do not hesitate to reach out.