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  • Brittany Besler

Taxpayer Friendly Supreme Court Ruling RE FBAR Penalties












On occasion the Supreme Court can be surprising and this ruling is no exception. In a 5-4 decision, last week the Supreme Court ruled that the penalty for failure to file an FBAR is on a per-year basis and NOT on a per-account basis.


Bottom Line

The IRS claimed that the FBAR penalties should be applied on a per-account basis and assessed a

penalty of $2.72 million dollars. The taxpayer disagreed, and while he admitted to his mistake, he felt

the penalty should apply on a by-year basis which would equate to $50,000. Today the Supreme Court

weighed in and agreed the penalty should be $50,000.


Background

Alexander Bittner, a Romania- American dual citizen failed to file the international informational

form known as an FBAR or FinCEN. This form is required when a U.S. person (including a citizen,

resident, corporation, partnership, limited liability company, or a trust and estate) holds a financial

interest in or signature or other authority over at least one financial account outside of the United

States and the aggregate value of such accounts exceed $10,000 AT ANY TIME DURING THE CALENDAR YEAR.


Bittner moved to the United States in the 1980s eventually becoming a U.S. Citizen. In 1990

Bittner return to Romania and became fairly successful, generating over $70 million in income through businesses and investments. From 1996-2011 Bittner lived in Romania. Despite being a U.S. citizen he did not always file a U.S. tax return, but did file on occasion. Despite having an aggregate balance in all of his foreign accounts that exceeded $10,000 he never filed and FBAR.


Bittner returned to the U.S. in 2011. According to the case he claims, this was when he learned of his duty to report the accounts. He then filed 1996-2010 FBARs and a timely 2011 FBAR. The IRS claimed those forms were “inaccurate and incomplete”. Bittner refiled 2007-2011.


FBARS

Per the Bank Secrecy Act (31 USC §5314), every year every US person must report certain

foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, to the Treasury Department and keep certain records of those accounts, if the aggregate valley of those accounts are greater than $10,000. You report the accounts by filing a Report of Foreign Bank and Financial Accounts (FBAR) on Financial Crimes Enforcement Network (FinCEN) Form 114. Failure to report these accounts can result in a penalty depending on if the failure was willful or non-willful. The penalties are typically $10,000 if the failure is non-willful.


The FBAR is an annual report typically due on April 15 th (unless that deadline falls on a weekend

or holiday, which it does for 2023, moving that deadline to April 18 th ). If you cannot file by the deadline you can get an automatic extension to October 15 th . You file this return with the FinCEN and NOT with the IRS.


Penalty Assessment

In June 2017, the IRS assessed penalties for failure to report the accounts for 2007-2011. The

penalties for 1996-2006 were not assessed due to the statute of limitations having expired. The number of accounts for 2007-2011 was 272 separate financial accounts. As a result of this amount of accounts the IRS initially assessed $2,720,000 in penalties. The IRS presented an argument focusing on the language of Section 5321 describing a violation as an “account specific” item.


Bittner disagreed and decided to pursue legal action to dispute the claim. Bittner’s argument

was that the penalty should apply per year resulting in a penalty of only $50,000. The district court agreed and reduced the assessment to the $50,000. However, the U.S. Court of Appeals for the Fifth Circuit disagreed holding that the penalty should be assessed on a per account basis. That decision was at odds with a 2021 Ninth Circuit decision of U.S. v. Boyd. As a result of the circuit split the Supreme Court agreed to hear the case.


Supreme Court Decision

On February 28, 2023, the Supreme Court held that the Bank Secrecy Act's $10,000 maximum

penalty for the nonwillful failure to file a complaint report should be calculated per report, not per

account. The opinion states "…. the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per- account basis." With that, the judgment of the Fifth Circuit was reversed, and the case was remanded for further proceedings consistent with the opinion.


Interestingly it was clearly not an easy decision to reach for the countries highest court,

delivering a 5-4 vote. Justice Gorsuch delivered the opinion except as to Part II–C. Justice Jackson joined the opinion in full, with Chief Justice Roberts, and Justices Alito and Kavanaugh joining except for Part II- C. Justice Barrett filed a dissenting opinion with Justices Thomas, Sotomayor, and Kagan. Read the full opinion here. Note that Part II- C of the opinion surrounds a discussion of the courts rule of lenity, and the implications of not applying that rule to this case.

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