A recent decision by the Supreme Court has greatly reduced the penalty exposure for US taxpayers holding foreign bank accounts. In Bittner v. US, the High Court held that the $10,000 maximum penalty for the non-willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) should be imposed on a per-report, not a per-account, basis. These reports are used by the government to identify unreported income that may be subject to U.S. taxation. The lower court, the 5th Circuit Court of Appeals, had held that the $10,000 penalty could be calculated based on the number of bank accounts covered by each required report, which resulted in multi-million penalty for the taxpayer in the case, Alexandru Bittner.
Taxpayer Faced $2.72 Million Penalty
Bittner, a dual citizen of Romania and the US, was living in Romania and earning substantial income from investments that he held in foreign bank accounts up until he returned to the US in 2011. When he learned of his FBAR filing obligation, he submitted the required annual reports covering five years, 2007 through 2011. The US government found Bittner’s late-filed reports deficient because the reports did not include information on all Bittner’s foreign accounts. Taxpayers are required to report all account for which they have either signatory authority or a qualifying interest.
Bittner filed corrected FBARs providing information for each of his accounts, a total of 272 accounts for the 5 years. The government calculated the penalty due at $2.72 million, computed as $10,000 for each account covered by the 5 FBAR reports. Challenging that penalty, Bittner argued that the maximum penalty for non-willful violations should be $10,000 per report, not $10,000 per account. In reversing the 5th Circuit, the Supreme Court agreed with Bittner in a 5-4 decision. The line-up in the Justices was interesting, with Judge Jackson joining in the conservative majority and Judge Barrett filing a dissent.
Why Court Stepped In
The Supreme Court took the case because there was a split in the circuit courts of appeals. The 5th Circuit allowed the $10,000 per account penalty. However, the 9th Circuit, in U.S. v. Boyd, held in 2021 that the IRS can impose only one $10,000 penalty per required FBAR report. One reason the Supreme Court agrees to hear cases is if the circuit courts around the country are in disagreement about an important issue, like here. The High Court then steps in to resolve the issue and create a uniform rule throughout the US.
FBAR Filing Requirements and Penalty Rules Going Forward
The Supreme Court’s decision in Bittner is an important victory for high-wealth taxpayers, dual citizens and any taxpayer who has a US filing obligation and holds foreign accounts. Imposing a $10,000 penalty per account, especially in cases where the taxpayer did not intend to hide anything, seemed punitive and could be excessive.
Even with this favorable opinion, taxpayers should be mindful of their FBAR filing obligations. Taxpayers must file if:
- foreign accounts in the aggregate exceed $10,000 any time during the year
- the taxpayer holds either a qualifying interest in the account or signatory authority over the account
- FinCEN Form 114 forms are required
- the form is due on April 15th
If the reports are not filed or are deficient, the IRS can impose one of two civil penalties on taxpayers who fail to file their FBARS. The first penalty is for non-willfulness, where a taxpayer does not intend to slip up. That penalty is up to $10,000. The higher willfulness penalty may be imposed on a taxpayer that “willfully fails to file” an FBAR. That penalty is the greater of $100,000 or 50% of the balance in the account at the time of the violation. It is important to note that it is possible for civil penalties to exceed the balance in the foreign financial account, and criminal penalties can be imposed in addition to civil penalties. Criminal penalties are only imposed for willful failure to file FBARs and can be up to $500,000 and 10 years in prison for multiple law violations.
Consult your Frazier & Deeter tax advisor to evaluate your foreign holdings and determine if you are in compliance with the US foreign financial account reporting laws:
Dave Kim, Tax Partner & National Practice Leader, International Tax | dave.kim@frazierdeeter.com
Mike Whitacre, Tax Partner | mike.whitacre@frazierdeeter.com
David Patton, Tax Partner | david.patton@frazierdeeter.com
Malcolm Joy, Lead Partner, United Kingdom | malcolm.joy@frazierdeeter.com
As a seasoned tax professional with extensive expertise in international tax law, I can unequivocally affirm the significance of the recent Supreme Court decision in Bittner v. US regarding the penalty exposure for US taxpayers with foreign bank accounts. This landmark decision has far-reaching implications, particularly in understanding the nuances of the Foreign Bank and Financial Accounts (FBAR) filing requirements and penalty rules.
The Bittner case, involving a dual citizen of Romania and the US, Alexandru Bittner, who faced a staggering $2.72 million penalty, hinged on the interpretation of the penalty structure for non-willful failure to file FBARs. The pivotal aspect of the Supreme Court's ruling is the shift from a per-account to a per-report basis for imposing the $10,000 maximum penalty. This alteration is crucial for taxpayers, especially those with multiple foreign accounts, as it significantly reduces the potential penalty exposure.
It's important to note that the Supreme Court's decision stems from a circuit split, where the 5th Circuit allowed the $10,000 per account penalty, while the 9th Circuit, in U.S. v. Boyd, held in 2021 that only one $10,000 penalty per required FBAR report could be imposed. The Supreme Court's intervention aimed to create a uniform rule throughout the US, resolving the conflict between circuit courts on this vital issue.
The ruling, with a 5-4 majority and an intriguing alignment of Justices, including Judge Jackson in the conservative majority and Judge Barrett filing a dissent, emphasizes the significance and contentious nature of the matter.
Looking ahead, this decision is a crucial victory for high-wealth taxpayers, dual citizens, and anyone with US filing obligations holding foreign accounts. The per-report penalty structure is seen as more reasonable, especially in cases where non-willful violations occur, and taxpayers did not intend to conceal information.
Despite this favorable development, taxpayers must remain vigilant about their FBAR filing obligations. The aggregate value of foreign accounts exceeding $10,000 at any point during the year triggers the filing requirement. Taxpayers with either a qualifying interest in the account or signatory authority over it must submit FinCEN Form 114 by April 15th annually.
Failure to comply with FBAR filing obligations can result in civil penalties. For non-willful violations, the penalty is up to $10,000, while willful failures can incur a penalty of the greater of $100,000 or 50% of the account balance at the time of the violation. It's crucial to emphasize that civil penalties could surpass the account balance, and in cases of willful violations, criminal penalties of up to $500,000 and 10 years in prison may apply.
In light of these complexities, taxpayers are strongly advised to consult with experienced tax advisors to ensure compliance with US foreign financial account reporting laws. The professionals at Frazier & Deeter, including Dave Kim, Tax Partner & National Practice Leader, International Tax, Mike Whitacre, Tax Partner, David Patton, Tax Partner, and Malcolm Joy, Lead Partner, United Kingdom, can provide valuable insights and guidance tailored to individual circ*mstances. It's imperative for individuals with foreign holdings to assess their situations and seek expert advice to navigate the intricate landscape of international tax regulations.
