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 circ*mstances 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.
Related content:United States: Circuit Split - An in-depth analysis of Bittner and Boyd non-willful FBAR violations
FAQs
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.
What is the penalty for a non-willful FBAR violation? ›
The maximum penalty for a non-willful violation is $10,000. The maximum civil penalty for a willful failure is the greater of $100,000 or 50% of the value of the account—willful criminal violations can also result in jail time.
What is the $10000 non-willful failure to file an FBAR penalty per financial account? ›
The penalties for failing to file an FBAR can be severe. For willful violations, the penalty can be as high as the greater of $100,000 or 50% of the account balance. Non-willful violations carry a penalty of up to $10,000 per violation. In some cases, criminal charges can also be filed.
What is the maximum penalty for a non-willful failure to disclose income with form 114? ›
31 U.S.C. § 5321(a)(5) imposes civil penalties for failing to report accounts. The amount depends on whether the failure was “willful” or “non-willful.” The maximum penalty for a non-willful violation is $10,000 (adjusted for inflation).
How do I avoid FBAR penalties? ›
Filing the Report to Avoid FBAR Penalties
When filing an FBAR for a given tax year is a requirement, you must complete and submit the report no later than April 15 of the following year, so as to avoid FBAR penalties. The IRS requires these reports to be filed electronically through the BSA E-Filing System.
Do I need to report all accounts for FBAR? ›
A person required to file an FBAR must report all of his or her foreign financial accounts, including any accounts with balances under $10,000.
What is the largest FBAR penalty? ›
Specifically, Section 5321(a)(5) of the Bank Secrecy Act (“BSA”) authorizes the Treasury to impose a civil penalty for any non-will failure to file FBARs “not to exceed $10,000.” 31 U.S.C.
What triggers an FBAR audit? ›
If the IRS suspects that you have $10,000 or more in one or more foreign financial accounts and have not filed a Foreign Bank Account Report (FBAR), or if they believe you misreported assets and income on the FBAR, you may be subject to audit.
What is the penalty for not reporting foreign bank account? ›
On February 28, 2023, the U.S. Supreme Court, in a narrow 5-4 opinion, determined that taxpayers who non-willfully fail to file annual Foreign Bank Account Reports (FBARs) face a maximum $10,000 penalty for each report they failed to file.
Do I need to file FBAR if I have more than 10000 in credit? ›
A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
It's a common misconception that an overseas account with less than $10,000 doesn't need to be reported. However, if the combined highest value of all foreign accounts on any day in the tax year exceeds $10,000, then all accounts must be reported on the FBAR.
What accounts fall under FBAR? ›
The following types of accounts have to be reported on the FBAR if they meet the filing requirement of $10,000:
- Bank accounts (checking and savings)
- Investment accounts.
- Mutual funds.
- Retirement and pension accounts.
- Securities and other brokerage accounts.
- Debit and prepaid credit cards.
FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
What is the FBAR penalty for inflation in 2023? ›
FBAR Penalties (Update)
That is because, in February 2023, the Supreme Court issued a ruling limiting civil non-willful FBAR penalties — the most common type of foreign bank account penalty — to a $10,000 per year penalty (the $10,000 adjusts for inflation each year).
What is the penalty for filing a frivolous tax return a maximum fine of $50000? ›
If the failure continues beyond 90 days of notice from us, an additional penalty of $10,000 for each 30-day period is imposed up to a maximum of $50,000 if the taxpayer's conduct is not willful. None.
Do non U.S. citizens need to file an FBAR? ›
Who files an FBAR? U.S. persons (U.S. citizens, Green Card holders, resident aliens, and dual citizens) are required to file an FBAR if the combined balance of all the foreign accounts you own or have a financial interest or signature authority is more than $10,000 at any point during the calendar year.
What is the criminal penalty for FBAR? ›
CRIMINAL FBAR PENALTIES
Criminal penalties for willfully failing to file an FBAR may result in a fine of at most $250,000 and/or 5 years of imprisonment. 31 U.S.C. § 5322(a).
Can the IRS see my foreign bank account? ›
Yes, eventually the IRS will find your foreign bank account. When they do, hopefully your foreign bank accounts with balances over $10,000 have been reported annually to the IRS on a FBAR “foreign bank account report” (Form 114).
What happens if I have more than $10000 in a foreign bank account? ›
Any U.S. citizen with foreign bank accounts totaling more than $10,000 must declare them to the IRS and the U.S. Treasury, both on income tax returns and on FinCEN Form 114.
What is the maximum account value for FBAR? ›
Who Must File the FBAR? A United States person is required to file an FBAR if that person has a financial interest in or signature authority over any financial account(s) outside of the United States and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year.
The amount of the civil penalty generally depends on whether the late filing was willful or non-willful. For willful penalties, the IRS may assess by statute up to 50% of the account balance in the foreign account or $100,000 (adjusted for inflation), whichever is greater.
How much does it cost to file FBAR? ›
FBAR filing cost
When you add FinCEN Form 114 to your assisted tax return, FBAR filing costs $99 and includes the same attention to detail and 100% Accuracy Guarantee as our Expat Tax Prep Services.
How much money can I transfer without being flagged? ›
A person may voluntarily file Form 8300 to report a suspicious transaction below $10,000. In this situation, the person doesn't let the customer know about the report. The law prohibits a person from informing a payer that it marked the suspicious transaction box on the Form 8300.
When you get audited do they look at your bank account? ›
The Short Answer: Yes. Share: The IRS probably already knows about many of your financial accounts, and the IRS can get information on how much is there. But, in reality, the IRS rarely digs deeper into your bank and financial accounts unless you're being audited or the IRS is collecting back taxes from you.
How far back can the IRS audit you? ›
How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years.
Can we file FBAR for previous years? ›
Do I need to file FBAR for previous years? If you are required to FBARS then you should file delinquent FBA R S for the years open under the Statute of Limitations to prevent the IRS from assessing FBAR penalties. There are several voluntary disclosure programs to file late FBA R s.
Is it illegal to have an overseas bank account? ›
Is it legal to have an offshore bank account? There is nothing criminal about opening an offshore bank account. However, it is a crime to use an offshore account to avoid paying taxes or to attempt to shield funds from the U.S. government. Offshore banking should not be used for those purposes.
Is it illegal to put money in foreign bank account? ›
In summary, holding money in an offshore bank account is not illegal, and it is also not tax-exempt. As long as you have legitimate business reasons, you can invest in “secret” bank accounts—although it will not really be secret at all.
Does FBAR mean no taxable income? ›
The FBAR form is simply an information return, it is not a tax return. Therefore, no taxes will be due as a direct result of filing an FBAR. However, by filing an FBAR and making the IRS aware of your foreign bank accounts, those accounts should also be included and accounted for in a tax return.
Do I have to report foreign bank account to IRS? ›
A U.S. person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report: a financial interest in or signature or other authority over at least one financial account located outside the United States if.
Specifically, a person is not required to file an FBAR report with respect to a foreign financial account which is owned by the U.S. government, an Indian Tribe, a U.S. state, or a political subdivision of a state.
How do I know if my FBAR was filed? ›
If you do not have any email correspondence associated with your submission, navigate to the "Individual FBAR: Submission Status Lookup" page (https://bsaefiling1.fincen.treas.gov/NoRegSubmissionStatusLookup), enter the email address specified at the time of submission as well as the date range of the submission (max ...
How much money triggers an IRS audit? ›
Under the Bank Secrecy Act, various types of businesses are required to notify the IRS and other federal agencies whenever anyone engages in large cash transactions that involve more than $10,000.
What not to say in an IRS audit? ›
Do not lie or make misleading statements: The IRS may ask questions they already know the answers to in order to see how much they can trust you. It is best to be completely honest, but do not ramble and say anything more than is required.
What are red flags when filing taxes? ›
Some red flags for an audit are round numbers, missing income, excessive deductions or credits, unreported income and refundable tax credits. The best defense is proper documentation and receipts, tax experts say.
What change did IRS make for 2023 to help with inflation? ›
For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900, and for heads of households, the standard deduction will be $20,800 for tax year 2023, up $1,400 from the amount for tax year 2022.
What is the IRS penalty for foreign bank account? ›
On February 28, 2023, the U.S. Supreme Court, in a narrow 5-4 opinion, determined that taxpayers who non-willfully fail to file annual Foreign Bank Account Reports (FBARs) face a maximum $10,000 penalty for each report they failed to file.
What is the penalty for FBAR Form 114? ›
A person who wilfully fails to file an FBAR or files an incomplete or incorrect FBAR, may be subject to a civil monetary penalty of $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater. Willful violations may also be subject to criminal penalties.
