In its upcoming term, the Supreme Court will settle an issue that has vexed taxpayers, the IRS, and numerous federal courts: how to calculate the penalty for a non-willful failure to file a Report of Foreign Bank and Financial Accounts, or FBAR. The statute in question authorizes the IRS to assess a non-willful penalty of up to $10,000 for each violation, and the justices will interpret whether violation is determined on a per-FBAR form basis (a single $10,000 penalty per year) or on a per account basis (a $10,000 penalty for each unreported foreign account).
US citizens and residents are required to file the FBAR form annually if they have a financial interest in, or signature or other authority over, any foreign financial account if the aggregate value of all such accounts exceeds $10,000 at any point during the calendar year. The FBAR filing requirement is imposed as part of the federal Bank Secrecy Act, and that law imposes significant financial penalties for failing to timely file the form each year.
Over the last few years, the Justice Department has aggressively pursued the collection of FBAR penalties by filing lawsuits in federal courts across the country. These cases have resulted in a patchwork of conflicting judicial decisions as to whether the non-willful penalty provision is calculated per FBAR form or per account. This difference in methodology can result in sharply divergent penalty calculations, especially for taxpayers with multiple unreported accounts.
The Supreme Court has agreed to hear an FBAR case from the US Court of Appeals for the Fifth Circuit, United States v. Bittner. Alexandru Bittner, a dual citizen of Romania and the US, had multiple bank accounts located outside of the US. He failed to file FBARs to report those foreign accounts, and the IRS determined that he was liable for non-willful penalty for the year 2007 to 2011. In each of those years, Bittner had more than 25 offshore accounts. The IRS concluded that Bittner violated the FBAR requirements a whopping 272 times—one for each foreign account that was not reported each year—amounting to a total penalty assessment of $2.72 million.
After the IRS assessed this penalty, the Justice Department sued Bittner to reduce the penalty assessment to judgment. On cross-motions for summary judgment, the trial court determined that the IRS penalty assessment of $2.72 million was unlawful and that the proper penalty amount was $50,000 ($10,000 per form per year). The Fifth Circuit reversed on appeal, holding that each failure to report a foreign bank account constituted a violation for purposes of the penalty statute, and that the penalty therefore applied on a per account rather than a per form basis.
The Fifth Circuit’s ruling in Bittner is directly contrary to the decision of another federal appeals court in United States v. Boyd, in which the Ninth Circuit held that the non-willful FBAR penalty applies only per form and does not depend on the number of foreign accounts. In that case, decided last year, Jane Boyd had 13 foreign accounts, and the IRS calculated the penalty based on 13 violations arising out of a one-time failure to file the FBAR form. After the trial court ruled in favor of the IRS, the Ninth Circuit reversed, concluding that the penalty statute authorizes a single non-willful penalty for failure to file the FBAR.
The Supreme Court’s decision to hear Bittner to settle the conflict that has arisen from the conflicting interpretations of the meaning of “violation” in the FBAR penalty statute is important for several reasons. First, the conflicting holdings by the appeals courts in Bittner and Boyd mean that taxpayers are subject to disparate penalty treatment depending on where they reside. Taxpayers who live in the states comprising the Ninth Circuit will face significantly lower FBAR penalties than taxpayers residing in the states comprising the Fifth Circuit. Taxpayers in all other states face widespread uncertainty as to which penalty approach will be adopted by courts in those jurisdictions. By settling this conflict, the high court will ensure that taxpayers subject to non-willful FBAR penalties will be treated consistently—an important hallmark of our tax system.
Second, the justices’ decision to hear Bittner is significant because of the large number of cases that may be affected. The FBAR requirements apply to a substantial number of US citizens and residents, as well as a variety of entities including corporations, partnerships, estates, and trusts. In addition, millions of US citizens reside abroad and presumably maintain bank accounts in their countries of residence. Until relatively recently, the vast majority of individuals—and a large portion of the tax practitioner community—haven’t heard of the FBAR requirement. It is widely estimated that millions of taxpayers are required to file the FBAR form but are not doing so. Under these circumstances, it is critical that taxpayers and the tax practitioner community have a clear understanding of how non-willful FBAR penalties will be calculated.
Third, many taxpayers with FBAR filing obligations have multiple accounts, particularly those that reside outside of the US. The FBAR form itself provides a streamlined reporting option for taxpayers with more than 25 accounts. As both Bittner and Boyd demonstrate, taxpayers with multiple accounts can face staggering FBAR penalties if they are calculated on a per-account basis.
Finally, the Supreme Court needs to give clarity because of the unique nature of the FBAR penalty framework. The IRS has the authority to assess FBAR penalties against taxpayers, but such penalties cannot actually be collected until the Justice Department sues to reduce an assessment to judgment. This system tends to encourage settlement of FBAR cases at the IRS level to avoid lengthy and potentially uncertain litigation. Because so many FBAR cases are settled at the agency level, clear guidance from the high court is critical to both the IRS and taxpayers.
The Supreme Court’s decision to hear Bittner should be welcomed by the entire tax community. The environment of uncertainty regarding whether the non-willful FBAR penalty is calculated on a per-form or per-account basis is unfair to taxpayers, determinant to tax administration, and must be resolved. The oral argument is scheduled for Nov. 2, 2022, and all interested stakeholders should watch closely for any indication as to which way the nine justices ultimately will rule.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Matthew D. Lee is a partner in the Philadelphia office of Fox Rothschild LLP. He co-chairs the firm’s White-Collar Criminal Defense and Regulatory Compliance practice group.
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