On June 21, 2022, the U.S. Supreme Court decided to review (that is, granted certiorari) in the case of Bittner v. United States. This case centers around the report of foreign bank and financial accounts (FBAR) and penalties for not timely filing the FBAR form. The Supreme Court most likely granted certiorari to resolve a disagreement (split) between circuit courts of appeal. In Bittner v. United States (5th Cir. 2021), the Fifth Circuit Court of Appeals held that the nonwillful FBAR penalty is imposed on a per-account basis. In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the Ninth Circuit Court of Appeals held that the nonwillful FBAR penalty is imposed on a per-year basis. For the taxpayer in Bittner, the difference between per-account and per-year is the difference between a $2,720,000 penalty (per account) and a $50,000 penalty (per year), which is a 5440% difference!
FBAR Penalty Basics
A taxpayer is required to file an FBAR if they have financial interest or signature or other authority over foreign financial accounts and the aggregate balance in those accounts exceeded $10,000 at any time during the year. See 31 U.S.C. § 5314; 31 C.F.R. §§ 1010.350(a), 1010.306(c). The FBAR form must be filed for each calendar year, and it is due by April 15 of the following year.
If a U.S. person does not timely file the FBAR form, then the United States (through the Internal Revenue Service) can impose penalties. There are two types of penalties—willful and nonwillful. There also can be criminal exposure related to unfiled FBAR forms. Willful penalties can be quite large—up to 50% of the balance in the foreign account. 31 U.S.C. § 5321(a)(5)(C).
For nonwillful penalties, the statute reads: “The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” The statute then continues: “the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.” See 31 U.S.C. § 5321(a)(5). The main question in Bittner is what is a “violation” for purposes of this statute. Is it based on each FBAR form filed (that is, on a per-year basis), or is it based on each foreign account reportable on the FBAR form (that is, a per-account basis—allowing for multiple penalties per year)? This distinction can make a very large difference.
The IRS generally advises its agents to limit nonwillful penalties to one $10,000 penalty per year. See Internal Revenue Manual 126.96.36.199.4.1(4)(a) (Jun. 24, 2021). However, the IRS and the United States take the position that the government has the authority to impose a $10,000 penalty for each foreign account (the per-account basis). See IRM 188.8.131.52.4.1(7). The IRS has imposed some aggressive penalties in the past.
The Bittner Case
In Bittner, the taxpayer had 50 to 60 foreign bank accounts but did not file any timely FBAR forms. Once the taxpayer learned of his FBAR filing obligation, he did not enter into the IRS’s voluntary disclosure program. Instead, he directly filed late FBAR forms. The IRS decided to impose penalties across 5 years. Across those five years, the IRS identified 272 “violations” of the FBAR reporting requirement and assessed a $10,000 penalty for each “violation.” This resulted in a $2,720,000 penalty against the taxpayer.
The United States then sued to reduce the FBAR penalty assessment to judgment. In the district court, the taxpayer convinced the judge that the nonwillful FBAR penalty was limited to $10,000 per year for each of the 5 years (for a total of $50,000) instead of the per-account basis. The United States appealed this decision and the Fifth Circuit reversed—holding that the FBAR penalty is on a per-account basis and that the $2,720,000 penalty was the appropriate interpretation of the statute.
Now, the U.S. Supreme Court will review the matter and decide whether the nonwillful FBAR penalty is on a per-account or per-year basis.
Are you concerned that you may have unfiled or incomplete FBAR forms? Has the IRS already assessed FBAR penalties against you? Contact David J. Warner, Tax Attorney & Shareholder at Holtz, Slavett & Drabkin to discuss your situation.
David is a former IRS senior trial attorney (all the attorneys at Holtz, Slavett & Drabkin are former IRS attorneys). While at the IRS for 9 years, David oversaw all large FBAR penalty determinations in Southern California and lead the IRS FBAR cadre. David now represents clients in FBAR litigation, as well as sensitive domestic and international tax examinations, tax litigation, employment tax cases, criminal tax matters, and difficult tax collection matters. Please contact David at (949) 999-6606 to schedule a consultation.