The U.S. Supreme Court recently weighed in on an issue regarding a provision of the Bank Secrecy Act (BSA) that has split two federal courts of appeal. Its 5-4 ruling in Bittner v. U.S. is welcome news for U.S. residents who “non-willfully” violate the law’s requirements for the reporting of certain foreign bank and financial accounts on what is generally known as an FBAR. The full name of an FBAR is the Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts.
The BSA requires “U.S. persons” to annually file an FBAR to report all financial interests in, or signature or other authority over, financial accounts located outside the country (with certain exceptions) if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. The term “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust or estate.
According to related regulations, individuals with a financial interest in fewer than 25 accounts in a given year must provide details about each account. A filer with a financial interest in 25 or more accounts needs to only provide the number of accounts and certain other basic information for each person on whose behalf the filer has signature authority. FBARs generally are due on April 15, with an automatic extension to October 15 if the April deadline is not met.
Under the BSA, certain willful violations of the requirement are subject to a civil penalty up to the greater of $100,000 or 50% of the maximum account balance during the year of the account at issue. Other willful violations are subject to a penalty of up to $100,000. A penalty of up to $10,000 is prescribed for a non-willful violation of the filing requirement with an exception for reasonable cause. Criminal penalties also may be imposed.
Violations at issue
The case before the Supreme Court was brought by Alexandru Bittner, a dual citizen of Romania and the United States. He testified that he learned of the reporting obligations after returning to the United States in 2011. Bittner subsequently submitted the required annual reports for 2007 through 2011.
The IRS deemed his FBARs deficient because they only provided details about Bittner’s largest account and did not address the other accounts in which he held an interest or over which he had signature authority. Bittner then filed corrected reports with information for each of his accounts. Although the IRS did not contest the accuracy of the new filings or find that his previous errors were willful, it determined the penalty was $2.72 million — $10,000 for each of 272 accounts reported in five FBARs.
Bittner went to court to contest the penalty, arguing that it applies on a per-report basis, not per account — so he owed only $50,000 in penalties for his non-willful violations. The district court agreed, but the Fifth Circuit Court of Appeals reversed the ruling, siding with the IRS. By contrast, the Ninth Circuit, in U.S. v. Boyd, found in 2021 that the BSA authorized “only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” That meant it was up to the Supreme Court to settle the issue.
High court’s ruling
The Supreme Court agreed with Bittner’s interpretation of the BSA’s penalty provision for FBAR violations. It cited multiple sources that supported this conclusion.
For example, the Court noted that Congress had explicitly authorized per-account penalties for certain willful violations. The Court explained that when Congress includes particular language in one section of a statute but omits that language from a neighboring section, Congress conveys a difference in meaning.
The Court also highlighted various public guidance from the IRS, including instructions for earlier versions of the FBAR and an IRS fact sheet that consistently led the public to believe that a non-willful violator is subject to a maximum single $10,000 penalty. While the Supreme Court emphasized that such guidance was not “controlling” or decisive, it was a reason for the Court to question the validity of the government’s current position.
Implications for taxpayers
The Supreme Court’s ruling significantly reduces taxpayers’ potential financial exposure for non-willful violations of the FBAR reporting requirements. The reports typically list multiple accounts, meaning the IRS’s interpretation could have led to tens of thousands of dollars in penalties for a single non-willful violation.
As the Court also pointed out, an individual with only three accounts who made non-willful errors when providing account-specific details would face a potential penalty of $30,000, regardless of how slight the errors or the value of the accounts. But a person with 300 bank accounts would shoulder far less risk because he or she is required to disclose only the correct number of accounts, with no details. Similarly, a person with a $10 million balance in a single account who fails to report the account would be subject to a penalty of $10,000 — while someone who fails to report a dozen accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.
It is important to note that the Supreme Court’s ruling applies only to non-willful failures to file. The penalties for violations that are knowing, intentional, reckless or due to willful blindness are not subject to the per-report limit and may be assessed on a per-account basis, with costly ramifications.
The Supreme Court’s ruling in Bittner should bring relief to taxpayers who have non-willfully violated the BSA’s filing requirement, but it did not clear all uncertainty around FBAR penalties. For example, the Court did not address the mens rea (level of intent) on the part of the taxpayer that the IRS must establish to impose a non-willful penalty or whether penalties for violations of the BSA’s recordkeeping requirements are determined on a per-account basis. We can help you avoid these thorny questions by ensuring you properly comply with your FBAR obligations.
If you have any further questions about this Client Alert, please contact Michael Loesevitz at [email protected].
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