US Supreme Court decides non-wilful FBAR penalties are per report, not per account

US Supreme Court decides non-wilful FBAR penalties are per report, not per account

The US Supreme Court ruled on February 28, 2023, in the case of Bittner v. US, that a US individual who does not file their Foreign Bank and Financial Accounts (FBAR) on a non-wilful basis, will face a single penalty for failing to file the FBAR. This ruling eliminates the possibility of multiple penalties based on the number of unreported foreign accounts.

The Bank Secrecy Act mandates that any US person with a financial interest in one or more foreign financial accounts valued at over $10,000 must disclose these accounts on Form FinCEN 114. Failure to do so on a non-wilful basis results in a civil penalty of $10,000, adjusted for inflation (e.g., $14,489 for 2022).

It was unclear whether the penalty for a non-wilful failure to file was based on the number of unreported accounts or simply the failure to file the FBAR report itself.

This discrepancy was seen in the conflicting positions taken by the Ninth Circuit in US v. Boyd, 991 F.3d 1077 (9th Cir. 2021) and the Fifth Circuit in US v. Bittner, 19 F.4th 734 (5th Cir. 2021), leading to the US Supreme Court granting certiorari in the appeal of Bittner.

Alexandru Bittner was found to have not reported 272 foreign accounts during the 2007-2011 tax years in the Bittner case. The IRS imposed a $10,000 penalty per account, resulting in a penalty of $2.72 million. Bittner argued that the $10,000 penalty should be applied to each tax year that he failed to file an FBAR. Therefore, he contended that the maximum penalty he should face is $50,000, i.e., one penalty for each tax year.

Justice Neil Gorsuch, writing for the majority in a 5-4 vote, opined on behalf of the Supreme Court. They concurred with Bittner's stance that he should only face a penalty for each FBAR he failed to file and not for each individual account that he did not report. The basis for the ruling was that the language of IRC §5321, which deals with FBAR civil penalties, addresses the obligation to file reports rather than individual accounts or their quantities.

The Supreme Court's decision has resulted in relief for those who have failed to file an FBAR report in a non-wilful manner, as they are now exempted from the harsh fines imposed by the International Revenue Service (IRS). If someone has already paid non-wilful FBAR penalties on a per-account basis, it is crucial to file a refund lawsuit within the allowed statute of limitations.

The Bittner ruling by the Supreme Court is only applicable to non-wilful penalties for failing to file an FBAR. If a taxpayer is found to have wilfully failed to file an FBAR, the penalties are imposed on the higher of 50 per cent of the account balance or $100,000.