On February 28, 2023, in Bittner v United States, 598 U.S. (2023) the U.S. Supreme Court, in a five to four decision, ruled that the non-willful FBAR penalty should be assessed per form rather than per account. The decision settles the inconsistent conclusions reached by the Court of Appeals for the Fifth and Ninth Circuits as to whether 31 U.S.C. § 5321 authorizes the IRS to impose multiple non-willful FBAR penalties for the untimely filing of an FBAR.
On October 26, 1970 Congress enacted the Bank Secrecy Act (BSA) also known as the “Currency and Foreign Transaction Reports” to the address the legal and economic impact of foreign banking in the United States. The BSA was enacted, in part, based upon the findings by the House Committee on Banking and Currency (the “Committee”) following a one day investigative hearing held on December 9, 1968. The Committee concluded that Americans were using secret foreign bank accounts and foreign financial institutions for nefarious purposes including income tax evasion, money laundering and other crimes.
As part of the BSA, 31 U.S.C. § 5314(b) Congress tasked the Treasury Secretary with the responsibility of promulgating regulations designed to facilitate the implementation of the BSA. As part of the implementation of the BSA, 31 C.F.R. §103.27 requires a U.S. Citizen with an interest in or control over one or more foreign financial accounts with a value exceeding $10,000 at any time during that calendar year to file FinCen Form 114 (previously TDF 90-22.1 ) with the Commissioner of Internal Revenue on or before June 30 of the following year.
The power to assess a civil monetary penalty for FBAR violations was vested with the Treasury Secretary but later delegated to the Financial Crimes Enforcement Network (FinCEN). Treasury Order 180-01, 67 Fed. Reg. 64697 (2002). Authority was once again delegated to the Internal Revenue Service. 31 C.F.R. § 103.57.
Alexandru Bittner (“Bittner” or the “Taxpayer”) was a dual citizen of Romania and the United States, who maintained Foreign Financial Accounts overseas during the years 2007-2011. Bittner was unaware that he was required to file FinCEN Form 114, commonly referred to as an “FBAR,” and consequently, failed to file FBARS for the years 2007-2011.
Following his return to the United States from Romania in 2011, the Taxpayer first learned that he was required to file FBARS. Bittner subsequently submitted FBARS for the five year (2007 through 2011), but failed to include all of his Foreign Financial Accounts. After being notified by the Government that his FBAR filings were deficient, Bittner filed corrected FBARs providing information for each of his accounts. The Taxpayer maintained 61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011.
Thereafter the Government assessed a 2.72 Million non-willful FBAR penalty against Bittner, representing a $10,000 penalty for each account for each of the five years. The Government maintained that the non-willful FBAR penalty should be assessed per account rather than per form.
Bittner challenged that penalty in Court, arguing that the BSA authorizes a maximum penalty for non-willful violations of $10,000 per report, not $10,000 per account. The Fifth Circuit disagreed with the Taxpayer and sustained the penalty.
In an earlier decision the Ninth Circuit arrived at a different conclusion. In United States v. Boyd, 991 F. 3d 1077, 1079 (CA9 2021), the Ninth Circuit concluded that the non-willful FBAR penalty should be applied per form rather than per account.
Jane Boyd (“Boyd” or the “Taxpayer”) is an American citizen, who had a financial interest in fourteen Foreign Financial Accounts located in the United Kingdom. The aggregate balance for Boyd’s accounts exceeded $10,000 in the year 2010. Consequently, the Taxpayer was required to file an FBAR for 2010, but failed to do so.
In addition, Boyd received interest and dividends in connection with her Foreign Financial Accounts, which she failed to report on her 2010 U.S. Income Tax Return. In 2012 the Taxpayer entered the now discontinued Offshore Voluntary Disclosure Program (“OVDP”) for purposes of coming into compliance with her U.S. Tax and financial reporting obligations. In furtherance of her remediation efforts under the OVDP in October of 2012, Boyd filed her 2010 FBAR, reporting her fourteen accounts and also filed an amended U.S. Income Tax Return.
In 2014, the Taxpayer requested and was granted permission to “Opt Out” of the OVDP. Subsequently, the IRS examined the Taxpayer’s 2010 income tax return and concluded that Boyd’s failure to timely file an FBAR resulted in thirteen non-willful FBAR violations. Consequently, the IRS assessed $47,279 in non-willful FBAR penalties.
The Government subsequently filed suit in the United States District Court for the Central District of California and obtained a judgment against her for $47,279 together with interest and additional late payment penalties and interest. Thereafter, Boyd appealed to the Ninth Circuit.
The Ninth Circuit reversed the lower Court’s decision maintaining that the non-willful FBAR penalty should be applied per form rather than per account. The Bittner and Boyd decisions set the stage for a showdown at the Supreme Court.
The Supreme Court held that the BSA’s $10,000 maximum penalty for the non-willful failure to file a compliant report accrues on a per-report, not a per-account, basis. In support of its decision, the Court noted that 31 U. S. C. §§5321(a)(5)(A) and (B)(i) makes no mention of accounts or their number. The Court further reasoned that under 31 U.S.C. § 5314 a violation occurs when an individual fails to file a report and that the non-will penalty should be tied to the report rather than to the number of accounts.
The Bittner case represents a major victory for the Taxpayer and a blow to the government. However, Bittner may result in the Government assessing the more crippling willful FBAR penalty, given the low evidentiary bar (Preponderance of Evidence). FBAR enforcement will remain a top priority for the IRS. The 80 Billion in funding received by the IRS has certainly served to enhance their resolve and commitment to make FBAR investigations and enforcement a top priority.
If you have Foreign Financial Accounts and have failed to file FBARS and/or failed to make the necessary return disclosures, or failed to report income from your Foreign Financial Accounts, protocols, such as the Streamlined Foreign and Domestic Offshore Procedures, are in place to bring you into compliance. These protocols have been in place for over ten years and have been widely publicized.
Non-filers who have yet to be detected may have a false sense that they are in the clear. However, behind the scenes, the IRS has been diligently working with its global partners to secure information related to the identity of U.S. account holders and their foreign bank accounts. For those individuals who have elected to utilize a shell company or a nominee as the named owner of a foreign account in order to avoid detection by the IRS, new international agreements are now in place designed to ferret out offshore tax evasion and to promote transparency.