The long legal journeys for two taxpayers, Ms. Jane Boyd and Mr. Alexandru Bittner, came to a happy end on Tuesday, Feb. 28, 2023.
On that date, the Supreme Court of the United States ruled, in the case of Bittner v. United States, that the best reading of the statute imposing non-willful Report of Foreign Bank and Financial Accounts (FBAR) penalties is on a “per-form” basis and not a “per-account” basis. Put another way – the Court said that non-willful FBAR penalties can only be assessed once for each year and not once for each of your accounts. So, if you had nine accounts on a delinquent FBAR, the penalty would be $10,000 rather than $90,000.
Boyd held thirteen accounts in the United Kingdom, which included her retirement accounts from when she was a schoolteacher there. After discovering her mistakenly omitted FBARs, she filed them, but despite being found “non-willful” in her mistake, the Internal Revenue Service (IRS) still assessed her a significant per-account penalty.
Bittner held accounts in Romania, where he was born and raised. He immigrated to the United States in 1982, eventually became a naturalized citizen, and then returned to Romania in 1990 after the fall of communism. He had a successful business career in Romania, amassing a large savings, before returning to the United States in 2011. He too learned of his missing FBARs and filed them soon thereafter. And, like Boyd, the IRS found his mistakes were “non-willful,” but assessed him FBAR penalties over a five-year review period on a per-account basis for $2.72 million.
Both Boyd and Bittner fought these assessments, filing in the 9th and 5th Circuits, respectively.
The FBAR statute speaks of filing “reports” to disclose your “accounts” and that the penalty for a “violation” is up to $10,000. Is the non-filing of the single report the violation? Or is each missing account a violation? These questions have been roiling the tax community for over a decade (when the knowledge of FBAR filing really became salient), and the questions (finally) came before the Court. Practitioners have always fought for limiting the penalty to a single violation in any year, but older versions of the IRS manual allowed for per-account assessments at the discretion of the IRS examiner, and with no ruling to make the per-report violation official, taxpayers had to worry about the extent of their potential penalty.
Justice Gorsuch’s majority opinion has (finally) provided a clear rule. The Court held that, because the statute did not state that the “non-willful” penalty provision applies to accounts or their number, but instead pegs it to violations (which occur when the reports themselves go unfiled), and despite other provisions in the statute referencing accounts or their number, in all cases from now on non-willful violations get assessed on a per-report, not a per-account, basis. “When Congress includes particular language in one section of a statute but omits it from a neighbor, we normally understand that difference in language to convey a difference in meaning…” So, with the Court’s decision, the FBAR penalty for non-willful violations is officially one per report. This will be a great boon for U.S. taxpayers under FBAR examination, who can now have more certainty regarding their penalty exposure.
There are, however, important caveats to keep in mind.
First, the court did not limit willful penalties. Those remain at $100,000 or 50% of the account value, whichever is greater. So, someone with a modest foreign pension worth $190,000 could still be subject to a $100,000 penalty if found willful. The Supreme Court had a chance to review large willful penalties, but chose not to.
Second, this decision talks about a $10,000 penalty. However, all FBAR penalties are being increased to keep up with inflation.
Third, Bittner does not affect any tax or other international information reporting form penalties, such as for Forms 8938, 3520, 5471 or 5472. These all carry $10,000 to $25,000 fines for non-filing. And while the FBAR and Form 8938 have a great deal of overlap, the IRS can still impose penalties on both at the same time.
The Bittner decision provides a great deal of penalty relief for taxpayers, even if other issues remain. Contact Moore Doeren Mayhew to speak with an international tax advisor if you have questions about how this case affects you, or if you want more clarity on your international reporting requirements.
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