Key Takeaways

• The IRS may impose penalties for non-willful “FBAR” (i.e., the Report of Foreign Bank and Financial Account filings) reporting violations on a per-report basis but not a per-account basis.
• The Supreme Court’s ruling provides much-needed clarity to taxpayers who may be preparing voluntary disclosures or who are already in discussions with the IRS about prior non-willful violations.
• Taxpayers subject to non-willful penalties should ensure that the penalty computation in any settlement discussions does not exceed $10,000 per FBAR report filed.
• The ruling may also engender further litigation or disputes with taxpayers regarding the line between willful and non-willful failures to file.

On Feb. 28, the U.S. Supreme Court ruled that non-willful penalties related to FBARs apply to each report filed, not on a per-account basis. The 5-4 decision resolved a split between the Fifth and Ninth circuits that focused on noncompliance penalties levied against U.S. persons that failed to comply with FBAR reporting requirements, holding that the maximum fine of $10,000 applies to each FBAR report filed, not to each foreign account reported on a single filing. As covered in our prior alert, the IRS imposes monetary penalties set at $10,000 for non-willful violations and substantially more for willful violations. In addition, the IRS may make a criminal referral to the U.S. Department of Justice for certain willful violations.

The foreign account reporting requirements at issue in the case were established by Congress through the adoption of the Bank Secrecy Act (the Act) in 1970, first covering only willful, or intentional, failures to report foreign accounts with balances in excess of $10,000. The Act was expanded in 2004 to cover non-willful violations. An example of a non-willful violation would be a U.S. taxpayer unaware of his or her reporting obligations relating to foreign accounts. Penalties are imposed when a taxpayer cannot demonstrate reasonable cause for a violation.

The case before the U.S. Supreme Court involves a foreign-born businessman who became a U.S. citizen but then returned to his home country (without renouncing his U.S. citizenship) to invest in and operate local businesses. He claimed that the penalty for his non-willful failure to file FBARs or to disclose more than 270 reportable foreign accounts for five years should be computed on a per-FBAR basis for each year reported, thus totaling no more than $50,000. The IRS argued that FBAR penalties for non-willful noncompliance should be applied on a per-account basis, meaning that in his case, the penalties would exceed $2.7 million. A split between the Fifth Circuit[1] and the Ninth Circuit[2] resulted in the Supreme Court agreeing to hear the case. The Ninth Circuit had held that the penalty applied on a per-form basis; the Fifth Circuit held that the penalty applied on a per-account basis.

The circuit split regarding interpretation of the Act had caused confusion for non-willful U.S. violators subject to penalties. In the decade since the Act’s expansion to cover non-willful violations, the IRS has computed and applied penalties inconsistently, and the Supreme Court’s ruling provides much-needed clarity to taxpayers who may be preparing voluntary disclosures or who are already in dialogue with the IRS about prior violations. The Supreme Court ruling also may engender further litigation or disputes regarding the line between willful and non-willful failures to file. The IRS, for example, may be less inclined to characterize a violation as non-willful given the lower maximum penalty for taxpayers with multiple accounts.

Clients who commit FBAR reporting failures often have unique personal circumstances and are unaware of their filing obligations. Whatever the conditions, the Court’s decision should provide relief to those non-willful taxpayers who committed unknowing violations, ensuring that they will not be subject to millions of dollars of account-based penalties. For clients who suspect that they may be in violation of FBAR disclosure requirements, it is important to engage professionals who are aware of recent legal developments and to create a plan for voluntary disclosure and then continued compliance.

The case is United States v. Bittner, No. 21-1195 (Feb. 28, 2023).

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