In a welcome decision for the U.S. expat community, the U.S. Supreme Court has ruled against the IRS on the issue of the scope of FBAR penalties, significantly reducing the proposed penalties on the taxpayer and setting an important precedent for how FBAR penalties should be calculated moving forward.
FBAR Obligation and Penalties
The FBAR must be filed if the maximum values of your foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year. The FBAR form (formally referred to as FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
A negligent or “non-willful” failure to file can result in a penalty of $10,000 per account per year unless there is reasonable cause for failing to file, whereas a “willful” failure to file can result in civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account, as well as criminal penalties in certain circumstances.
US Supreme Court Decision on FBAR Penalties
In Bittner v. United States, No. 21–1195 (Feb. 28, 2023), the U.S. Supreme Court ruled that the $10,000 penalty for non-willful delinquency should apply on a per-form, and not a per-account, basis.
The decision was very close with a 5–4 majority deciding to reverse the U.S. Court of Appeals for the Fifth Circuit, which ruled previously in favor of the IRS.
In the Bittner case itself, the ruling a made huge monetary difference, with the penalties at issue being reduced from $2.72 million to $50,000.
Ramifications of the Supreme Court Decision
The Bittner decision is clearly a welcome clarification and precedent for how the IRS must impose penalties on non-willful FBAR failures.
Tax practitioners have, however, expressed concern that the decision may push the IRS to more actively and aggressively pursue willful FBAR penalties, given the higher penalty potential.
In this regard, it would have been helpful if the Bittner decision addressed exactly how to distinguish between willful and non-willful violations. At the beginning of the decision, the Court sidestepped the issue, writing: “What, if any, mens rea the government must prove to impose a ‘nonwillful’ penalty is not before us.”
Consistent with the U.S. Supreme Court’s interpretation of the word “willful” in non-FBAR contexts, lower courts in recent years have consistently held that the standard for “willfulness” for civil FBAR violations includes seemingly lower thresholds of recklessness and willful blindness. These courts have rejected the stricter “intentional violation” threshold used in the criminal context.
Taxpayers should take solace in the fact, however, that the courts have been uniform with regard to the burden of proof for civil FBAR penalties - the government bears the burden of proving liability for the civil FBAR penalty by a preponderance of the evidence, meaning the event was more likely than not to have occurred.
Despite the favorable U.S. Supreme Court decision, the key takeaway for taxpayers with foreign accounts is to be aware of and compliant with the FBAR requirement, so that penalties do not become an issue in the first place.