The U.S. Supreme Court issued their decision in Bittner v. United States (S Ct No. 21-1195, 2023) on February 28, 2023. The court’s ruling is a positive result for many taxpayers and resolves a split in decisions among the Appellate Courts.
The Supreme Court held that the $10,000 penalty assessed against U.S. persons for nonwillful compliance failures to file reports of foreign bank and financial accounts, is assessed against each report that is required to be filed and is not assessed against each bank account required to be reported.
Foreign Bank and Financial Accounts Report (FBAR)
A U.S. person with certain signatory authority or qualifying ownership interests in foreign bank or financial accounts must annually report all such accounts if the aggregate value of those accounts exceeds $10,000 at any time during a calendar year. This annual report is commonly referred to as an FBAR. Foreign bank accounts, brokerage accounts, mutual funds and similar financial accounts are reported on FinCEN Form 114. The Bank Secrecy Act authorizes a maximum penalty of $10,000 for nonwillful failure to properly file a compliant FBAR and timely disclose foreign financial accounts.
Bittner v. United States
The Supreme Court ruling substantially reduced the penalty assessed against Mr. Bittner for not properly filing and reporting his interests in foreign bank and financial accounts from years 2007-2011. Originally, the U.S. Department of Treasury assessed penalties of $10,000 for each of the more than 50 accounts reported on each FBAR per year. Total penalties issued were approximately $2,720,000 ($10,000 x 272 individual accounts reported on the five FBARs).
Mr. Bittner argued, and the Supreme Court agreed, that the maximum penalty for nonwillful violations of foreign bank and financial account reporting is limited to $10,000 per report. Thus, Mr. Bittner’s total penalty is reduced to only $50,000 ($10,000 for each annual FBAR). Limiting the maximum penalty assessment to each report rather than each account is a win for U.S. persons filing an FBAR.
Next Steps
U.S. persons that paid penalties assessed against each account on their FBAR should consider options to seek refunds for excessive amounts paid. Alternatively, the Treasury may establish a procedure to streamline refunds of these penalties.
It is important to note that the penalty addressed in Bittner was assessed for nonwillful reporting violations. Going forward, the U.S. Government is likely to increase scrutiny on those filing FinCEN Form 114 to determine if any compliance failures may be willful. Penalties for willful compliance failures are much more draconian: the greater of $100,000 per account or one-half of the highest balance in each foreign account.
If you would like to discuss the reporting requirements for foreign accounts for yourself, or your business, please do not hesitate to contact your Cherry Bekaert Tax Advisor.
