BREAKING! US Supreme Court — FBAR “Nonwillful” Penalty is Per Form and NOT Per Account

What we have all been waiting for!  Bittner v. United States was just decided hours ago by the United States Supreme Court! An amazing taxpayer win.  It is late here in the Middle East, so I provide only the information you need to know!  You can read the full case here.

The Bank Secrecy Act (BSA) $10,000 maximum penalty for the nonwillful failure to file a compliant FBAR (Form 114) applies on a per report, and NOT (as the IRS would like it)  a per account, basis.

Here’s a nutshell summary –

The taxpayer, Mr. Bittner, had five late filed FBARs that collectively involved 272 accounts. The IRS assessed a penalty of  US$ 2.72 million (272 accounts multiplied by the $10,000 penalty). Mr. Bittner challenged the penalty in court, arguing that the BSA authorized a maximum penalty for nonwillful violations of $10,000 per FBAR report and not $10,000 per account.  Mr. Bittner lost that case in the Fifth Circuit.  The US Supreme court reversed and held that the BSA’s $10,000 maximum penalty for the nonwillful failure to file a compliant FBAR applies on a per report, not a per account, basis.

Taxpayers needed Mr. Bittner to win this case. How many frightened “nonwillful” taxpayers joined one of the prior IRS “Offshore Voluntary Disclosure” (commonly referred to as OVDI or OVDP) initiatives out of extreme fear that the penalties for unfiled or improperly filed FBARs could result in utter financial ruin if the $10,000 penalty applied per account (over a time period of 6 years)?  Joining OVDI or OVDP provided frightened taxpayers with a “penalty structure” that while none too sweet, at least supplied an idea of the price that would have to be paid.  Unfortunately, these initiatives were not taxpayer-friendly and IRS even pulled a bait-and-switch.   Taxpayers who “opted out” were faced with grave difficulties in IRS audits and many times, worse penalties!

The “nonwillful” FBAR penalty was becoming a money-grab. The Bittner case has now put this penalty in the right perspective.

Update March 3 2023

There are still concerns though – digging deeper. Have a listen to the podcast with attorney John Richardson. One concern is that the IRS will more readily go for the jugular and assert a “willful” FBAR violation if the account is large enough.  The willful penalty can be assessed at the higher of $100,000 or 50% of the account balance at the time of the violation, for each year that a required FBAR wasn’t filed or was filed incorrectly (e.g., leaving off an account).  The court cases to date have made it easier and easier to uphold a finding of “willfulness” with the concepts of “willful blindness” and “reckless disregard”.  More on this topic at my blog post here.

Another question springs to mind – now that the penalty is clearly “per form”, can taxpayers get a refund of penalties paid “per account”?  That would be a very interesting court case! Let’s see if it comes to pass in the legal system.  My blog post here discusses the legal issues involved.

Posted February 28, 2023 Updated March 3, 2023

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