Yesterday, in Bittner vs. United States, 598 U.S. ______ (2023), the Supreme Court resolved a split between the Ninth and Fifth Circuits on the question of whether penalties for non-willful FBAR violations accrue on a per-report or per-violation (i.e., per-account) basis. The facts of the Bittner case demonstrate how important the distinction can become. Mr. Bittner was born in Romania, immigrated to the U.S., became a dual-Romania-U.S. citizen, moved back to Romania for a period of time, then moved once again back to the U.S. When he returned to the U.S., Mr. Bittner first learned that U.S. persons are legally required to file Foreign Bank Account Reports (FBARs) that disclose their interests in foreign accounts to the Treasury Department. So, Mr. Bittner hired an accountant and filed FBARs for the five preceding years (likely because the foreign account record-keeping regulations require that U.S. persons with an interest in a foreign account maintain records of that foreign account for five years, see 31 C.F.R. § 1010.420). But it turned out that, while those FBARs had disclosed details about Mr. Bittner's largest foreign account, the forms had inadvertently omitted details about numerous other, smaller, bank accounts. When the IRS informed him that all foreign accounts must be disclosed, Mr. Bittner submitted corrected FBARs that disclosed a total of about 50 to about 60 foreign accounts that had existed at various times during the five-year period. (Mr. Bittner's corrected disclosure actually went beyond the FBAR's requirement to simply check a single box in the event a taxpayer has an interest in 25 or more foreign accounts).
The penalty for a non-willful FBAR violation is $10,000. At first glance, therefore, most would assume that Mr. Bittner faced a total of $50,000 in IRS penalties ($10,000 for each of the five incorrect FBARs that were initially filed). But no: the IRS assessed a total of $2.72 million in non-willful FBAR penalties under the theory that Mr. Bittner was liable for a $10,000 penalty per account, per FBAR, per year – which amounted to 272 separate accounts during the relevant five-year period (hence the $2.72 million figure). The Fifth Circuit agreed with the government and upheld these massive IRS penalties, reaching the opposite conclusion than a determination reached by the Ninth Circuit in a prior case, United States v. Boyd (9th Cir. 2019), which had held that the penalty is limited to $10,000 per-report, not per-account.
In a case that will have critical implications for many thousands of U.S. persons with foreign accounts, the Supreme Court sided with Mr. Bittner and held that the Bank Secrecy Act's $10,000 penalty for non-willful violations accrues on a per-report basis and thus vacated the $2.72 million in penalties assessed by the IRS and upheld by the Fifth Circuit. Writing for the majority, Justice Gorsuch observed that traditional rules of statutory construction weighed in favor of a per-report rule (particularly since the statute permits per-account penalties for some willful FBAR violations, but is silent on similar per-account penalties for any non-willful violations), and that the rule of lenity further supports the proposition that, when there is any doubt, “statutes imposing penalties are to be strictly construed against the government and in favor of individuals.” Justice Gorsuch also correctly observed that the IRS itself has long warned taxpayers that non-willful FBAR violations would result in a “maximum” penalty of $10,000.
Bittner should give some measure of comfort to the many Americans who hold interests in foreign accounts for many legitimate reasons. Even now, after years of foreign account enforcement initiatives by the IRS, many Americans – especially non-residents and dual-citizens – are not fully aware of the various foreign account reporting requirements (which can include more than just FBAR filings) and often innocently neglect to include a small local foreign bank account on an FBAR. While inadvertent mistakes and omissions on an FBAR will likely still result in a penalty, at least now we know that taxpayers will not face multiple penalties resulting from a single incorrect FBAR that might even potentially have exceeded the value of the account in question many times over.