Supreme Court Rules In Taxpayer’s Favor On FBAR Penalties
Alexandru Bittner, a Romanian–American dual citizen, made a mistake when he failed to report his foreign accounts. That much is clear. Neither he nor the IRS has ever suggested that his failure to report funds held in foreign bank accounts was willful. What has been disputed is how much he should pay for that mistake. The answer to that question is $50,000 or $2.72 million—depending on who you ask.
Today, the Supreme Court offered its response: $50,000.
Background
In the 1980s, Bittner moved to the United States, and he eventually became a U.S. citizen. In the 1990s, Bittner returned to Romania, where he became quite successful, generating over $70 million in income through businesses and investment ventures. As he earned income, he stashed it in a number of institutions, including foreign banks.
Bank Secrecy Act
As part of the Bank Secrecy Act (31 USC §5314), every U.S. person with a financial interest in, or signature or other authority over, one or more foreign financial accounts with an aggregate value of more than $10,000 must annually report the account to the Treasury Department. You do this by filing a Report of Foreign Bank and Financial Accounts—more commonly known as an FBAR. Failure to report can result in a penalty, depending on whether the failure was willful or non-willful. The penalties can be draconian, but typically, the penalty for a non-willful violation is $10,000.
The FBAR is an annual report now due on April 15 (unless it falls on a weekend or holiday, which is the case in 2023, making it due on April 18). It's the same deadline as Tax Day though you do not file an FBAR with the IRS—you file with FinCEN, or the Financial Crimes Enforcement Network. If you can't file by the deadline, you can get an automatic extension to October 15.
Failure To Report
From 1996–2011, Bittner lived in Romania. Even though he was a U.S. citizen, he occasionally, but not always, filed a U.S. tax return. And despite having an aggregate balance in all of his foreign accounts that exceeded $10,000, he never filed an FBAR.
Bittner returned to the U.S. in 2011. That, he claims, is where he first learned that he had a duty to report the accounts. He filed delinquent FBARs for 1996-2010 and a timely FBAR for 2011. However, all of the forms were, according to court documents, “inaccurate and incomplete.” Bittner eventually refiled FBARs for 2007-2011.
Penalties
In June 2017, the IRS assessed penalties against Bittner for failing to report the accounts for 2007-2011 (the IRS did not assess any FBAR penalties against Bittner for 1996–2006, due to the statute of limitations). There were 272 accounts at issue for those five years. As a result, the government initially sought $2,720,000 in penalties against Bittner. Their argument focused on the idea that the language of section 5321—the civil penalties clause—consistently describes a "violation" as something that is "account specific."
Bittner disagreed and took the matter to court. He disputed the amount due, claiming, among other things, that the penalty should apply per year, not per account. That would, he argued, result in a (much) lesser penalty of $50,000.
The district court agreed and reduced the assessment to $50,000—$10,000 per year, not per account. However, the U.S. Court of Appeals for the Fifth Circuit disagreed, holding that a failure to report should result in a penalty per account. That decision was at odds with a 2021 Ninth Circuit decision (United States v. Boyd). As a result, the Supreme Court agreed to hear the matter. Oral arguments were heard on November 2, 2022.
Decision
On February 28, 2023, the Supreme Court held that the Bank Secrecy Act's $10,000 maximum penalty for the non-willful failure to file a compliant report should be calculated per report, not per account. The opinion notes, "Best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis."
With that, the judgment of the Fifth Circuit was reversed, and the case was remanded for further proceedings consistent with the opinion.
It was, however, clearly not an easy decision to reach, with a 5-4 vote. Justice Gorsuch delivered the opinion except as to Part II–C. Justice Jackson joined the opinion in full, with Chief Justice Roberts, and Justices Alito and Kavanaugh joining except for Part II-C. Justice Barrett filed a dissenting opinion with Justices Thomas, Sotomayor, and Kagan.
Reaction
After the decision, Rachael Rubenstein, a Member at Clark Hill, who shepherded the case for more than a decade, said, "We are overjoyed with this result, which bring to conclusion a 10+ year controversy. We have represented Mr. Bittner for all these years and are absolutely thrilled to achieve this result on his behalf. We are particularly thankful for Haynes Boone’s excellent representation before the Supreme Court, led by Daniel L. Geyser, who masterfully argued the case."