Introduction to the FBAR Penalty Dispute:
In a significant decision, the U.S. Supreme Court recently ruled the penalty for violating the “Report of Foreign Bank and Financial Accounts” (FBAR) rules applies on a per-report basis, rather than a per-account basis. This decision brings clarity to a previously divided area of law, as the Fifth Circuit and Ninth Circuit reached opposing conclusions on the matter. The case at the center of this ruling is Bittner v. United States, No. 21-1195 (S. Ct. February 28, 2023)1
Background on FBAR Reporting Requirements:
FBAR refers to the annual reporting requirement for U.S. persons who have a financial interest in or signature authority over foreign bank accounts, brokerage accounts, or other financial accounts. The reporting requirement applies when the aggregate value of all foreign accounts exceeds $10,000 at any time during the calendar year. Failure to file an FBAR report can result in civil and criminal penalties, depending on the nature and severity of the violation.
The Controversy of the FBAR Penalty:
The FBAR penalty structure has been a source of legal controversy in recent years. The main point of contention revolved around whether the penalty for violating the reporting requirements should be applied on a per-account basis or a per-report basis.
The Fifth Circuit held that the penalty should be applied on a per-account basis, which would result in higher penalties for those with multiple accounts. Conversely, the Ninth Circuit held the penalty should be applied on a per-report basis, leading to potentially lower penalties overall.
Supreme Court’s Decision in Bittner v. United States:
In the Bittner case, the Supreme Court resolved this split by ruling the penalty for violating the FBAR rules should be applied on a per-report basis. The Court examined the language and purpose of the statute, as well as the legislative history, to arrive at its decision.
The Court reasoned that applying the penalty on a per-report basis aligns with the intent of the law, which is to ensure proper disclosure of foreign accounts, rather than to punish individuals for each account they possess. Additionally, the Court noted a per-report penalty structure would provide a more equitable approach, as it would not unduly penalize individuals with multiple accounts.
Implications of the Supreme Court’s Ruling:
The Supreme Court’s decision in Bittner v. United States has several important implications for individuals subject to FBAR reporting requirements and their advisors:
• Greater clarity: The Court’s decision resolves the ambiguity surrounding the FBAR penalty structure and brings uniformity to the application of penalties across the United States. This allows taxpayers and advisors to better understand the consequences of failing to file an FBAR report.
• More equitable penalties: By applying the penalty on a per-report basis, the Supreme Court has ensured the penalties are more equitable and not overly punitive for those with multiple accounts. This approach recognizes the primary goal of the FBAR reporting requirements is to promote transparency, rather than to impose excessive penalties on taxpayers.
• Potential impact on future cases and settlements: The Bittner decision will likely impact ongoing FBAR-related litigation and could influence the negotiation of settlements in cases involving FBAR violations. Taxpayers who have been assessed penalties on a per-account basis may have grounds to challenge those assessments, potentially leading to reduced penalties.
• Importance of compliance: The Supreme Court’s decision underscores the importance of FBAR compliance. Taxpayers with foreign accounts should ensure they understand their reporting obligations and should consult with tax advisors to ensure they are meeting these requirements.
Conclusion of the FBAR Penalty Dispute:
The Supreme Court’s decision in Bittner v. United States provides much-needed clarity on the application of penalties for violating FBAR reporting requirements.If you have questions or concerns regarding the proper disclosure and reporting of your overseas holdings, please call the experienced RJS LAW international tax attorneys at 619-595-1655 of contact us via the web RJS LAW to schedule a free consultation.
Written by Andrea Cisneros Valdez, Esq., LL.M.
1Bittner v. United States, No. 21-1195 (S. Ct. February 28, 2023)