Apr 2, 2023 A “Passover” from Hefty FBAR Penalties: Supreme Court Clarifies Non-Willful FBAR Penalties
As we approach the Passover holiday, celebrating the liberation of the Jewish people from slavery in Egypt, it’s a good time to think about liberation from hefty financial penalties. Thankfully, the U.S. Supreme Court has recently delivered a decision that may feel like a “Passover” for some U.S. citizens with foreign accounts. Let’s explore the Bittner v. United States case and how the Supreme Court ruling on non-willful FBAR penalties can impact taxpayers.
U.S. Supreme Court Landmark Decision
The U.S. Supreme Court recently delivered a landmark decision in Bittner v. United States, which clarified the penalties for non-willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR). In a 5-4 decision, the Court ruled that the $10,000 penalty for non-willful failure to file an FBAR applies per report, not per account. This decision has resolved a split between the Fifth and Ninth Circuit Courts, providing taxpayers and tax professionals with much-needed guidance.
What is an FBAR?
FBARs, or Financial Crimes Enforcement Network (FinCEN) Forms 114, must be filed annually under the Bank Secrecy Act (B.S.A.) of 1970. U.S. persons must report all financial interests in, or signature or other authority over, financial accounts located outside the United States if the aggregate value of those accounts exceeds $10,000 at any time during the calendar year covered by the FBAR. You can see more about FBARs on our website here.
The Bittner case centered on Romanian-American businessperson Alexandru Bittner, who was assessed FBAR penalties totaling $2.72 million for non-willful violations of the FBAR reporting requirements for 272 accounts between 2007 and 2011. Bittner contested the penalties, arguing that they should apply on a per-report, not per-account, basis. The district court agreed with Bittner, holding that the penalty applies per report, but the Fifth Circuit reversed the decision. The Ninth Circuit, however, held that the fine applies on a per-report basis, creating a split between the circuits.
The Supreme Court’s decision in Bittner v. United States now resolves this split, providing taxpayers with foreign accounts clarity. The Court noted that the statute (31 U.S.C. §5321(a)(5)(B)) does not mention accounts but instead refers to a legal duty to “file reports.” As such, the Court determined that penalties for non-willful violations accrue on a per-report, not a per-account, basis, reversing the Fifth Circuit’s decision.
Why It Matters
This ruling is significant for U.S. persons here in Israel with foreign accounts, as it can substantially reduce the potential penalties for non-willful FBAR violations. Especially for those in the hi-tech realm that change jobs often and have new pension accounts set up each time they start a new job. The decision also serves as a reminder for taxpayers to be diligent in their FBAR reporting obligations. Failing to do so can still result in costly penalties, albeit on a per-report basis rather than per account.
It is essential for U.S. citizens living in Israel with foreign accounts to consult with our team to understand their FBAR reporting obligations and potential penalties for non-compliance. Timely and accurate reporting can help taxpayers avoid unnecessary penalties and maintain tax compliance. As we celebrate Passover and the liberation of the Jewish people, the Bittner v. United States decision also offers some relief and liberation.