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On February 28, 2023, the U.S. Supreme Court released a 5-4 decision against the IRS’s position on the imposition of nonwillful violations of timely Foreign Bank Account Reporting (“FBAR”) reporting for U.S. citizens. Interestingly, the decision crossed the perceived Right Wing/Left Wing split of the Court as Justice Barret authored the dissenting opinion which was joined by Justices Thomas, Sotomator and Kagan.
The Facts
Bittner immigrated to the U.S. from Romania in 1982 and held a series of menial jobs in the U.S.. Along the way, he became a naturalized U.S. citizen.
After the fall of the Soviet empire, he returned to Romania in 1990 where he launched a successful business career before returning to the U.S. in 2011. Upon his return, he learned of his requirement to file FBAR returns and engaged an accountant to help him prepare said filings from 2007 through 2011.
The accountant prepared the report incorrectly and the IRS pointed out the error. Bittner hired a new accountant who could have checked a box on the FBAR report to indicate that he was exempt from filing detailed FBARs as the IRS does not require detailed reporting where a taxpayer has at least 25 foreign accounts. Instead, the accountant provided details for all 272 foreign accounts that Bittner held for the five years in question.
The IRS treated each of the accounts as a “nonwillful violation” subject to a per-account penalty of US $10,000 for a total of $2,720,000 in penalties. Bittner argued that the penalty should be applied on an annual basis for a total of $50,000 in penalties.
Willful vs. Non-willful Violations
The penalties for a willful violation of the FBAR rules are, at first glance, more severe than the penalties for Non-willful violations.
For “willful violations”, the law states that if an individual willfully violates the FBAR requirements, he may face a maximum penalty of $100,000.[1] The law further states that “a failure to report the existence of an account or any identifying information required to be provided with respect to an account” is subject to a maximum penalty of either $100,000 or 50% of the “balance in the account at the time of violation”.[2]
The wording of the penalty provisions relative to non-willful violations of the FBAR rules contrast with the wording relative to willful violations by simply imposing a $10,000 penalty for “any violation” of the FBAR reporting rules.
The Supreme Court Decision
The IRS ruled in favour of the taxpayer, Bittner, and reduced the penalty from $2.72 million to $50,000 based on the following rationale:
- It was erroneous for the IRS to infer that the “per account” penalty applicable for willful violations should be applied on a “per account” basis for nonwillful violations. When Congress includes particular language in one section of the statute but omits it from a neighboring statute, the difference in language is deliberate in conveying a difference in meaning. There is nothing in the “nonwillful” rules to suggest a penalty per account.
- In a number of IRS pronouncements including form instructions and other information circulars, the IRS specifically mentioned a single $10,000 penalty for Non-willful violations. Though IRS guidance does not necessarily govern the law, the Supreme Court has long held that it may consider the consistency of an agency’s views when weighing the persuasiveness of any interpretation it offers in court.
- As individuals with over 25 accounts are not required to provide details and individuals with less than 25 accounts are, it puts generally lower net worth individuals at greater penalty risks than high net worth individuals who typically maintain more accounts. Alternatively, an individual with a single account worth $10 million is at a lower penalty risk than someone with 5 different accounts totalling $20,000, which would seem to be an incongruous result.
Summary
While $10,000 per annum penalties will still apply to nonwillful violations of the FBAR rules, the quantum exposure for unwilful FBAR omissions has been mitigated.
Please contact Stanley Abraham at (647) 256-7551 if you have any questions regarding the content herein.
[1] Bank Secrecy Act (“BSA”) §5321(a)(5)(c)(i)(I)
[2] BSA §5321(a)(5)(D)(ii); §5321(a)(5)(c)
