March 2, 2023
US Supreme Court reaches pro-filer position in holding that the nonwillful FBAR penalty applies per report, not per account
On February 28, 2023, the US Supreme Court held in Bittner v United States that the $10,000 penalty1 for nonwillful failure to file FBAR reports imposed under 31 USC Section 5321 applies per annual report/filing, not per account. The 5-4 decision rejected the government's argument that the nonwillful penalty applies on a per account basis and resolves divergent positions held by two appellate courts. The Court did not address, except by way of dicta, the more serious penalty for willful failure to file.
In Bittner, the Fifth Circuit held that a separate violation had occurred for each foreign account not timely reported on an FBAR and imposed a penalty of $2.72 million over five years. The filer argued the penalty should apply on a per-report basis, which would reduce the penalty to $50,000 (i.e., one $10,000 violation per year), consistent with the Ninth Circuit's decision in United States v. Boyd, 991 F. 3d 1077. In Boyd, the court held that the nonwillful penalty applies on a per-report basis, regardless of the number of unreported foreign accounts. The government did not question the completeness or accuracy of the final filings submitted by the defendant in either case. It asserted the nonwillful violation based on the number of accounts reported by the filer on his late filed FBAR.
Although the Supreme Court decision is pro-filer for accidental or negligent failures to file, taxpayers nonetheless should bear in mind that the more severe willful penalty explicitly applies to each account by statute and that the government can assess the willful violation where it deems appropriate. The civil penalty for willful failure to report is the greater of $100,000 (adjusted for inflation) or 50% of the balance in the account at the time of the violation. The government has broad latitude to interpret when a violation is willful, particularly where it deems a taxpayer has exercised "willful blindness" regarding an obligation to file. Courts have held that the failure to answer "yes" to the question on a Form 1040 asking whether an FBAR is required is significant evidence of willfulness.
Taxpayers who have failed to file complete and accurate prior year FBARs and who have not yet come into compliance should carefully consider options for filing, including the IRS's Delinquent FBAR Submission Procedures and Streamlined Filing Compliance Procedures. A strong nonwillful failure to file statement included with such a filing is important to prevent potential challenges that a failure to file was willful.
Published by NTD’s Tax Technical Knowledge Services group; Jennifer A Brittenham, legal editor
1 As adjusted for inflation.