If you personally or jointly own a foreign financial account, you may have to file a FinCEN Report 114, “Report of Foreign Bank and Financial Accounts” (FBAR).In February 2023, the U.S. Supreme Court ruled in Bittner v. U.S. that the $10,000 penalty for nonwillful failure to file an FBAR applies per form — not per the number of financial accounts required to be reported on that form.
Some may have wishfully thought that this decision put the long-running debate surrounding FBAR penalties to rest. Not so fast: The petitioner in the ongoing case of Bedrosian v. U.S. is now arguing that the ruling in Bittner should compel the Court to review the difference between nonwillful and willful violations as it applies to his case. The U.S. government disagrees.
When the case first arose, a Pennsylvania district court held that the plaintiff’s FBAR violation was nonwillful and, therefore, subject to a cap of $10,000 in penalties because of negligence. The government appealed.
On that appeal, the U.S. Court of Appeals for the Third Circuit remanded the case back to the district court. This led to the lower court applying the Third Circuit’s standard in defining the term “willfully.” As a result, the FBAR violation in question was categorized as a willful nondisclosure — upping the penalty to half of the balance of the unreported account plus interest.
The Government’s Reply
On December 29, 2022, the plaintiff filed a “petition for certiorari” in the Supreme Court. The petition referenced Bittner and sought to have his failure to disclose the nearly $2 million balance of one of his Swiss bank accounts chalked up to an honest mistake — not a deliberate attempt to circumvent FBAR reporting rules.
On May 15, 2023, the government filed a brief arguing that the Bittner decision shouldn’t sway the Court because the issues at hand in the two cases are dissimilar despite both revolving around FBAR penalties. According to the brief, Bedrosian “does not implicate the question the Court resolved in Bittner, and a remand for further consideration in light of Bittner would therefore be unwarranted.”
The government’s brief goes on to argue that Bittner concerned a nonwillful violation whereas the violation in Bedrosian was willful. The brief also argues that the Court “expressly distinguished” the statutory language differentiating those two violation types, “explaining that the language of the willful penalty provisions ‘tailor[s] penalties to accounts.’” Per the government’s argument, similar language doesn’t appear in the provision applicable in cases like Bittner.
“Second, in any event, the [U.S. Treasury] Secretary assessed only a single civil penalty under [Code Sec. 5321(a)(5)] in this case, predicated on a single FBAR on which petitioner willfully failed to report a single account — his main UBS account,” the brief continues. “The case therefore does not involve any exercise of the Secretary’s authority to assess multiple penalties for multiple willful violations on a single FBAR.”
The Petitioner’s Counter
In a May 26 reply, the petitioner’s legal team countered that the Court has an opportunity to allow the IRS to consider a taxpayer’s state of mind when deciding between assessing willful or nonwillful penalties. A more flexible, subjective standard would prevent an “overly expansive” interpretation of congressional intent.
Furthermore, the petitioner’s team asked the Court to rule in his favor in light of Bittner. According to their reply:
In Bittner, this Court rejected the government’s expansive reading of the provision of the FBAR statute setting forth the penalties for nonwillful violations, finding instead that Congress intended the penalty to be assessed on a per-form rather than per-account basis. After Bittner, there can be no doubt that the government’s power to penalize nonwillful violations is circumscribed. The government is now limited to a maximum $10,000 penalty in situations where it previously may have chosen to assess millions of dollars of penalties.
Further Developments Pending
The 2022 petition has been pending throughout the year, as several motions to extend the time for the Supreme Court to respond have put the case on the back burner. As of this writing, the end of the current Supreme Court session was looming. Contact your CPA if you have questions about filing an FBAR.
Bittner v. U.S., No. 21-1195, Feb. 28, 2023 (U.S. Supreme Court)
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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change as a result of rapidly evolving legislative developments and government guidance.