Supreme Court Ruling Addresses Fines for Non-Willful FBAR Violations

 Posted on April 06, 2023 in Taxation Law

U.S. taxpayers who own foreign assets and investments often face confusion about their requirements when filing taxes and reporting information to the IRS. In general, taxpayers must file a Foreign Bank and Financial Account Report (FBAR) on an annual basis, and they must include information about all accounts or other assets owned outside the United States. Failure to file FBARs can result in steep penalties. Until recently, there was some confusion about how penalties were applied in certain situations. However, a recent Supreme Court ruling has cleared up this issue and provided some understanding of the potential penalties in certain cases.

Bittner v. United States

In the case of Bittner v. United States, the defendant was charged with failing to report foreign accounts to the IRS between 2007 and 2011. The question was whether the penalties that would apply should be based on the number of reports that were not filed or the number of accounts that were not reported. A maximum $10,000 penalty may be applied for each violation, and initially, the IRS imposed a total penalty of $2.72 million based on the number of accounts that were not reported between 2007 and 2011. The defendant challenged this decision, and the fine was reduced to $50,000, or $10,000 for each year that he did not report his assets correctly. An appeals court reversed the ruling, and the defendant then appealed the case to the Supreme Court.

After review, the majority of the Supreme Court justices ruled that FBAR penalties should be issued on a per-report basis rather than a separate penalty being assessed for each account that was not reported. In the majority opinion, Justice Neil Gorsuch stated that the laws addressing this issue state that a person has a duty to file reports to the IRS, without discussing specific accounts or the number of accounts listed. While the law does allow for penalties to be assessed on a per-account basis for willful violations, the failure of the law to specify how penalties should apply for non-willful violations means that a single penalty will apply for the failure to file a report, regardless of the number of accounts that should have been reported.

Willful vs. Non-Willful FBAR Violations

Notably, the Supreme Court's ruling applies to non-willful FBAR violations. These types of violations are those that occurred due to a mistake or a taxpayer's misunderstanding of their reporting requirements. If a taxpayer can demonstrate that they failed to file an FBAR because they did not realize that they needed to report certain assets, they may be assessed a penalty for each year in which they failed to meet their requirements. The amount of this penalty is regularly adjusted based on inflation, and for penalties assessed after January 19, 2023, it is $15,611.

If a taxpayer purposely or knowingly committed a violation, including failing to file an FBAR when they knew that they were required to do so or filing an FBAR with false information, they may face much higher penalties. For penalties assessed after January 19, 2023, the maximum fine is $156,107 or 50 percent of the amount in an account at the time of the violation, whichever is higher. A person may also face criminal penalties, which include fines of $10,000 and/or a sentence of 5 years for each violation.

Contact Our San Jose FBAR Lawyer

If you have been or are concerned that you may be accused of FBAR violations, it is important to understand the steps you can take to address this issue and minimize the potential penalties you may face. At John D. Teter Law Offices, our San Jose foreign tax reporting attorney can provide the representation you need as you respond to the IRS, and we will help you determine how to maintain compliance with all applicable tax laws. Contact us at 408-866-1810 to schedule a consultation and get legal help with tax-related concerns.

Sources:

https://www.supremecourt.gov/opinions/22pdf/21-1195_h3ci.pdf

https://www.scotusblog.com/2023/02/strange-lineup-of-justices-limits-penalties-for-failure-to-file-reports-about-foreign-bank-accounts/

https://www.irs.gov/pub/irs-pdf/p5569.pdf