In a divided 5-4 opinion in Bittner, the Supreme Court resolved a split between the 5th and 9th Circuit Courts of Appeals related to how nonwillful penalties associated with not timely filing annual FBAR reports are computed. The court’s decision reduces the size of nonwillful penalties related to FBAR filing deficiencies and potentially provides an opportunity for refunds for some taxpayers that paid penalties previously. However, the path forward for claiming any potential refunds remains unclear.
FBAR background
Under the Bank Secrecy Act (BSA) codified in Title 31 of the United States Code, U.S. persons, including citizens, residents, corporations, partnerships, LLCs, trusts, and estates, must file an FBAR every year in which the U.S. person possesses a financial interest in or signature authority over a financial account outside the United States if the aggregate value of all those accounts located outside the United States exceeded $10,000 at any time during the calendar year. While the FBAR is due April 15 following the calendar year being reported, there is an automatic extension to Oct. 15. An FBAR must be filed electronically through the BSA’s E-Filing System. Though the FBAR is administered by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network, the IRS plays an active role in enforcing FBAR compliance. Penalties for failing to timely file FBARs vary greatly based on whether a violation is a willful or nonwillful violation.
FBAR penalties and the dispute
Penalties for failing to timely file FBARs range from $10,000 for a nonwillful violation to 50% of the maximum account value or $100,000 (whichever is greater) for willful violations. Both penalties are adjusted annually for inflation. Nonwillful violation penalties may be removed if the filer can demonstrate that reasonable cause existed for the omission.
Taxpayers and the IRS have disagreed about the application of the $10,000 penalty for nonwillful violations of FBAR filing requirements. Generally, in the case of an FBAR filed late or not filed at all, the IRS has applied a penalty for each account that should have been included on the delinquent FBAR. Taxpayers have challenged the IRS’ per-account view for computing the penalty, arguing that the penalty should be applied on a per-form basis for each delinquent FBAR. This disagreement was the focus of the dispute in Bittner, a case that arose in the 5th Circuit and in which the lower court held that the $10,000 penalty is to be applied on a per-account basis and should be imposed for each foreign financial account not timely reported on an FBAR. An earlier case from the 9th Circuit, U.S. v. Boyd, adopted the opposite approach and held that the $10,000 penalty is to be applied on a per-form basis, meaning that the $10,000 penalty is applied once for the single nonwillful violation as opposed to being applied for each individual account that should have been reported on a delinquent FBAR.
The different approaches produce dramatically different results in the calculation of the amount of FBAR penalties. The taxpayer in Bittner, for example, failed to timely report 272 foreign accounts over a five-year period. Using the per-form method resulted in a total of $50,000 in penalties, while the per-account approach resulted in $2.72 million in penalties. In determining that the penalty for nonwillful violations should be assessed on a per-form basis, the Supreme Court finally has resolved this long-standing dispute and provided taxpayers and their advisers with some certainty in this area.
Looking ahead
As a result of the decision in Bittner, taxpayers that paid FBAR penalties on a per-account basis should now be treated as having overpaid the penalty and should be entitled to a refund of the excessive penalties paid. Currently, the mechanism to claim refunds remains unclear. The IRS has yet to comment on whether it believes it has the authority to issue refunds. Additional questions concerning how long taxpayers have to file refund claims and whether any equitable doctrines exist to provide relief to taxpayers remain unanswered.
Crowe observation
Penalties for failing to timely file FBARs are authorized by the BSA, not the tax code. It is not certain whether typical IRS refund procedures apply or whether affected taxpayers might be forced to file refund suits in federal court.
Taxpayers that previously paid penalties for nonwillful FBAR filing violations on a per-account basis, in excess of the per-form penalty amount, should consult their tax advisers and monitor developments in this area to determine the best path forward. Additionally, taxpayers currently evaluating potential FBAR violations should calculate the penalty in light of the Bittner decision.
