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Federal Tax

Supreme Court Seemed Skeptical of Government’s Position on FBAR Penalties

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

On November 2, 2022, the Supreme Court heard oral arguments in Alexandru Bittner’s appeal of his nonwillful FBAR penalty. The justices seemed skeptical of the government’s argument that the penalty for a nonwillful violation should apply per account rather than per FBAR.

Under the Bank Secrecy Act (31 USC §5314), every U.S. person with a financial interest in, or signature or other authority over, one or more foreign financial accounts with an aggregate value of more than $10,000 must annually report the account to the Treasury Department (“reportable account”).

U.S. persons comply with section 5314 by filing a Report of Foreign Bank and Financial Accounts (also known as an FBAR). A U.S. person can use one FBAR to report multiple reportable accounts. (IRS.gov/FBAR)

A U.S. person who fails to report a reportable account on an FBAR may be subject to a penalty. The amount of the penalty depends on whether the failure was willful or nonwillful. The maximum penalty for a nonwillful violation of the reporting requirements in section 5314 is $10,000 (adjusted for inflation for violations after 2015).

The failure to comply with section 5314 won’t result in a penalty if the person’s failure was due to “reasonable cause.” This is known as the reasonable cause defense. (31 USC §5321(a)(5)(B)(i))

How we got here.

The Supreme Court agreed to hear Bittner’s appeal after the Fifth Circuit held that the $10,000 penalty for nonwillful failure to file an FBAR applied to each account that should have been reported on an FBAR. See Fifth Circuit holds FBAR penalties apply on a per-account basis, splits with CA9. The Fifth Circuit’s decision conflicted with that of the Ninth Circuit, creating a circuit split. See CA 9 reverses district court: non-willful FBAR penalty applies per form, not per account.

Oral arguments.

During oral arguments, the Court seemed sympathetic to Bittner, who was naturalized as a U.S. citizen in 1987, and became a very successful businessman after he returned to his native Romania in 1990. The Court rigorously questioned the government’s interpretation of the statute and appeared to disagree that the statute supported the government’s position that the nonwillful FBAR penalty applies on a per account, not a per FBAR basis.

 

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