FBAR Penalties Set By Supreme Court
In a positive development for the American expatriate community, the U.S. Supreme Court has delivered a ruling that favours taxpayers and limits the scope of FBAR (Foreign Bank Account Report) penalties. This decision not only significantly reduces the proposed penalties imposed on taxpayers but also establishes an important precedent for calculating FBAR penalties going forward.
Understanding FBAR Obligation and Penalties
The FBAR obligation arises when the total value of an individual’s foreign financial accounts exceeds $10,000 at any point during the calendar year. The FBAR, also known as FinCEN Form 114, must be filed electronically using the BSA E-Filing System, administered by the Financial Crimes Enforcement Network (FinCEN) under the U.S. Department of the Treasury.
Failure to file an FBAR due to negligence or a “non-willful” violation can result in a penalty of $10,000 per account, per year, unless reasonable cause can be established. Conversely, a “willful” failure to file can lead to civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account, and in certain circumstances, even criminal penalties may apply.
US Supreme Court’s Verdict on FBAR Penalties
In the case of Bittner v. United States (No. 21-1195, decided on February 28, 2023), the U.S. Supreme Court ruled that the $10,000 penalty for non-willful FBAR violations should be applied per form rather than per account. The decision was reached by a narrow majority of 5-4, overturning the previous ruling in favour of the IRS by the U.S. Court of Appeals for the Fifth Circuit. The Bittner case itself witnessed a substantial reduction in the penalties imposed, from $2.72 million to $50,000, due to the Supreme Court’s verdict.
Implications of the Supreme Court’s Decision
The Bittner decision provides much-needed clarity and sets a precedent for the IRS in applying penalties for non-willful FBAR violations. However, tax practitioners have expressed concerns that this ruling may prompt the IRS to more actively pursue and impose higher penalties for willful FBAR violations. It would have been beneficial if the Supreme Court had addressed the specific criteria for differentiating between willful and non-willful violations. In the beginning of the decision, the Court refrained from delving into this matter, stating, “What, if any, mens rea the government must prove to impose a ‘non-willful’ penalty is not before us.” Notably, lower courts have consistently adopted a broader interpretation of “willfulness” for civil FBAR violations, encompassing recklessness and willful blindness, rather than limiting it to intentional violations used in criminal cases.
Taxpayers can find solace in the fact that the burden of proof for civil FBAR penalties rests with the government. The government must establish liability for the civil FBAR penalty by a preponderance of evidence, meaning it must demonstrate that the event was more likely than not to have occurred.
Despite the favourable U.S. Supreme Court decision, taxpayers with foreign accounts should remain vigilant and ensure compliance with FBAR requirements to avoid penalties altogether. Being aware of and fulfilling FBAR obligations from the outset is crucial to preventing penalty issues.
Taxation processes can be confusing, but Xerxes Associates are here to assist. Contact us via www.xerxesllp.com or fill out our contact form to discuss your expat tax situation with us.
