On June 21, 2022, the United States Supreme Court agreed to hear a dispute involving split decisions among the circuit courts on non-willful penalties. The Fifth Circuit parted ways with the taxpayer friendly decision of the Ninth Circuit that non-willful penalties are capped at $10,000 per FBAR filing instead of the $10,000 per unreported bank account argued by the government. District courts in New Jersey, Connecticut, California, and Texas had all ruled in the taxpayer’s favor that non-willful penalties were capped at $10,000 per form as well.  The case headed to the Supreme Court is United States v. Bittner, where a taxpayer friendly decision from the District Court reduced the $2.7 million penalty to $50,000 based on a $10,000 per form cap on non-willful FBAR penalties.  The Fifth Circuit reversed the favorable district court decision and held that the “$10,000 penalty cap therefore applies on a per-account, not a per-form basis.”

About United States v. Bittner

Alexandru Bittner was a Romanian immigrant who naturalized in 1987, returned to Romania in 1990, and became a successful businessman and investor. Bittner maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein. Although Bittner had accountants maintaining compliance with Romanian tax laws he argued that he was unaware that as a U.S. citizen he still had to report his interests in certain foreign accounts and never filed FBARs while living in Romania. When he returned to the United States in 2011, he hired a CPA who filed corrected FBARs in 2012 but only listed his largest account and didn’t list his interest in 25 or more qualifying accounts. Bittner hired a new CPA in 2013 who filed corrected FBARs listing all foreign bank account information and balances. The accounts for each unreported year was in excess of 50 separate accounts.

Bittner argued that they committed only one non-willful violation, not multiple violations based on the number of accounts, and that the maximum penalty allowed by the statute was $10,000 for the failure to file the FBAR form each year. This is the same, successful, argument made to the Ninth Circuit in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021). The different results on the same argument leaves both the government and taxpayers confused about how to handle non-willful penalties going forward. The results for similar taxpayers should be the same, but currently isn’t. It is being reported that the government is respecting the Boyd decision only in the states that comprise the 9th Circuit (i.e. Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, Northern Mariana Islands, Oregon, and Washington). This leaves taxpayers outside the reach of the 9th Circuit at a serious disadvantage.

Willful and Non-Willful Penalties

The government is allowed to impose a civil penalty on any person violating any provision of the Bank Secrecy Act pursuant to 31 U.S.C. §5321(a). There are two types of penalties depending on whether the violation was willful or non-willful. See 31 U.S.C. §5321(a). The maximums for the penalty are also different depending on whether the violation was non-willful (capped at $10,000) or willful (capped at the greater of $100,000 or 50% of the balance in the account at the time of the violation). Non-willful violations also contain a provision preventing penalties if the violation was “due to reasonable cause” and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.” The non-willful penalty does not explicitly prevent multiple violations, but it doesn’t authorize it either and that is where the dispute lies. Further complicating the issue is that the per-account analysis can lead to a clearly strange result. An admittedly non-willful taxpayer can pay a larger penalty than a willful violator merely because of the number of accounts involved.  This absurdity was raised in Bittner, but summarily dismissed by the Fifth Circuit as not absurd because of the government’s goal “to crack down on the use of foreign financial accounts to evade taxes.” However, the Fifth Circuit never addresses why a calculation system that can punish non-willful actions more severely than similar willful actions is not absurd or at least evidence that Congress deliberately left out the designation of number of accounts to prevent that result. At the Supreme Court, it appears several advocacy groups are entering an appearance as well.  These currently include the American College of Tax Counsel, Center for Taxpayer Rights and The Chamber of Commerce of the United States of America. Taxpayers currently assessed with non-willful FBAR penalties must weigh their options and their desire and ability to wait for further guidance against the benefits of a potentially favorable decision.