On February 28th, 2023, the Supreme Court declared that the $10,000 amount specified in the Bank Secretary Act as a penalty for non-wilful misreporting of foreign interests in an FBAR document must be applied on a per report, not on a per-account, basis.
This choice holds great significance, not in the least a fiscal one. In the case of Alexandru Bittner specifically, it is a matter of paying $50,000 in penalties – for each of the five years that the necessary reports were not filed – as opposed to $2.7 million, for each foreign account Bittner acquired and did not report over the same five-year period. The decision will also hold importance for many others who are caught up in confusion over the misfiling of an FBAR.
The court decision was only just passed in favor of Bittner, with five justices passing and four opposing. Interestingly, the judges were largely mixed on the issue – those from left-leaning and right-leaning backgrounds alike took different stances on the decision. Justice Gorsuch delivered the ruling on behalf of the majority; Justice Barrett represented the voice of dissent.
The FBAR and What It Means
All U.S citizens with interests abroad – regardless of whether they reside inside or outside the U.S – must report these interests on a document known as the FBAR. The FBAR is filed separately from regular tax documents, meaning it is sometimes neglected by taxpayers. However, it is an obligation.
In the case of Alexandru Bittner, a Romanian-American dual national and businessman, the FBARs were not filed properly for a period of five years during which he lived in Romania and gained assets there. Upon returning to the U.S in 2011, Bittner discovered that he had overdue FBAR forms, which he had been supposed to fill out even while living in Romania, as he was a citizen of the U.S.A. The reports were filed, but on late FBARs which required further amendments.
Mr Bittner represents many thousands of Americans with interests outside of the United States. When we think of foreign accounts abroad, we may think of large-scale business interests such as Bittner’s, but in many cases, they are more modest than this. If you split time between America and another country, whether for work, pleasure, or to visit family, you may have a bank account abroad; if you own a vacation home, investment property, or even a small apartment you used to live in prior to living in the U.S, and have an account to maintain it or accept rent, this must be reported on the FBAR. All of these examples are common reasons why you may have to report duties on an FBAR.
The Issue in Bittner: The Calculation of the Bank Secrecy Act Penalty
The penalty for non-wilful improper reporting of an FBAR (including non-reporting) is listed by the Bank Secrecy Act as $10,000. This much is clear – the issue in Bittner arose when deciding how to calculate it. Bittner challenged an attempt to charge him per each account he did not file while living abroad, for each of those five years, which due to his large number of business interests while living in Romania, culminated in nearly $3 million dollars.
The Court summarized that Bittner’s duty had been to report on an annual basis. It was this duty which was neglected, and therefore this was his sole violation. By extension, they chose to have him pay the penalty per year.
Moreover, the legal code makes a distinction between wilful and non-wilful violations of the duty to report. While failure to comply in and of itself is considered binary – meaning, whether you do so nefariously or innocuously, you are still in violation of the code – there is a distinction made according to intent, and while wilful violations make a point of including a number of accounts in the penalty calculation, non-wilful ones do not. The majority of judges saw this as a meaningful omission that reflected intent on the part of the lawmakers.
The Importance of Bittner
The case clarifies the application of penalties for non-wilful FBAR misreporting. The ruling sets far more favorable conditions for the taxpayer, who will have to pay substantially less in the case of non-wilful reporting.
Nonetheless, there is much for taxpayers to learn from when it comes to Bittner. First, the importance of being aware of reporting duties, and moreover, completing them properly – as the law makes no distinction between a document filed with mistakes and one which was not filed at all. Whatever the outcome of Bittner may be, it’s clear that the best avenue is to avoid these penalties in the first place – particularly considering how complex this area of tax law can be.
Remember, the question of who files an FBAR and who does not is not as dramatic as high-value business interests. You may have a foreign bank account, be a signatory on a foreign account, or even simply have power of attorney for a foreign trust fund (for example). You may not be the owner, but a beneficiary or a trustee – it is usually necessary to disclose any connection to any type of foreign account. The deadline for an FBAR coincides with the regular tax year (April 15), so you can incorporate the FBAR as part of your regular tax filing.
The question remains of what will happen to those who have already paid on a per-account basis for non-wilful violations in the past. While it’s still early days, there may be potential for a refund in the future, but it is not clear who will handle this. While enforcement of penalties is handled by the IRS, the penalties paid are not a tax, and therefore refunding them are not in the IRS’ scope. In future, there may be an administrative process to request refunds – if not, it will have to be done on an individual basis through the courts.
