The U.S. Supreme Court has ruled by a vote of 5-4 that the maximum $10,000 penalty for the non-willful failure to file Form FinCEN 114 applies on a per-form basis and not per account. The decision in Bittner v. United States on February 28, 2023, is a rebuke of the IRS’ previous position that assessed penalties of up to $10,000 per account.
The FinCEN 114, more commonly referred to as the FBAR (Report of Foreign Bank and Financial Accounts), requires U.S. persons to annually disclose their financial interest or signature authority over all foreign financial accounts if the aggregate maximum balance of all such accounts exceeds $10,000 USD at any time during the year. This requirement was imposed in order to curb tax evasion or money laundering through overseas accounts. Although this requirement is under the U.S. Treasury Financial Crimes Enforcement Network (FinCEN) and not the Internal Revenue Service, the IRS has responsibility for administrating enforcement and imposing penalties.
The purpose of reporting foreign financial accounts on the FBAR is solely to disclose the taxpayer’s financial interest or signatory authority over foreign financial accounts and does not carry any tax consequences. However, failure to file the FBAR, if required, is subject to significant penalties under IRC Section 5321(a)(5). Arising from this code section, the issue before the Supreme Court was the interpretation of per-violation penalties being assessed by the IRS.
The amount of penalty depends on an assessment of the taxpayer’s willfulness in failing to file the FBAR and disclose their accounts. If a taxpayer is found to have willfully failed to file the form, the penalty is greater than 50% of the undisclosed account balances or $100,000.
The IRS’s position has been that each failure to disclose a foreign account was a separate violation, and as such, penalties for taxpayers who were completely unaware of their requirement to file the FBAR would be $10,000 for every foreign account discovered by the IRS. Further, penalties would apply per account for each year the taxpayer non-willfully failed to file the FBAR.
Justice Neil Gorsuch wrote in the majority opinion: “Best read, the BSA [Bank Secrecy Act] treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.” The further added he Bank Secrecy Act (BSA) does not make it illegal to hold foreign accounts. Nor does the BSA tax those accounts. To the contrary, the federal government has acknowledged that “U. S. persons maintain overseas financial accounts for a variety of legitimate reasons including convenience and access.” IRS Pub. 5569, Report of Foreign Bank & Financial Accounts (FBAR) Reference Guide, p. 1 (Rev. 3–2022). As relevant here, the BSA simply requires those who possess foreign accounts with an aggregate balance of more than $10,000 to file an annual report on a form known as an “FBAR”—the Report of Foreign Bank and Financial Accounts. 31 U. S. C. §5314; 31 CFR §1010.306 (2021). These reports are designed to help the government “trace funds” that may be used for “illicit purposes” and identify “unreported income” that may be subject to taxation separately under the terms of the Internal Revenue Code Read more.
MillerMusmar CPAs will continue to follow the IRS and FinCEN’s next steps regarding how this decision will affect taxpayers previously subjected to penalties for non-willful failure to file in prior years on a per-account basis.
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