US Supreme Court to rule on conflict relating to how to prevent US persons with overseas accounts from circumventing US law

The US Supreme Court has announced that it will adjudicate a conflict between federal appellate courts about how to compute the non-willful penalty for a taxpayer failing to file form 114 from the Financial Crimes Enforcement Network (FinCEN) of the US Treasury. This form is known as the Report of Foreign Bank and Financial Accounts (FBAR). The Court made this announcement before the end of its most recent term.

The FBAR is authorised by the Bank Secrecy Act. It provides the Department of the Treasury with information from US persons who have financial interests in, or other authority over, accounts maintained with financial institutions outside the US. The disclosure helps identify US persons who may be using foreign financial accounts to circumvent US law.

FBAR compliance enforcement by the Internal Revenue Service (IRS) and the subsequent litigation by the Department of Justice has become a highly contested issue facing non-compliant US persons, particularly US individuals.

Some of those affected have no idea what an FBAR is, why it needs to be filed or who is required to file it. The United States Supreme Court is now entering the fray and will consider how to compute the non-willful FBAR penalty, which, depending on the outcome, could have significant financial consequences to those with non-willful violations.

The purpose of this blog is not to review the FBAR filing requirements, which are far from simple or self-evident.[1] Rather, it is to provide background with respect to the non-willful FBAR penalty and the pending Supreme Court review.

Non-Willful FBAR Penalties

The civil penalty for non-willful FBAR violation seems straightforward. Absent reasonable cause, the amount of any non-willful penalty ‘shall not exceed USD10,000.’[2] FBAR litigation involving non-willful penalties comes down to a single issue: is the penalty applied per form or account? 

For example, if an individual fails to report five foreign accounts on an FBAR, and that failure is not willful, is the penalty USD 10,000 (failing to file the FBAR), or USD 50,000 (failing to disclose five accounts)? Clearly, this issue has significant implications for an individual with numerous foreign accounts. 

Although several courts have addressed this dispute, the controversy relating to it has consistently focused on two recent cases in the US Circuit Courts of Appeal—United States v. Boyd[3] in the Ninth Circuit and United States v. Bittner in the Fifth Circuit.[4]

The Boyd court ruled that non-willful penalties should be applied on a per form basis, while in Bittner, the court concluded that the penalties are assessed per each undisclosed account.  Without doing a deep dive into each court’s rationale, the controversy boils down to the statutory construction of Section 5321(a)(5)(A).[5] 

In Boyd, the Ninth Circuit interpreted the phrase ‘any provision of section 5314’[6] to conclude that failing to file the FBAR violates Section 5314. The penalty is therefore applied per form. In contrast, the Fifth Circuit held that each unreported account was a violation and the penalty should be imposed per account rather than per form. 

To understand the financial consequences of the per form/account quandary, consider how the resolution of the issue impacts the individual in the Bittner case. The IRS assessed non-willful penalties for FBAR violations from 2007 to 2011. During those five years, 272 accounts went unreported. Therefore, a per form penalty would yield a USD 50,000 penalty. In contrast, a per account penalty would result in a USD 2.72 million penalty.

Supreme Court Review

The circuit split created by the Boyd and Bittner opinions has injected a high degree of uncertainty for individuals when it comes to the assessment of non-willful FBAR penalties. The IRS continues to assess non-willful penalties on a per account basis.

However, when assessing the strength of their case and the best course of action to take, an individual facing these penalties now must proceed amid much uncertainty and inconsistency. The Supreme Court agreed to hear the Bittner case to resolve the circuit split and end the per form/account debate.

Understanding the FBAR requirements and when an FBAR is required to be filed is complex. Those practitioners (including this author) who have litigated FBAR issues have seen first-hand that several people have been subject to FBAR penalties simply because they (and their advisor) may have been unaware of or misunderstood the FBAR requirements. Penalties imposed for lack of awareness are not limited to non-willful penalties, even when acting on the advice of a professional. 

In certain instances, non-willful penalties are appropriate, which makes the upcoming decision of the Supreme Court so important. The significant disparity in potential penalties in Bittner demonstrates the current difficulty of an advisor in evaluating the merits of a non-willful FBAR case and how to proceed. Clearly, people with numerous foreign financial accounts face much greater uncertainty and financial consequences than those with merely one or two foreign accounts.

We look forward to how the Supreme Court will resolve the conflict in circuits in its next term.

Thanks to STEP USA and Chad M. Vanderhoef of Holland & Knight who authored this blog

[1] For those who have an interest in the requirements, please see IRS, Report of Foreign Bank & Financial Accounts (FBAR) Reference Guide, Publication 5569 (3-2022).

[2] 31 U.S.C. § 5321(a)(5)(B).

[3] 991 F.3d 1077 (9th Cir. 2021).

[4] 19 F.4th 734 (5th Cir. 2021).

[5] 31 U.S.C. 5321 authorizes the government to ‘impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314 (civil penalties depending on whether the violation was willful or non-willful).

[6] 31 U.S.C. § 5314, titled ‘Records and reports on foreign financial agency transaction’ requires the Secretary of the Treasury to require in-scope persons to keep records, file reports, or keep records and file reports, when the in-scope person makes a transaction or maintains a relation for any person with a foreign financial agency.

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