In Bittner v. United States, Supreme Court Delivers Non-Willful FBAR Penalty Relief

• Jurisdiction: United States,Federal
• Law Firm: Taft Stettinius & Hollister
• Subject Matter: Litigation, Mediation & Arbitration, Tax, Trials & Appeals & Compensation, Income Tax
• Author: Mr Todd C. Lady and Benjamin Hager
• Published date: 23 March 2023

The U.S. Supreme Court limits penalties for non-willful FBAR violations, bringing years of dispute between taxpayers and the IRS to a close. However, questions remain as to how far this ruling may reach.

Background

The recent U.S. Supreme Court ruling in Bittner v. United States significantly impacts U.S. taxpayers with "undisclosed" offshore bank and other financial accounts. Under the Bank Secrecy Act (BSA), U.S. persons that own interests in ' or have certain authority with respect to ' foreign bank or financial accounts with a balance in excess of $10,000 at any time during the year generally must disclose the existence and balance of such accounts to the U.S. government.¹ This disclosure, a Report of Foreign Bank and Financial Accounts ' commonly known as a FBAR ' does not report an actual tax liability. Instead, the FBAR essentially reports the existence of, and interests in, such accounts. The FBAR is intended to assist the U.S. federal government in identifying U.S. persons who have money in offshore accounts that may be sourced from unreported taxable transactions or that earn income that is not reported for U.S. income tax purposes. Though the BSA is not contained within the Internal Revenue Code, the Internal Revenue Service (IRS) was delegated FBAR reporting enforcement authority in 2003.² In other words, the IRS has been tasked with policing FBAR compliance.

Notwithstanding that offshore bank accounts described in the popular press often belong to wealthy U.S. individuals who have engaged in tax evasion ' the likely overwhelming number of offshore accounts that are reported (or unreported) each year have their genesis in much less sensational fact patterns. For example:

1. Persons who are first-generation ' or even second-generation ' U.S. citizens may inherit funds held in foreign banks from their non-U.S. parents,
2. Persons who become U.S. residents ' perhaps with no intention to permanently reside in the U.S. ' may maintain foreign bank accounts in their "home" country,
3. Persons who have dual citizenship status but live outside the U.S. and have minimal U.S. ties may have offshore bank accounts and
4. Persons involved in small or medium size business conducted overseas may hold foreign currencies in offshore bank accounts Each of these situations has led to thousands of FBAR disputes with the IRS, and in many instances, the taxpayer has never heard of an "FBAR."

Because FBAR reporting is a self-reporting system, significant fines and penalties...