In its first decision of 2018, the US Tax Court considered whether the six-year statute…
Rare Supreme Court Ruling Favors Taxpayers!
The US Supreme Court rarely hears tax cases, but this week ruled on a case in favor of taxpayers. The case was originally heard because lower courts issued conflicting opinions.
This week, the Supreme Court scaled back the federal penalties for failing to file required reports listing foreign bank accounts in a ruling likely to help some Americans with foreign accounts.
The justices, voting 5-4, threw out a $2.72 million fine on Alexandru Bittner, a businessman who didn’t file reports for five years when he was living in Romania. Bittner contended the maximum penalty under federal law is $50,000. The case is Bittner v. United States, 21-1195.
The decision resolves a split between the Fifth and Ninth circuits. The Fifth Circuit had held that the penalty could be imposed per unreported account (Bittner, 19 F.4th 734 (5th Cir. 2021)); the Ninth Circuit has held it can only be applied per unfiled FBAR covering all foreign accounts each year (Boyd, 991 F.3d 1077 (9th Cir. 2021)).
FBARs (Financial Crimes Enforcement Network (FinCEN) Forms 114, Report of Foreign Bank and Financial Accounts) are required to be filed annually by the Bank Secrecy Act of 1970 (BSA), P.L. 91-508. U.S. persons must report on an FBAR all financial interests in, or signature or other authority over, financial accounts located outside the United States (with certain exceptions) if the aggregate value of those financial accounts exceeded $10,000 at any time during the calendar year covered by the FBAR. The statute (31 U.S.C. §5321(a)(5)(B)) prescribes a civil penalty of up to $10,000 for a non-willful violation of any provision of the FBAR filing requirement (unless due to reasonable cause).
In the case, the IRS asserted that Bittner violated the law 272 times, once for each account not reported in those five years. Bittner said he violated the law at most five times, once for each annual report he failed to file.
Writing for the court, Justice Neil Gorsuch backed Bittner’s reading of the law. “Best read, the BSA 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,” he wrote.
Bittner, a dual US-Romanian citizen, was required to file an FBAR during the 2007-2011 period at issue in the case. Bittner and his allies said the government’s interpretation left taxpayers vulnerable to punitive fines for obligations many people do not know they have.
The Biden administration defended the larger fines, arguing that each foreign account is a distinct concern for the government. The administration pointed to a provision that shields people from fines if a violation was due to “reasonable cause” and said the law gives the Treasury Department discretion to impose a penalty below the maximum when warranted.
Tax compliance issues for Americans with accounts abroad have increased in the past decade, pushing many Americans to give up their passports. Congress added another set of forms starting in 2011 with the Foreign Account Tax Compliance Act.
The case is a rare win for taxpayers with foreign accounts. However, penalties are still very high for non-compliance. Noncompliant taxpayers are encouraged to use some of the voluntary disclosure programs with reasonable penalties to come into compliance.
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