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U.S. Supreme Court FBAR ‘Dose of Common Sense’: Penalty Per Report

Date

March 15, 2023

Read Time

5 minutes

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With what it referred to as “a dose of common sense”, the U.S Supreme Court ruled in U.S. v Bittner that the Bank Secrecy Act’s (BSA) $10,000 penalty for the non-willful failure to file a compliant foreign bank account report (FBAR) is determined on a per-report, not a per-account, basis. For Mr. Bittner (and many others), this is a material distinction. In Mr. Bittner’s particular circumstances, the difference is a penalty of $50,000 on a 5-year per-report basis, rather than $2.72 million on an annual per-account basis.

The Court’s decision was close, with a split of five (Justices Gorsuch, Jackson, Roberts, Alito, and Kavanaugh) to four (Barrett, Thomas, Sotomayor, and Kagan). 

Foreign Financial Accounts

It is increasingly common for U.S. persons to have foreign financial accounts for any number of reasons. A U.S. person may have inherited accounts from a relative in another country, may live and work in another country, or may have vacation property and keep a local bank account for expenses in another country – all legitimate and innocuous reasons to have foreign financial accounts, neither illegal nor nefarious. 

Duty to Report

In the government’s efforts to trace funds that may be used for illicit purposes and identify unreported income for taxation, since 1970 the BSA has required U.S. persons to “keep records and file reports” when they transact with or maintain a relation with a “foreign financial agency.” The reports must contain information related to the identity and address of the participant, the legal capacity in which the participant is acting, the identity of the real parties in interest, and a description of the transaction. The duty, as the Court frames it, is binary. One either files a report “in the way and to the extent the Secretary prescribes, or one does not.”

Penalty for Violation

If the duty is not fulfilled, there are penalties for enforcement. Initially, there was a penalty for willful violations, capped at $1,000. Then in 1986, Congress authorized penalties on a per-account basis for certain willful violations. Most recently, in 2004, Congress amended the BSA to include penalties for non-willful violations, but without referencing accounts as it had earlier when it increased the penalty for willful violations, which it could easily have done. Thus, based on the language of the statute, the drafting history, and additional grounds, the Court has now clarified the per-report penalty calculation for non-willful violations.

Refunds

Although the BSA is enforced by the IRS, the FBAR penalties are not a tax and there is no amended return to file for a refund. For ongoing non-willful penalty violation examinations, the Supreme Court has spoken, and penalties are to be determined annually per report. But be aware that non-willful violation penalties can be properly assessed for mistakes – for instance, wrong information on a report or a late report can give rise to a penalty. For non-willful penalties that have been paid on a per-account basis, we are hopeful that the IRS will establish a process to request an administrative refund to avoid the need to file a refund suit.

Compliance

Although the clarity with respect to the non-willful FBAR penalty computation is welcome, penalties are to be avoided in the first place by fulfilling the duty to report.

Annual filing is required if a U.S. person has a financial interest in or has signatory authority over foreign financial accounts in excess in the aggregate of $10,000 in value at any time during the calendar year. The measure is the value of the account, not income from the account. Presently, the filing due date coincides with the filing due date for individuals—April 15—with an automatic extension to October 15. 

The reporting obligation extends to many types of filers and accounts, not just individuals with foreign bank accounts.

  • U.S. Persons: The “U.S. persons” subject to reporting requirements include U.S. citizens, wherever they live; foreign persons residing in the U.S. (resident aliens), regardless of their citizenship; and entities organized under the law of a State of the United States or the District of Columbia (but not of a territory of the United States), including partnerships, limited liability companies, corporations, and trusts.
  • Reportable Accounts: Accounts in a foreign country required to be reported include bank accounts, securities accounts, insurance and annuities with cash value, brokerage and commodities accounts, mutual funds, and ETFs.

Be aware that more than one person can have an FBAR reporting obligation with respect to the same foreign financial accounts. This is common in typical personal financial and wealth planning situations. For example:

  • Principal and Agent: If a U.S. person, the Principal, names another U.S. person as Agent under a financial power of attorney and the Principal have foreign financial accounts, both the Principal and the Agent are required to file FBAR reports, subject to the aggregate $10,000 reporting threshold.
  • Grantor, Trustee(s), and Beneficiaries: If a Grantor establishes a trust which holds a foreign financial account, the Grantor, each Trustee, and certain Beneficiaries may have FBAR reporting obligations for the same account held by the trust. The Grantor will have reporting obligations if the Grantor is treated as the owner of the trust for income tax purposes under the grantor trust income tax rules. The Trustee or Trustees will have a reporting obligation as the holders of the legal title to the foreign financial account. Each Beneficiary with a present financial interest in more than 50% of the assets of the trust or who receives more than 50% of the current income from the trust is required to file an FBAR. There is, however, an exception for a Beneficiary if the U.S. Trustee or U.S. agent of the Trustee filed. All reporting is subject to the aggregate $10,000 reporting threshold.

The ruling of the Court in Bittner is good news for every U.S. person with a reportable foreign financial account. It is also a reminder to attend to 2023 and future annual FBAR filings.

If you have questions regarding your wealth planning and foreign financial accounts, contact a member of the LP Trust and Estates Group.


Filed under: Trusts & Estates

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