Imagine the IRS discovering your “secret” offshore bank accounts.  Imagine further that instead of the IRS assessing a penalty of $10,000 for failing to file the “FBAR”, which is the proper banking disclosure form, the IRS hits you with $10,000 in penalties for each account.  In the case of a taxpayer named Bittner, who had 272 foreign accounts, the IRS assessed $2,720,000 in penalties, rather than $10,000 for failing to file the FBAR.  In Bittner v. United States, decided this week, the Supreme Court of the United States (SCOTUS) decided against the expansive position of the IRS.  While this is good news for U.S. taxpayers with offshore financial accounts, compliance with the various disclosure requirements is still crucial.

Individuals who own or control a foreign financial account are required to file the Report of Foreign Bank and Financial Accounts (“FBAR”), FinCEN Form 114, each year.  The reporting requirement applies to offshore bank and brokerage accounts, retirement accounts, etc. with an aggregate value of at least $10,000 during the calendar year.

Under The Bank Secrecy Act, the 1970 law that implemented the FBAR reporting regime, a $10,000 penalty applies to non-willful violations of the statute.  (Willful or intentional violations are punished much more severely, including a potential referral for criminal charges).  However, the statute is ambiguously worded and raises questions about how the penalty should be applied for multiple offshore accounts.  Does a person’s failure to file the FBAR constitute a single violation, punishable by one $10,000 penalty, or does a person commit a violation for each foreign financial account that is not disclosed on the FBAR, resulting in multiple $10,000 penalties?  Several U.S. circuit courts have reached differing conclusions over the past few years, and the issue reached the U.S. Supreme Court.

In Bittner v. United States, by a 5-4 ruling, the Court held that the $10,000 maximum penalty for the non-willful failure to file an FBAR is to be applied on a per-report basis, not a per-account basis.  The Court made its ruling based on several factors.  The first factor was the penalty provision itself.  Since the penalty provision did not explicitly address the number of accounts, the Court determined that Congress’ intent was to penalize each report not filed, rather than each account.  The second factor was the government’s intent in constructing the statute. The government included per account penalties in the statute from 1986 until 2004, when the statute was amended.  In the amended version of the statute, the government deliberately left out the language that specifically allowed for a per account penalty.  This demonstrated to the Court that the government changed its intent to only penalize per report violations by removing the per account language.

The third factor was Congress’ statement of purpose of the statute.  The purpose of the statute is to require reports or records that may assist the government in criminal investigations, tax investigations, intelligence and counterintelligence investigations.  Since the purpose of the statute did not indicate an intent to maximize penalties for every non-willful mistake, the Court decided that the statute should not be interpreted to include maximizing penalties for each non-willful account.  The fourth factor is that pursuant to the rule of lenity, the statute should be construed in favor of Bittner.  The rule of lenity states that statutes imposing penalties are to be construed strictly against the government and in favor of individuals.  Following the Court’s determination of the intent of Congress (the second factor discussed above), the Court ruled that the statute should be construed favorably to the taxpayer, whose position was that the penalty should apply on a per report, not a per account basis.

From 2007 to 2011, Bittner failed to file a FBAR for the 272 foreign accounts which he owned.  The government’s position was that the penalty should be for each account not reported, for a total of $2,720,000 in penalties.  Bittner’s position was that the penalty should apply to each FBAR form not filed, in his case for the five years between 2007 and 2011, totaling $50,000.  SCOTUS’ decision saved Bittner millions of dollars in penalties.  However, the open question is whether Congress will amend the penalty provision to reinclude the language for penalties on a per account basis?

Owning a foreign account is legal and appropriate in many circumstances - - maintaining foreign real estate, transacting with foreign business counterparties, providing money to family abroad - - but U.S. taxpayers must comply with the various reporting obligations, from the FBAR form to IRS Form 8938 (and potentially other IRS forms).  If you have any questions about offshore banking, foreign assets and IRS compliance, please contact Asher Rubinstein at ar@gdblaw.com.