- The United States Supreme Court recently issued a ruling in Bittner v. United States, 143 S. Ct. 713 (February 28, 2023).
- The ruling addressed the penalties for taxpayers who fail to comply with the obligation of filing an annual report (called an “FBAR”) under the Bank Secrecy Act that is due by April 15th each year (with a 6-month extension available to October 15th).
- Any failure to file triggers a fine of up to $10,000 for non-willful violations or up to $100,000 and up to five years in prison for willful violations.
- The Supreme Court ruled that the penalties apply per report, not per account – meaning if a taxpayer has multiple accounts, only one penalty applies for failing to file the necessary reports.
- Taxpayers concerned about FBAR penalties or other tax matters should contact a Wood + Lamping tax attorney.
The United States Supreme Court recently clarified a murky area of law and handed a major victory to American taxpayers living abroad or who have funds on deposit in foreign bank accounts. The Court’s ruling addressed the penalties for a taxpayer’s failure to comply with its obligation to report foreign bank accounts under the Bank Secrecy Act.
What You Should Know About FBAR Requirements
Congress enacted the Bank Secrecy Act (the “BSA”) to track financial transactions that could be used for money laundering and other illegal purposes and to identify unreported taxable income deposited into foreign accounts. The BSA requires taxpayers to file an annual report called an “FBAR” identifying the foreign bank accounts in which a taxpayer has a financial interest or control when the aggregate value of such accounts equals at least $10,000 at any time during a calendar year. Like tax returns, these reports are due by April 15th each year, with an automatic six-month extension available to file by October 15th. But instead of filing an FBAR with the IRS, taxpayers file them with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).
Penalties for FBAR Violations
The BSA imposes harsh penalties for failure to file an FBAR. “Non-willful” failures trigger a fine of up to $10,000, and “willful” failures carry penalties of up to $100,000 and up to five years in prison. Despite the substantial penalties, many taxpayers are unaware of the FBAR requirements.
The Supreme Court recently resolved a split in the federal courts about applying non-willful FBAR penalties. Some courts applied the $10,000 penalty to each FBAR a taxpayer failed to file, and other courts applied the penalty to each unreported bank account. The difference is significant.
For example, imagine an American citizen working abroad for the past two years who has two checking accounts and one savings account with a foreign bank. He didn’t know about the FBAR, so his failure to file was non-willful, and he filed the two FBARs as soon as he learned about it. If the penalty applies to each unfiled FBAR, he would pay $10,000 for two years, totaling $20,000. If the penalty applies to each unreported account, he would owe $30,000 per year ($10,000 for each of his three bank accounts), for a total FBAR penalty of $60,000.
Changes for American Taxpayers Living Abroad
The Supreme Court resolved this question in Bittner v. United States, 143 S.Ct. 713 (February 28, 2023). The Court held that non-willfull FBAR penalties apply per report, not per account. This is a win for taxpayers with foreign accounts, but there is still some ambiguity about when a taxpayer’s failure to file becomes “willful.”
What Should I Do Next?
It is important to understand your obligations under the Bank Secrecy Act and any potential penalties for failing to comply. Working with a qualified tax attorney can help ensure that any FBARs you file are accurate and in compliance with all applicable laws. If you are concerned about penalties for failure to file FBARs or other tax matters, please contact a Wood + Lamping tax attorney at https://woodlamping.com/practice-areas/tax/.