Supreme Court Limits FBAR Penalty, Should Taxpayers Worry?

Supreme Court Limits FBAR Penalty, Should Taxpayers Worry?

The Supreme Court’s FBAR Ruling 2023

Now that the Supreme Court has ruled in favor of Bittner and against the IRS for FBAR purposes, this ruling will undoubtedly have an impact on how FBAR matters are handled by the U.S. government for years to come. As a result of the ruling, the IRS is limited in how it can assess non-willful civil FBAR penalties when a U.S. person failed to report foreign bank and financial accounts on the annual FBAR (aka FinCEN Form 114). From a technical standpoint, taxpayers with foreign accounts file one FBAR per year – whether they have a single account or multiple accounts. Prior to Bittner, the IRS had the liberty of determining whether it would issue a Per Form penalty (one penalty per year) or a Per Account penalty (based on the number of accounts). What are the potential pitfalls in the coming years?

Will There Be a New FBAR Form?

If the IRS can no longer issue multiple penalties for taxpayers who missed reporting foreign accounts, there is the concern that the Government could revamp the FBAR Form so that Taxpayers have to report each account on a separate form. This was surmised by the Supreme Court in its ruling and is something to keep an eye on.

From the Bittner ruling:

      • “The government replies that the per-report interpretation risks the anomaly that the Secretary could formulate reporting requirements to require a separate report for each account and in that way effectively achieve a per-account penalty for nonwillful violations.”

Shift Focus to Other International Reporting Forms

When a US person has foreign assets, the FBAR is only one of several IRS international information reporting forms they must file. Some Taxpayers may have to file additional forms as well as (or instead of) the FBAR depending on the type of account they have. This could include forms to report foreign trusts (Form 3520/3520-A), foreign gifts (Form 3520), foreign corporations (Form 5471), foreign partnerships (Form 8865), and foreign assets (FATCA Form 8938).

Potential Uptick in Willfulness Cases

It is very important to note that the ruling does not impact civil willful FBAR violations. There is no bright-line test to determine willfulness — and willfulness penalties can reach upwards of 50% maximum value of unreported accounts – assessed on an annual basis, up to six years. That is not to say that the IRS can just now determine that a non-willful violation is willful, but since there is no bright-line test to determine willfulness, it can make the waters much murkier than they were prior to the issuance of the Bittner ruling.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

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