On Feb. 28, 2023, the U.S. Supreme Court issued its opinion in Bittner v. United States, which focused on the correct penalty amount for non-willful violations of the foreign bank and financial accounts (FBAR) filing statute. The FBAR is an annual form to report bank accounts held outside the U.S. While not a tax form, the IRS administers compliance with the FBAR filing requirements and determines penalties for noncompliance. In a 5-4 decision, the Court held that the statute only authorizes a penalty on a per-form basis and not on a per-account basis. This is a significant victory for Alexandru Bittner and those similarly situated because the difference between a per-form and per-account penalty can be drastic.
While the case at its base is a dispute over statutory construction, it does have near-term practical consequences and points to areas of tax administration that Congress and the Internal Revenue Service should address. The non-willful penalty has been in place since 2004. Nineteen years is too long to solve a problem that should never have existed in the first place.
What isn’t in dispute is that the statute and implementing regulations are ambiguous and the IRS’ and Bittner’s interpretations each have their own problems. The majority opinion moors its interpretation on Congress’ silence in 2004: “[T]he one thing Congress did not say is that the government may impose non-willful penalties on a per-account basis.” The non-willful penalty didn’t exist until the 2004 amendments. Willful penalties are calculated per account. If Congress wanted to adopt a similar penalty structure for non-willful penalties, it could have. Therefore, this couldn’t be the correct meaning.
Appeal to Practicality
A theme that runs through Justice Gorsuch’s opinion is an appeal to practicality and how these FBAR penalties are assessed in the real world. First, FBAR penalties have increased over time. These have historically been implemented with small incremental increases. Therefore, when the new penalty was enacted in 2004, it’s much more reasonable to assume that a $10,000 maximum penalty was envisioned instead of one in the millions. There’s no contemporaneous evidence that Congress intended a per-account penalty. Second, the majority highlights the IRS’ own guidance that it now sought to disown. While acknowledging that the guidance wouldn’t control its analysis, the guidance that the IRS puts out to the public informs what the statute was understood to mean when it was enacted and the years since. Reading between the lines, it appears that the majority knew that over the course of years of increased FBAR enforcement, a decision was made at the IRS to reverse course on how to assess this penalty. There was no genuine belief that this was the correct statutory interpretation from the beginning; rather, it was an after the fact justification for a policy that brought in more revenue to the fisc (no matter the harm inflicted along the way.) Last, the opinion doesn’t belittle Bittner, a Romanian-born U.S. immigrant with business interests in Romania. There are legitimate reasons for U.S. persons, whether living in or out of the United States, to have foreign bank accounts. This doesn’t mean that these people did anything wrong. A non-willful penalty is intended for violations that are based on lack of knowledge or negligence. A per-form penalty is enough for conduct that causes no tax loss whatsoever and was usually the result of poor IRS messaging.
In contrast, the dissent, while principally adopting the government’s interpretation, distorts FBAR enforcement in the real world. It portrays Bittner in a negative light while not acknowledging the benign aspects of his case and others who’ve been assessed a substantial non-willful penalty. The dissent also believes that the reasonable cause exception can help when, in fact, the IRS’ implementation of reasonable cause in the FBAR context raises a bar that’s very hard to reach.
Administrative Refund?
The immediate effect of the case is that ongoing examinations with FBAR non-willful penalties will need to follow Bittner. For already assessed FBAR penalties at the higher level, if the government files suit for an unpaid penalty, defendants should be able to have the penalties reduced or file a counter-suit on the basis of this decision. (It’s also possible that if the Court remands a penalty calculation back to the IRS for a new determination, the IRS may be time-barred.) In cases in which penalties have been partially or fully paid, the holding will allow for a refund based on the lower-calculated amount. It isn’t necessary to file a Form 843 for an administrative refund prior to filing a refund suit for an FBAR penalty because it’s not a tax or penalty found in the Internal Revenue Code. Hopefully, the IRS will provide a streamlined process to request an administrative refund without the need to file suit.
Common Sense Changes
The final takeaway from the case is that when Congress doesn’t do its job, both the government and the public suffer. With this case behind it, Congress and the IRS should consider some of the following common-sense changes:
- Raising the FBAR filing threshold from $10,000 to a much higher number or indexing the threshold to inflation;
- Relieving filers living outside the United States from filing the FBAR or increasing the threshold for expats;
- Integrating the FBAR into the annual income tax return for better exposure and increased compliance;
- Doing away with the similar but not always duplicative FBAR and Form 8938 filings;
- Allowing for a first-time penalty abatement for non-willful FBAR penalties; and
- Implementing a reasonable cause definition that considers a filer’s experience and sophistication, the residence of the filer and connection to the location of the bank account and whether there was any related tax loss.