On February 28, in Bittner v. United States, the Supreme Court held that the Bank Secrecy Act (“BSA”) imposes a maximum penalty of $10,000 for non-willful violations on a per report, not per account, basis. This alert discusses the Bittner decision, which resolved recent uncertainty in the application of non-willful foreign bank account reporting penalties.
The BSA requires U.S. persons that maintain foreign financial accounts with an aggregate balance exceeding $10,000 to file an annual Report of Foreign Bank and Financial Accounts (“FBAR”). In addition to directly holding foreign bank and financial accounts, FBAR obligations may apply to U.S. persons that have signature authority over foreign financial accounts or controlling interest in entities that maintain foreign financial accounts.
Persons required to file an FBAR but who fails to do so may be subject to penalties. Willful violations of the BSA, including failing to file a report or failing to provide account identifying information, may incur a penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation and potential criminal charges as well. Non-willful violations may incur a penalty up to $10,000 per BSA violation.
The Fifth and Ninth U.S. Circuit Courts disagreed as to how to apply penalties for non-willful violations. One appellate court upheld separate $10,000 penalties for each account that was unreported on a taxpayer’s FBAR,1 while another appellate court upheld a single $10,000 penalty for each unfiled FBAR, each of which would have disclosed 25 or more reportable accounts.2 The recent Supreme Court addresses this split among the Circuit Courts.
The Supreme Court ruled that penalties for non-willful FBAR violations should be applied on a per report basis, even though there might be multiple accounts that were unreported on the FBAR. This ruling is favorable to taxpayers to the extent it limits excessive penalties. This ruling may also have a derivative effect of diminishing the Internal Revenue Service’s effectiveness to negotiate FBAR settlements by threatening larger penalties.
This ruling does not change a U.S. person’s potential FBAR filing obligations. U.S. persons, including investment managers, should review their investment holdings and structures to determine whether an FBAR filing obligation exists.
For additional information on FBAR obligations, please contact a member of Seward & Kissel’s Tax Practice.