Supreme Court Rules on Bittner v. United States

“Supreme Court Rules on Alexandru Bittner v. United States,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Margaret Van Houten, ACTEC Fellow from Des Moines, Iowa. In August of 2022, ACTEC filed an amicus brief with the Supreme Court in Bittner v. United States. This important case dealt with the Bank Secrecy Act and addressed the construction and application of the $10,000 civil penalty for Foreign Bank Account Reporting or FBAR. In February 2023, the Supreme Court passed judgment on the case. ACTEC Fellow Suzanne Shier of Chicago, Illinois worked on the amicus brief team and is here today to update us on the ruling. Welcome, Suzanne.

Supreme Cout Opinion

ACTEC’s Amicus Brief

Bittner Background

Thank you, Margaret. I’m delighted to be here. With what I referred to as a dose of common sense, on February 28th, the US Supreme Court ruled in US v. Bittner that the Bank Secrecy Act’s $10,000 penalty for the non-willful failure to file a compliant Foreign Bank Account Report or FBAR, is determined on a per report, not a per account basis. For Mr. Bittner and many others, this is a material distinction. In Mr. Bittner’s particular circumstances, the difference is a penalty of $50,000 on a five-year per-report basis, rather than $2.72 million on an annual per-account basis.

The Court’s decision was close with a split of five: Justices Gorsuch, Jackson, Roberts, Alito, and Kavanaugh, to four: Justices Barrett, Thomas, Sotomayor, and Kagan. This is an unusual constellation of Justices, to say the least. Justice Gorsuch delivered the opinion of the majority, and Justice Barrett, the dissent.

ACTEC Amicus Brief

As Margaret mentioned, the American College of Trust and Estate Counsel submitted an amicus brief written by a working group of members of the International Estate Planning Committee and the Amicus Review Committee. The ACTEC brief, which focused on educating the Court on FBAR issues related to private financial gift and estate planning, is cited in the Court’s opinion.

It is increasingly common for US persons to have foreign financial accounts for any number of reasons. A US person may have inherited accounts from a relative in another country, may live and work in another country, or may have vacation property and keep a local bank account for expenses in another country. All legitimate and innocuous reasons to have foreign financial accounts; neither illegal nor nefarious.

Mr. Bittner was born in Romania, immigrated to the United States in his youth, was naturalized in the United States, then returned to Romania after the fall of Communism, lived and worked in Romania until he returned to the United States in 2011. Mr. Bitter had been unaware prior to his return to the United States that he was subject to FBAR reporting requirements due to his US citizenship, even while he was living in Romania. Mr. Bittner had numerous business accounts, which he reported on late filed FBARs, which required amendment after filing.

FBAR Penalties

The specific issue before the Court was the penalty computation. A $50,000 penalty for FBAR reporting violations for five years at $10,000 per year or a $2.72 million penalty computed on the basis of the number of years AND the number of accounts. Turning to the duty to report, in short, the Court determined that the violation was a failure to file an annual report and that the penalty is assessed based on that violation alone.

By way of background, in the government’s efforts to trace funds that may be used for illicit purposes and identify unreported income for taxation, since 1970, Section 5314 of the Bank Secrecy Act has required US persons to “keep records and file reports when they transact with or maintain a relationship with a foreign financial agency.” The statute specifies that the reports must contain information about the identity and address of the participants in the transaction or relationship, the legal capacity in which a participant is acting, the identity of the real parties and interests, and a description of the transaction. The duty, as the Court frames it, is binary. One either files a report in the way and to the extent the Secretary prescribes, or one does not.

There may be a single simple, inadvertent mistake or multiple willful errors. Both constitute a violation of Section 5314, and it is the violation that is the central issue. Then, we have penalties. If the duty under Section 5314 is not fulfilled and a violation occurs, there are penalties for enforcement. There are both civil penalties and criminal penalties and penalties for non-willful violations and willful violations. The civil penalties are in Section 5321.

And, although Section 5314 makes no mention to the number of accounts, Section 5321’s civil penalties for non-willful violations and for willful violations are distinct in regard to accounts. Initially, there was a penalty for willful violations capped at $1,000. Then, in 1986, Congress authorized penalties on a per-account basis for certain willful violations. Most recently in 2004, Congress amended the Bank Secrecy Act to include penalties for non-willful violations –but, without referencing accounts as it had earlier, it would increase the penalty for willful violations.

Bittner Decision Clarifies FBAR Penalties for Non-Willful Violations

The Court looked at the statutory language, the informal IRS guidance for taxpayers, and the drafting history with respect to non-willful violations and willful violations. Based on the language of the statute, the drafting history, and the informal IRS guidance, which admittedly is not binding, the Court has now clarified the per-report penalty calculation for non-willful violations.

Well, what about taxpayers who have paid violations? Violations and penalties have been assessed. The question of refunds arises. Although the Bank Secrecy Act is enforced by the Internal Revenue Service, the Foreign Bank Account Reporting penalties are not a tax, and there’s no amended return to file for a refund.

For ongoing non-willful penalty violation examinations, the Supreme Court has now spoken, and penalties are to be determined annually per report, but be aware that non-willful violation penalties can be properly assessed for simple mistakes. For instance, wrong information on a report or a late report can give rise to a non-willful penalty. For non-willful penalties that have been paid on a per-account basis, we were hopeful that the IRS will establish a process to request an administrative refund to avoid the need to file a refund suit. But, we have ongoing concerns regarding compliance. Although clarity with respect to the non-willful FBAR penalty computation is welcome, penalties are to be avoided in the first instance by fulfilling the duty to report.

Annual filing is required if a US person has a financial interest in or a signatory authority in foreign financial accounts and excess in the aggregate of $10,000 in value at any time during the calendar year. The measure is the value of the account, not income from the account. Presently, the filing due date coincides with the filing due date for individuals: April 15, with an automatic extension to October 15. The reporting obligation extends to many types of filers and accounts, not just individuals with foreign bank accounts.

And be aware that more than one person can have an FBAR reporting obligation with respect to the same foreign financial account. This is common in typical personal, financial, and wealth planning situations. For instance, a principal and an agent under a power of attorney can both have reporting obligations. And in the case of a trust a grantor, trustees, and beneficiaries can all have reporting obligations. So, it’s important to look at reporting obligations year-by-year, case-by-case. The ruling of the Court in Bittner is good news for every US person with a reportable foreign financial account. And it is also a reminder to carefully attend to 2023 and future filings. Thank you.

Thank you, Suzanne, for that wonderful presentation. And also, thank you for all of your work on the amicus brief.

You may also be interested in:

• ACTEC’s Supreme Court Amicus brief in Alexandru Bittner v. United States (Nov. 2022)
• Supreme Court Opinion
• ACTEC’s Amicus Brief

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