Updated IRS FBAR Case Procedures Guidance After Bittner

Over the past several years, there has been extensive litigation on the issue of non-willful FBAR penalties. The key issue was whether the IRS could penalize Taxpayers based on the number of accounts they failed to report or whether they were limited to a single penalty for each year that the FBAR (FinCEN Form 114) was not filed, incomplete, or filed late. Then, in 2023 the Supreme Court ruled in favor of a taxpayer and found that the IRS was limited to issuing non-willful FBAR penalties from and not per account. For example, if a Taxpayer had 15 unreported accounts, the IRS concluded that since all of those 15 accounts are listed on one single FBAR each year and because the taxpayer was non-willful, the violation should be limited to a single penalty — and not 15 penalties that would represent a $10,000 penalty per account. As a result, the Internal Revenue Service was forced to update its non-willful FBAR procedures. Let’s examine how the Supreme Court ruling in Bittner changed the landscape of non-willful FBAR penalty enforcement.

IRS Acknowledges that Bittner Limits Penalties

- - “Background: The Supreme Court held in Bittner that the failure to file a legally compliant Report of Foreign Bank and Financial Accounts (FBAR) constitutes a single violation of 31 U.S.C. 5314, regardless of the number of unreported or incorrectly reported accounts, and that penalties for non-willful reporting violations “accrue on a per-report, not a per-account basis”.

Non-Willful Violations are Per FBAR Report, Not Account

- - “Procedural Change: Each reference to “violation” as used in 31 USC 5321(a)(5) to refer to a failure to comply with the reporting requirements of 31 USC 5314 should be read to mean: a failure to file an FBAR report, in the way and to the extent the Secretary prescribes. To the extent IRM 4.26.16 and IRM 4.26.17 are inconsistent with the Court’s holding in Bittner v. United States, they will be revised as described in the attachments.”

Willful Violations are still on a Per Account Basis

- - “Whenever the term ‘violation’ is used in this IRM it includes any reporting or recordkeeping violation of 31 USC 5314, Records and Reports on Foreign Financial Agency Transactions, or its implementing regulations. The failure to file a legally compliant FBAR constitutes a single reporting violation. Under 31 USC 5321(a)(5)(B)(i), penalties for non-willful violations apply on a per-violation basis, capped at $10,000 for each violation. However, under 31 USC 5321(a)(5)(C) and (a)(5)(D)(ii), penalties for willful reporting violations apply on a per-account basis. Consequently, a single non-willful reporting violation can only result in a single penalty, but a single willful reporting violation can result in multiple penalties depending on the number of accounts which were not properly reported.”

Recommended Penalty is for Each Year of Non-Willful Violation

- - “Renumber previous paragraph (4) as paragraph (1) and revise to read as follows: In most cases of non-willful violations, examiners will recommend one $10,000 penalty (adjusted for inflation as described in IRM 4.26.16.5.4(5)) per violation. In ascertaining the penalty amount for non-willful violations (assuming the reasonable cause exception does not apply), examiners should use their discretion to calculate a penalty commensurate with the facts and circumstances of a case. See IRM 4.26.16.5.2.1 for more information about examiner discretion. The provisions in paragraph (4) below apply to this paragraph.”

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer 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 who 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.

**Need Help Finding an Experienced Offshore Tax Attorney?**

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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