IRS Curtails Mitigation of Some FBAR Penalties After Bittner

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The IRS will no longer routinely reduce the penalty for non-willful failure to file Reports of Foreign Bank and Financial Accounts (FBAR) following a major Supreme Court decision.

An IRS memorandum of guidance from early July that updated Report of Foreign Bank and Financial Accounts (FBAR) examination procedures says the agency will eliminate mitigation provisions for non-willful FBAR violations, leaving mitigation up to the IRS examiner case by case.

Mitigation provisions “should no longer be considered in calculating penalties for non-willful violations,” reads the memo, which has been cited in news reports.

“Pursuant to the Bank Secrecy Act (BSA) and its implementing regulations, a United States person having a financial interest in, or signature or other authority over, one or more foreign financial accounts must file an annual reporting form known as an FBAR if the aggregate value of such account(s) exceeds $10,000 at any time during the calendar year,” the memo adds by way of background.

Reacting to the High Court

Late last year, the U.S. Supreme Court ruled in Bittner v. United States against a $2.72 million fine on a businessman, Alexandru Bittner, who didn’t file reports for five years when he was living in Romania. Bittner maintained that he owed $50,000, or the $10,000 penalty for each of the five years. The IRS claimed he owed for each account, a total of 272 violations.

The case hinged on whether a “violation” under the BSA is the failure to file an annual FBAR no matter the number of foreign accounts or a separate violation for each account that isn’t properly reported.

“As the Court notes in its decision,” the IRS memo continues, “this reporting is ‘designed to help the government “trace funds” that may be used for “illicit purposes” and identify “unreported income” that may be subject to taxation.’

“The FBAR penalty statute … authorizes the Secretary to impose a penalty on any person who violates a provision of the FBAR reporting statute,” the memo adds. “For the amount of the penalty, the statute provides for a maximum penalty of $10,000 or, in the case of a willful violation: the greater of $100,000 or 50% of the balance in the account at the time of the violation.”

The IRS says it has historically interpreted “violation” to mean the failure to report a given account properly. The Supreme Court, however, held that the failure to file a legally compliant FBAR constitutes a single violation, regardless of the number of unreported or improperly reported accounts.

Mitigation deleted

An attachment to the IRS memo specifically deletes various mitigation measures for non-willful filing penalties per-filer per-year. Previously, for example, if the maximum aggregate balance for all accounts related to violation didn’t exceed $50,000 during a calendar year, the mitigated penalty was $500 per non-willful violation and the total non-willful penalties couldn’t exceed $5,000 per year.

“In most cases of non-willful violations, examiners will recommend one $10,000 penalty … per violation,” the memo says, adding that the penalty is now up to the case examiner.

The penalties for willful reporting violations apply per-account and guidance for calculation of penalties for willful reporting violations remains unchanged, the memo adds.

Observers say the elimination of mitigation alternatives draws a blurry line between willful and non-willful FBAR non-filings; appeals are urged, for now, in non-willful cases where mitigation is denied.

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About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA), the International Fiscal Association (IFA), a member of Clarkson Hyde Global, a world-wide association of accountants, auditors, tax specialists and business advisors and the Global Referral Network (GRN).

Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession. 

In 2021 and 2022, Alicea was the Gold and Silver Winner, respectively, of Citywealth’s Powerwomen Awards in the category USA – Woman of the Year – Business Growth (Boutique). In 2023, she continued her winning streak by receiving the Gold award for Company of the Year Female Leadership (Boutique). Furthermore, Alicea is currently listed in the Global Elite Directory 2023, which is an annual exclusive directory of the world’s elite lawyers and outstanding wealth advisors advising ultra-high net-worth clients.

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