updated 2:28 PM CEST, May 24, 2023

FBAR experts: SCOTUS Bittner decision could see shift towards more ‘willful’ charges, greater 'rule of lenity' awareness

U.S. Supreme Court Pixabay U.S. Supreme Court

(...or possibly not...)

Regular watchers of the way U.S. officials have been prosecuting American taxpayers whom they deemed to have committed "non-willful" breaches of the government's so-called FBAR regulations didn't have to be asked twice for their thoughts on Tuesday's landmark U.S. Supreme Court decision that – at long last – finally established how penalties for such breaches are to be determined. 

Within hours of the court's announcement of its decision, tax professionals as well as tax lawyers, American expatriates and others mostly hailed the ruling on such social media sites as Twitter and LinkedIn.

Especially as the ruling began to be studied in detail, though, certain questions began to emerge, such as how the decision might ultimately affect the way individual cases of un-filed FBARs (Reports of Foreign Bank and Financial accounts, aka Form114s) and other similar matters are likely to be dealt with by the government in the future.  

Some also questioned what, if anything, the ruling might mean for those taxpayers unlucky enough to have already paid eye-wateringly large non-willful FBAR penalties that had been determined using the more persecutory, and now no longer to be used, "per account" basis. 

"RT This is big news!!! US Supreme Court rules in Bittner that the civil non-willful #FBAR penalty is based on the failure to file the form and NOT based on each account. More analysis later!!," tweeted Toronto-based lawyer and American expat campaigner John Richardson (@ExpatriationLaw), within hours of the decision having been announced. 

Virgina La Torre Jeker (@VLJeker), a well-known American expat tax specialist based in Dubai, was also quick to tweet "BREAKING! US Supreme Court – FBAR "Nonwillful" Penalty is Per Form and NOT Per Account," which she followed with a link to a 500-word analysis she'd posted on her website, us-tax.org. 

"What we have all been waiting for!" La Torre Jeker wrote, in her website article, which was updated on March 3.

"Bittner v. United States was just decided hours ago by the United States Supreme Court! An amazing taxpayer win."

The morning after the Supreme Court's ruling came out, Richardson and La Torre Jeker discussed it further together, for a podcast (about which more details and a link may be found by clicking here). 

As reported, the Supreme Court on Feb. 28 ruled that the US$10,000 maximum penalty for those American taxpayers who have had non-U.S. bank accounts that they'd failed to report to U.S. officials annually, if their non-disclosure is found to have been "non-willful," should only be applied on a per-(FBAR) form basis, and not per account. 

The court's decision with respect to the way non-willful FBAR penalties should be assessed had long been sought by those caught out by the still-little-known FBAR regulations, and their lawyers, and for this reason was enthusiastically welcomed by many Americans, in the U.S. as well as abroad, who had been watching lower courts contradicting one another over non-willful FBAR penalties for years.

(A separate penalty regime also exists for willful FBAR cases, which for different reasons also often end up in court.) 

Considerations: Lenity, preponderance
of evidence, likelihood of a legal challenge

Jack Townsend, a Charlottesville, Virginia-based offshore tax expert whose FederalTaxCrimes.blogspot.com blog is avidly-read by other cross-border tax practitioners, pointed to a couple of points about the Bittner decision that stood out to him, in thoughts he (like Richardson and La Torre Jeker and others) posted within hours of the decision having been announced.

Justice Neil M.Gorsuch's own opinion, featured in the 32-page court document – "II-C, relating to  lenity" – for example, he noted, had attracted the support of only one other justice, "and hence [was] not part of the opinion of the Court [which Gorsuch had written]." 

'Lenity' is a legal term that refers to a court understanding that whenever a law is unclear or ambiguous – which is what most FBAR experts and observers would say the FBAR penalties were before Tuesday's decision – the court in question should rule in a way that is most favorable to the defendant. 

Townsend later elaborated on his opinion of the ruling, when asked to by the American Expat Financial News Journal.

"Three of the justices who agreed that the penalty should be assessed per form rather than per account did not concur in the majority opinion by Gorsuch discussion of the application of lenity in Part II-C," Townsend said.

"That is, they agreed [only] with the holding that the best interpretation was per form. The four dissenting judges held that the best interpretation was per account. Thus the majority wins – the law now is per form." 

As for whether the Bittner decision would affect criminal prosecutions "either in charging decisions, or how they are presented in a criminal case," Townsend said he didn't think so, adding: "The IRS already has enough FBAR criminal cases to make its point in criminal cases.

"Further, the 'beyond a reasonable doubt' burden-of-proof in criminal cases means that they have already picked the best cases for criminal prosecution. [So] the process for choosing cases for criminal prosecution is not likely to be affected by the Bittner decision."

Townsend did concur with many other observers in predicting that willful FBAR prosecutions will become more common as a result of last week's decision.

"While the Bittner decision may cause the IRS to assert the civil willful FBAR penalty in more cases," Townsend said, it was important to remember that "unlike the criminal cases, for the civil willful penalty, the government needs to prove willfulness by a preponderance of the evidence, rather than [just] beyond a reasonable doubt.

And yet, "my sense is that the IRS in some cases – maybe in many cases – asserted the non-willful penalty where it could have asserted the willful penalty because, on a per account basis, the amount of the non-willful penalty was significant relative to the amount of the willful penalty.

"That certainly was the case for Bittner, where, I speculate, the IRS would likely have asserted the willful penalty if it had known it would have only gotten one non-willful penalty per year.

"Of course, the IRS and DOJ Tax [Justice Department's tax office]  have to work harder, [and allocate greater resources], for the willful penalty than for the non-willful penalty.

"So, I speculate, some will benefit from the Bittner decision, but some will not benefit, in that they will get willful penalties and incur great expense [in attempting to fight them].

"So the bottom line, overall, is that the Bittner decision will help in most cases, but may prove [more] costly in some other cases."

'Importance of a good legal rep'

Frank Agostino, founder and president of Hackensack, New Jersey-based Agostino & Associates, and a former IRS attorney, said that the Bittner decision didn't change one increasingly obvious fact about FBAR legal challenges, which he says is the importance for the individual in question of having a good legal representative, to help them  tell their story early on.

This is because the determination of such things about their case as willfulness vrs. non-willfulness "depends on the facts and circumstances of each case, and the ability of the taxpayer to tell their story" in such a way that that it gets placed in the correct, least-serious category early-on, he explained.

Agostino pointed to the example of another highly-publicized FBAR case that the Supreme Court in January declined to hear, involving an 82-year-old Boston, Massachusetts-based immigrant grandmother named Monica Toth, whose family had escaped from the Nazis.

As media reports about her case invariably point out, the money-conscious Toth used to do her own tax returns, using forms she got from a public library, which ultimately resulted in her making regular mistakes – which in turn is now seen as the reason she initially caught the attention of IRS agents on the look-out for dodgy and inadequate filings, and also resulted in her being unaware of her FBAR-filing obligations. 

Then, once the IRS began to come after her, Toth initially represented herself rather than getting a lawyer, which is another reason many observers suggest that she ended up with a US$2.17 million, "willful" FBAR penalty that, owing to the Supreme Court's disinterest in her case, she now stands little chance of being able to avoid having to pay.

"The U.S. Tax Code is complex, difficult to interpret, and has countless inconsistencies and contradictions," Agostino pointed out.

"Several commentators [on the Bittner case] have recognized that the complexity of the Tax Code's international provisions makes it difficult for international taxpayers to understand their obligations, and creates uncertainty about how the law should be applied in particular situations.

"Against this background, Bittner is important because its applies the rule of lenity to international information reporting penalties. With tax cases, the rule of lenity means that if there is uncertainty about how a particular provision of the tax code should be interpreted, the ambiguity should be decided for the taxpayer.

"This means that if there is more than one reasonable interpretation of a provision of the law, the IRS should apply the interpretation that is most favorable to the taxpayer.

"Applying the rule of lenity to international reporting penalties, [if it continues], will reduce the number of civil penalties applied against international taxpayers, and make it easier to voluntarily comply – i.e., there should be less of a fear of arbitrary and capricious penalty assertions." 

'Common sense and what's fair didn't win' 

For Charles Bruce, a Washington, DC-based tax attorney who has also worked out of London and Lausanne, Switzerland, and who has spent decades watching courts wrestle with FBARs and related U.S. laws aimed at preventing tax evasion by wealthy Americans using non-U.S. bank accounts and other means, last week's SCOTUS decision was too little and too late. 

"This decision should not be seen as a rainbow auguring better times," Bruce said, stressing that he was speaking for himself and not any other entity, such as the Washington, DC-based American Citizens Abroad, of which he is the legal counsel, or its sister organization, the ACA Global Foundation, which he chairs.

"The fact that this set of facts has bounced around so many courts, and won in a narrow 5 to 4 decision, shows that taxpayers with problems involving foreign accounts, or for that matter foreign anything, are swimming up a waterfall.

"It’s simply bad that the system, meaning the IRS, did not see this as a disaster in the making. It just rocked along with no one ringing a bell. Not a proud thing.

"The common sense that came to the majority’s consideration [last Tuesday]  should have come to the IRS’s work on FBAR penalties years ago.

"Lastly, the taxpayer did not win by arguing what’s fair. Common sense and nuanced legislative interpretation is not the same as 'it ain’t fair'.” 

Toronto lawyer Richardson is of a similar conclusion, which he tweeted some days after the verdict was published, and based on the lack of agreement on the part of the nine justices in their decision on the Bittner case. 

"The real story is that this FBAR issue even had to be resolved by the Supreme Court," he tweeted.

"Think of it: The IRS is levying life-altering penalties based on violations of a statue that is so unclear that even the Supreme Court couldn't agree on what was intended."

Related articles:

In long-awaited landmark FBAR ruling, Supreme Court finds in favor of Bittner, and 'per form/year' accounting of penalties

Richardson, La Torre Jeker podcast: 'The morning after the U.S. Supreme Court FBAR decision in Bittner'

FBAR Timeline: 'How we got here'

U.S. Supreme Court to begin hearing Alexandru Bittner FBAR case arguments tomorrow (Nov.2nd)

U.S. Supreme Court (at last) agrees to decide on penalty for non-willful FBAR filing failures

FBARs (FinCEN Form 114s), Form 8938s and Form 8966s: not just one but three ways Uncle Sam monitors Americans’ overseas holdings

U.S. Supreme Court declines to hear FBAR case

Alexandru Bittner is latest FBAR litigant to petition Supreme Court for definitive penalties ruling

IRS: 'Cryptocurrency accounts to be included in FBAR reports'