Opinion: Post-Bittner, might taxpayers who paid 'non-willful' FBAR penalties based on the no. of accounts they held... get a refund?

March 18, 2023
By Robert S. Schwartz and Joseph M. Lemond
Opinion

Succo/Pixabay

As regular readers of the American Expat Financial News Journal will know, the U.S. Supreme Court on Feb. 28 finally ended years of confusion over a major expatriate banking issue, when it found that a lower court – like so many others in the years leading up to this decision – had erred when it ruled in favor of an IRS policy of basing the penalties it assigned to Americans found to have "non-willfully" held numerous unreported overseas financial accounts on the numbers of such accounts they held.

Instead, the court ruled, in a close (5-to-4) decision, that such non-willful penalties for failing to file annual "Foreign Bank Account Reports" (FBARs, or FinCen Form 114s) must be based on the number of FBAR forms that the individual taxpayer in question (in this case, a dual American/Romanian citizen named Alexandru Bittner) had neglected to file.

Below, two attorneys with Herold Law, P.A., of Warren, New Jersey, explain why this landmark ruling last month is likely to see many of the dozens (or more) of taxpayers who had been found guilty of having failed to file FBARs in the past, and who paid fines based on the per-account interpretation of the rules, considering their options of being able to claim a significant amount of their overpayments money back...

The legal question before the Supreme Court in Alexandru Bittner v. United States (No. 21-1195) was whether a 2004 Congressional amendment to the Foreign Financial Information Reporting penalty (originally enacted in 1970 as part of the Bank Secrecy Act, now at 31 U.S.C. §5311 through §5367) had increased the "non-willful" failure-to-file penalty from nothing to US$10,000 on the basis of the failure to file such a report per year, or on the basis of each and every foreign financial relationship or account that had not been reported.

For example, let's take a Switzerland/United States dual citizen, whom we'll call "Ann," who had ordinary deposit accounts with two Swiss banks, in addition to two investment accounts with a single Swiss investment management firm.

The IRS found that Ann – unaware of her FBAR obligations – had negligently (or, technically, "non-willfully") failed to file such reports, as required, for the five then-remaining of six years of the IRS's non-willful FBAR penalty collection period.

The question then was as follows: Was Ann's failure to to file FBARs for these five "open" years an oversight worthy of a US$50,000 penalty (five times US$10,000) – or one worth four times that amount (US$200,000)?

As we, and other professionals whom people like Ann typically turn to when they discover that the IRS is after them know, her case is typical of what we began to see after the IRS began enforcing the non-willful FBAR penalty in earnest from 2008 onwards.

(It should be noted here that in practice, many IRS revenue agents and group managers were persuaded by taxpayers' counsel to collect less than the full amount called for in certain cases – at first aside from, and later in accordance with, Internal Revenue Service FBAR penalty mitigation guidelines.)

And then, on Feb. 28, came the Supreme Court's 5-4 decision, written by Justice Neil M. Gorsuch. As has now been widely reported (in the tax industry press at least), the SCOTUS found that properly construed and interpreted, the 2004 amendment to 31 U.S.C. §5321 (and also taking into account the untouched companion section 31 U.S.C. §5314), could mean just one thing: That the penalty is US$10,000 per untimely and/or inaccurate annual report. Not per non-U.S. account held during the year.

Consequently, the question taxpayers who paid more than US$10,000 in non-willful FBAR penalties per annual report, between 2008 and 2023, will now be asking: Will they be able to get this extra penalty money back?

We think some will be able to, mainly based upon the following two legal supports.

The cases we see supporting
non-willful FBAR penalty claims

The first case we see that would appear to support such claims is a 1993 Supreme Court decision, in Harper v. Virginia Department of Taxation, (509 U.S. 86 (1993)). In that case, the justices held that when the Court construes and interprets a federal or state tax statute, or tax-like statute, in a certain way, that way applies to all other similar situations not yet cut off from relief by the application of other relevant laws.

The second case we see as potentially supporting the case for refunds of those U.S. taxpayers whose non-willful FBAR penalties had been based on the number of accounts they held, is the Tucker Act of 1887 (28 U.S.C. § 1491 et seq., in which the U.S. waived its sovereign immunity with respect to "certain kinds of claims," according to a Cornell Law School explanation.

The way we see this working would see those U.S. taxpayers who have paid the non-willful penalty at a rate of more than US$10,000 per report per year being able to sue the U.S. government, on grounds that the extra money they paid had been illegally collected. (Such claims would need to be filed with the Court of Federal Claims, or "Claims Court," if they were for amounts of US$10,000 or more, as claims for less than that would not be cost-effective.)

While not entirely free from doubt, the Tucker Act appears to rule out the over-payment recovery potential of those taxpayers whose excess non-willful FBAR penalties were paid more than six years before they managed to file their Claims Court claim. This is because the Tucker Act (at 28 U.S.C. §2501) states that a claims suit is barred "… unless filed within six years after the claim first accrues."

And such subsequent cases as Venture Coal Sales Co. v. United States, 370 F3d.1102 (Fed. Cir. 2004), aff'g. Claims Court, construe and interpret §2501 in such ways that we foresee excess penalty claims being seen to have first accrued on the date that each non-willful FBAR penalty had been paid to the IRS.

IRS refund program in the offing?

What will be interesting in the weeks and months to come will be how the IRS decides to handle this matter – if it does.

Given the number of people who, from what we have observed, have overpaid their non-willful penalties – based on last month's Supreme Court ruling – an IRS administrative refund program is conceivable.

Such a program might take many forms, such as one that might be based on when the excess penalties were paid – for example, it might be limited to those individuals who paid their excess penalties within three years of a given refund filing date.

We are dubious that such a program will, in fact, be launched, however, for a number of reasons, including the fact that the IRS isn't legally obliged to do so.

Congress, meanwhile, has been keeping the IRS busy for months, with a seemingly-accelerating number of projects, many of which are related to the Administration's Inflation Reduction Act (of 2022), which provides for added IRS funding, with the goal of boosting tax compliance and enforcement.

This could see some out-of-pocket non-willful FBAR penalty payers looking into Claims Court filings within the next few months. If enough cases were to come forward, the Claims Court in processing them could develop a standard regime, that isn't too time consuming or expensive.

On the other hand, the numbers prompt the IRS to introduce an omnibus case settlement program of its own. But were it to do this, we think it's possible that the IRS could decide that those FBAR penalty-payers who signed agreements consenting to the collection of what the recent Supreme Court ruling has now established were excessive penalty amounts could nevertheless be excluded from such a program.

At Herold Law, as we've begun telling our U.S.-resident clients, our view is that the state contract law in effect where the taxpayer resides is likely to be seen as the most relevant consideration to the question.

In many states, to be sure, such contract laws tend to take the view that contracts that reflect "mutual mistakes of law" are not binding – and, therefore, leave open the possibility of a potential right to file a claim.

What is clear is this: Given the numbers of individuals who paid significantly higher non-willful FBAR penalties as a result of court rulings that were based on an interpretation of the law that the Supreme Court overturned on Feb. 28, it's unlikely that the Bittner decision itself represents the end of the sky-high FBAR penalty story.

And we, for sure, will be watching this space with interest...
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Robert S. Schwartz and Joseph M. Lemond are tax attorneys with Herold Law, P.A., of Warren, New Jersey, which has helped American clients from abroad as well as Homelanders with legal cases arising from IRS claims that these U.S. citizens had been found to have failed to file one or more so-called FBARs (Reports of Foreign Bank and Financial Accounts).

The views expressed above are for general information purposes only and should not be construed as the rendering of legal advice or performance of legal services on behalf of any individual by Herold Law P.A., nor should any action be taken on account of the information presented.

In accordance with professional ethical rules, furthermore, Herold Law, P.A., renders legal advice and performs legal services only in the context of an attorney-client relationship entered into before rendering advice or performing services.

Further information may be obtained by contacting Robert Schwartz, of Herold Law, P.A., at This email address is being protected from spambots. You need JavaScript enabled to view it..

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