Income tax matters often come before the US Supreme Court without the fanfare given to politically or socially charged issues. This is the case of the Court’s narrow 5-4 opinion in favor of limiting the IRS penalties assessed to taxpayers who unwilfully fail to file the required Foreign Bank Account Reports(FBARs).
An unwilful act is a legalese for a mistake. A willful act means a person, a taxpayer in this case, intended to lie and defraud.
The Court’s finding on February 28, 2023, resolved a split in the lower courts of whether the penalty of $10,000 can be assessed to taxpayers making an honest mistake with no intention of filing an inaccurate return. The penalty issue centered around the unwilful actions of taxpayers being assessed $10,000 on a per-report or a per-account basis.
The focus of this blog is what the Court addressed in its ruling, and what it chose not to mention and remained silent.
Since the IRS does not accept ignorance of the tax code as a defense, the limit of this penalty is predicated upon the taxpayer’s intent. Logically, mistakes should not be penalized the same as intentional fraud.
The Court’s finding limited the “mistake” penalty to $10,000 per FBAR not filed and not on a per-account basis. This is a significant limitation as more than one account can be reported on one FBAR form.
Unfortunately, the Court did not address whether its 2023 ruling is retroactive to the original 2021 federal. If retroactive to 2021,taxpayers will be allowed to request a refund from the IRS within the 3-year period under the statute of limitations to do so.
The requirement to file a FBAR to report foreign accounts with a balance of more than $10,000 falls under the provisions of the Bank Secrecy Act. The government’s position was that the statute allowed for a penalty of $10,000 to be assessed on each account not reported. In plain English, a taxpayer with ten foreign accounts exceeding $10,000 would face penalties of $100,000, or $10,000 for each account.
Under the 2023 ruling, the taxpayer in the above example would be subject to the maximum penalty of $10,000 if all ten accounts were reported on one FBAR form.
In 2021, a federal court rejected the IRS’s practice and found that the penalty assessed to taxpayers for their mistakes is $10,000 per FBAR not filed. Unfortunately, another federal court agreed with the government’s right to assess $10,000 per account.
This is how and why the issue came before the US Supreme Court.
The Court’s Reasoning
In the majority opinion, the Court found that the Bank Secrecy Act did not speak to accounts or to the number of accounts. The statute spoke to the FBAR. Either a taxpayer complies with the statute by filing the FBAR or not. If Congress meant for the penalty to be assessed on a per-account basis, it would have explicitly provided for this distinction as it had in other statutes.
It is important to note that this $10,000 limitation applies only to taxpayers who had no intention to defraud, but simply made an honest mistake. Ignorance of the tax code will not negate a penalty, but an honest mistake will now limit it.
Conclusion
The Supreme Court’s finding settled the penalty in the future, meaning tax forms for 2022 filed subsequent to the 2023 ruling, and in future years. But what about the taxpayers who made the honest mistake of not filing their FBARs in 2021, the year of the initial federal ruling? These taxpayers with no intention to defraud were penalized the same as those who willfully defrauded the government.
Every US taxpayer has the right to file an amended return to seek a refund from the IRS within three years of filing. The unanswered question is whether taxpayers who made an honest mistake and paid the higher penalty can request a refund from the IRS based on the 2023 ruling, retroactively.
This is what the Supreme Court did not address.
Do You Fall into the Category of an “Unwilful Act” or an“Honest Mistake” in Not Filing a FBAR? If So, Contact the Reputable Anderson Bradshaw Tax Consulting Today
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