Bloomberg Tax
March 3, 2023, 9:45 AM

Foreign Account Penalty Lawsuits Loom After SCOTUS IRS Ruling

Aysha Bagchi
Aysha Bagchi

Following a Supreme Court ruling that the IRS has been over-penalizing people for non-willfully failing to report their foreign accounts, practitioners are hoping courts will further curb the IRS penalties in both willful and non-willful cases.

In a 5-4 ruling Tuesday, the high court agreed with Romanian-American businessman Alexandru Bittner that the IRS should have hit him with just five $10,000 penalties for his five years of non-willful reporting failures, rather than the 272 penalties it imposed—one for each unreported account in each of the five years. The penalty enforces a requirement under the Bank Secrecy Act and related rules for foreign bank and financial account holders to report assets exceeding $10,000 through a filing known as an “FBAR.”

While the ruling will benefit foreign account holders facing non-willful penalties, many others have faced penalties of 50% of the value of their foreign accounts for reporting violations that the IRS has deemed willful. Those penalties weren’t affected by the ruling.

Victor Jaramillo, a tax lawyer at Caplin & Drysdale, said he has seen tax returns that are 6 inches thick and questioned whether taxpayers notice the IRS’s foreign accounts inquiry on Schedule B, Part III of individual tax return Form 1040.

“But some courts have said, you signed the return, had a duty to review, and that box is checked ‘no.’ Willful! Do not pass go, pay 50 percent of the account balance,” Jaramillo wrote in an email to Bloomberg Tax.

Several courts across the country have agreed with the government that a “willful” FBAR failure doesn’t include merely intentional non-reporting. In Bedrosian v. United States, for instance, the US Court of Appeals for the Third Circuit said objectively reckless conduct is willful. In Kimble v. United States, the Federal Circuit said an account holder doesn’t need to know about the reporting requirement in order to willfully violate it.

Other Challenges

The court interpretations of “willful” FBAR violations have riled many practitioners, with some noting the much stricter standard for willful conduct in criminal tax cases, where the government must show a taxpayer intentionally violated a known legal duty.

“What’s deemed to be willful versus non-willful is an issue that I think many tax practitioners are concerned with,” said Larry Hill, a tax partner at Steptoe who has represented various clients facing FBAR penalties.

The government also largely has succeeded in cases over whether both willful and non-willful penalties still can be collected after the non-reporter has died, and whether large willful penalties violate the Eighth Amendment’s prohibition against excessive fines.

When it comes to those cases, language in the Bittner opinion about the penal nature of FBAR penalties could impact how the Supreme Court views the penalty, according to Jeff Neiman, an attorney at Marcus Neiman Rashbaum & Pineiro LLP who has handled FBAR cases.

Neiman noted in particular a portion of Justice Neil Gorsuch’s opinion that was signed onto by Ketanji Brown Jackson, but was not part of the majority opinion, in which Gorsuch said settled law dictates that penal statutes should be construed strictly so that individuals aren’t penalized unless the statute’s words “plainly impose” the penalty.

If Gorsuch and other justices were to see the penalties as penal, that could breathe fresh life into account holders’ legal challenges. Several courts have sided with the government in both the Eighth Amendment cases and the cases over whether penalties survive death because they have concluded that the penalty is remedial rather than penal in nature.

More at Supreme Court?

While petitions urging the Supreme Court to review other defenses against FBAR penalties have so far been rejected, there are some signals the high court could take greater interest down the line.

In both Kimble and Bedrosian—cases involving account holder claims that “willfulness” has been defined too broadly—the government initially waived its right to respond to account holders’ Supreme Court petitions. But while the court simply declined to take up Kimble in 2021, last month it asked the government to respond to the Bedrosian petition. The response is due in April.

That request doesn’t mean the justices will accept the case, but it does suggest the court “didn’t think this was sufficiently open-and-shut that it doesn’t even have to hear what the government thinks,” said Gil Rothenberg, a former head of the Justice Department Tax Division’s appellate section.

Nina Olson, a former National Taxpayer Advocate who now serves as executive director for the Center for Taxpayer Rights, said she fears that the IRS will more aggressively impose willful FBAR penalties following the limits the Bittner decision imposed on the agency’s non-willful penalty powers.

“Even if the IRS does not become more aggressive, the definition of ‘willfulness’ in this civil penalty is such a low bar—an ‘objective’ standard that is binary, yes/no did you check the box—that there is great risk of not considering the specific facts and circumstances of the taxpayer,” she said in an email to Bloomberg Tax.

The Center for Taxpayer Rights has seized on the high court’s interest in Bittner as another reason for it to weigh in on the willfulness issue. It told the justices in a Jan. 30 brief that Bedrosian is “a well-timed and pertinent companion to Bittner” that would allow the court to address decisions that have completely eroded “any discernable difference between the application of willful and non-willful FBAR penalties.”

Gorsuch also declared in January that he would like the high court to take up an Eighth Amendment challenge to the size of FBAR penalties. Dissenting from his colleagues’ decision not to review one such challenge in Toth v. United States, he said the case “would have been well worth” the court’s time and that he hopes lower courts will not repeat mistakes of the US Court of Appeals for the First Circuit, which sided with the government.

Jaramillo also holds out hope for the tide to turn in Eighth Amendment FBAR litigation.

“I have a case where the IRS stated in the Revenue Agent Report that it was not assessing all penalties (including continuation penalties) ‘so as to not violate the excessive fines clause of the Eighth Amendment,’” Jaramillo said.

“I know many practitioners that would love to see that admission in a court filing,” he added.

The IRS didn’t respond to a request for comment. The Justice Department declined to comment.

To contact the reporter on this story: Aysha Bagchi in Washington at

To contact the editors responsible for this story: Rachael Daigle at; Butch Maier at

Learn more about Bloomberg Tax or Log In to keep reading:

Learn About Bloomberg Tax

From research to software to news, find what you need to stay ahead.

Already a subscriber?

Log in to keep reading or access research tools.