Supreme Court Slashes IRS Penalty Against Taxpayer for Not Reporting Foreign Bank Accounts

Neil Gorsuch during a hearing in the Hart Senate Office Building in Washington on March 22, 2017. MANDEL NGAN/AFP/Getty Images

The Supreme Court ruled 5–4 in a fractured opinion on Feb. 28 that the IRS imposed an excessive fine on a businessman for failing to report foreign bank accounts, reducing the financial penalty to $50,000 from $2.72 million.

The decision came after the House of Representatives, now controlled by Republicans, voted in January to repeal a congressional provision allotting almost $80 billion to the IRS over the coming 10 years for increased enforcement.

Democrats say the IRS has long been underfunded, but Republicans say the extra money would have been used to harass taxpayers. Only 4 percent of the additional funding would have been devoted to improving taxpayer service, while 58 percent would have gone to escalating enforcement efforts, the New York Post reported in August 2022.

The petitioner, Alexandru Bittner, was born in communist Romania. He moved to the United States in his youth, working as a dishwasher and later as a plumber. Eventually, he was naturalized in the United States and has been a dual Romanian–U.S. citizen ever since.

Bittner returned to Romania after the collapse of Soviet bloc communism in 1990 and lived there until 2011.

He was a successful businessman and had several non-U.S. personal bank accounts and owned stock in a number of Romanian corporations that also had foreign bank accounts. While living abroad, Bittner had limited contact with the United States.

He said later he was unaware that he was required to file U.S. income tax returns reporting his foreign income. He was also unaware of the existence of the Report of Foreign Bank and Financial Accounts (FBAR) form or Financial Crimes Enforcement Network Form 114, or his duty to file such forms.

When Bittner returned to the United States in 2011, he came to learn that he should have filed U.S. tax returns while living in Romania. He hired a professional accountant, who advised him on the requirement to file FBARs and to prepare the needed documents.

The IRS found that Bittner had failed to timely file FBARs for five years: 2007 through 2011. In that period, because he had more than 25 foreign accounts, he wasn’t required to detail those accounts but was permitted merely to state the total number of foreign accounts in which he had a financial interest, or so he thought at the time. He then filed corrected forms that volunteered the full information. The financial penalty was initially set at $50,000 for the nonwillful violations.

But the IRS decided to impose the maximum penalty under the Bank Secrecy Act (BSA), even though Bittner’s delinquency was unintentional. Despite the fact that Bittner only failed to file five annual forms on time, the IRS took the position that he had violated the law a full 272 times—once for each account that wasn’t reported in each of those five years and fined him $10,000 for each unreported account.