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Updated IRS Guidance in Light of Bittner

What our Tax Litigation Attorneys Want you to Know about the IRS Changes to FBAR Tax Audit Procedures in Response to the Supreme Court Decision (Bittner v. US)
Q: What Are the Recent Changes in IRS Procedures Related to the Supreme Court Decision in Bittner v. US?

A: The IRS has recently updated its procedures in response to the Supreme Court's decision in Bittner v. US. The changes primarily affect the penalties imposed in FBAR cases (Report of Foreign Bank and Financial Accounts).

Q: What is the Significance of the Supreme Court Decision in Bittner v. US?

A: The Supreme Court's decision in Bittner v. USoverruled the IRS position that multiple penalties could be imposed in a single year for non-willful FBAR penalties. The Supreme Court determined that the failure to file a legally compliant FBAR constitutes a single violation, regardless of the number of unreported or incorrectly reported accounts. This means that the maximum penalty that can be imposed is $10,000 but increased by inflation as explained below.

Q: How Do the Changes Affect Penalties for Non-willful Reporting Violations?

A: The recent IRS guidance states that penalties for non-willful reporting violations now accrue on a per-report basis, rather than a per-account basis. This means that the non-willful failure to file a legally compliant FBAR for a specific calendar year is considered a single violation subject to a single penalty. The IRS guidance was needed so that its agents were not violating the Supreme Court’s ruling in Bittner.

Q: Are There Any Changes to Penalties for Willful Reporting Violations?

A: No, the Supreme Court's decision does not impact the calculation of penalties for willful reporting violations. Penalties for willful violations still apply per-account, and the IRS’ existing guidance remains unchanged.

Q: Do the Changes Address FBAR Recordkeeping Violations?

A: No, the changes resulting from the Supreme Court decision do not specifically address FBAR recordkeeping violations. The existing guidance on these violations remains unaffected.

Q: Did the IRS Guidance Address the Mitigation Provisions for Non-willful Violations?

A: Yes, it revoked these provisions. Previously those accounts with relatively small balances qualified for reduced FBAR penalties, but no more. In a fit of pique, the IRS is cracking down on even small offshore accounts. Penalties for small accounts have now been effectively doubled. Even for an account with a balance of $10,001 a penalty of MORE than $10,000 for each year of non-filing can now be assessed by the IRS.

Q: Why do you say more than $10,000 for each year?

A: The $10,000 penalty for a non-willful failure to file an FBAR is indexed for inflation. SeeFederal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. 2461 note, as further amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. For penalties assessed on or after January 19, 2023, the amount as indexed for inflation is $15,611.

Q: What Were the Former Mitigation Provisions for Non-willful Violations?

A: The former mitigation provisions provided guidelines for penalties per filer per year based on the maximum aggregate balance of all accounts related to the violations. Here are the former provisions:

Mitigation LevelMaximum Aggregate Balance for All AccountsMitigated Penalty Amount

Level I-NW

Did not exceed $50,000 at any time during the calendar year

$500 per non-willful violation. Total non-willful penalties cannot exceed $5,000 per year.

Level II-NW

Exceeded $50,000 but did not exceed $250,000

$5,000 per non-willful violation.

Level III-NW

Exceeded $250,000

The statutory maximum per non-willful violation.

As noted above the recent IRS guidance eliminates these former mitigation provisions for non-willful FBAR violations. They are no longer considered when calculating penalties for non-willful violations. IRS agents will continue to have discretion in determining the amount of the penalty subject to the statutory limitation.

In addition, the guidance from the IRS leaves open the possibility that in addition to the penalty for failure to file the FBAR, the IRS may seek to impose a separate penalty for failure to keep proper records. This penalty can be an additional $15,631 per year. Since the statute of limitations is six years the IRS could impose penalties of up to $93,366 for a non-willful failure to file an FBAR. On top of that the IRS could assess a failure to keep records penalty of another $15,561 per year if there has also been a failure to keep records.

Taxpayers who qualify would be well advised to enter the IRS’ Streamlined Filing Program.

Please keep in mind that this document provides a general overview of the recent changes in IRS procedures due to the Supreme Court decision in Bittner v. US. For more detailed information and specific guidance, to refer to the official IRS documents or consult with a tax litigation attorney familiar with FBAR requirements.

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