Supreme Court Reins in FBAR Penalties; Rejects IRS's Per-Account Approach

(Parker Tax Publishing March 2023)

In a 5-4 decision, the Supreme Court resolved a split between the Fifth and Ninth Circuits and held that that the maximum penalty of $10,000 for the nonwillful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) applies on a per-report, not a per-account, basis. The Court found that neither Section 5314 nor Section 5321 of the Bank Secrecy Act, which impose the duty to file an FBAR and authorize the nonwillful FBAR penalty, refer to "accounts" or their number but instead provide that a violation occurs when an individual fails file a report consistent with the statute's commands. Bittner v. U.S., 2023 PTC 42 (S. Ct. 2023).

Background

Title 31 of the U.S. Code (the Bank Secrecy Act (BSA)) and its implementing regulations require certain individuals to file annual reports with the federal government about their foreign bank accounts. Under 31 U.S.C. Section 5314, a U.S. person who possesses foreign accounts with an aggregate balance of more than $10,000 is required to file an annual Report of Foreign Bank and Financial Accounts (FBAR). Under 31 U.S.C. Section 5321(a)(5), the Treasury Secretary may impose a civil penalty of up to $10,000 for "any violation" of Section 5314.

In 2021, a split arose between the Fifth and Ninth Circuits on the issue of whether someone who fails to file a timely or accurate FBAR commits a single violation subject to a single $10,000 penalty or separate violations for each foreign bank account not properly disclosed on a single FBAR. In U.S. v. Boyd, 2021 PTC 72 (9th Cir. 2021), the Ninth Circuit held that the BSA authorizes only one nonwillful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts. However, in U.S. v. Bittner, 2021 PTC 372 (5th Cir. 2021), the Fifth Circuit reached the opposite conclusion and held that Alexandru Bittner, whose late-filed FBARs for 2007-2011 collectively involved 272 foreign bank accounts, was liable for a $10,000 penalty for each account, for a total penalty of $2.72 million.

Bittner appealed to the Supreme Court, which granted certiorari in order to resolve the split between the circuit courts. Bittner urged the Court to agree with the Ninth Circuit and hold that the law authorizes a single $10,000 fine for each untimely or inaccurate report. The government defended the judgment of the Fifth Circuit and asked the Court to hold that a $10,000 penalty attaches to each account not timely or accurately disclosed within a report.

Analysis

A 5-4 majority of the Court agreed with Bittner and held that the BSA treats a failure to file a legally compliant FBAR as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis. The Court therefore reversed the Fifth Circuit's judgment and remanded the case.

The Court found that Section 5314 does not speak of accounts or their number and that the word "account" does not even appear. Instead, the Court said that the relevant legal duty is the duty to file reports. The court observed that FBARs must include various kinds of information about an individual's foreign transactions and relationships. But whether a report is filed late, contains one mistake about the address of the participants in a transaction, or includes multiple willful errors in its description of transactions, the Court reasoned that the duty to supply a compliant report is violated. In the Court's view, the statutory obligation is binary. Either one files a report "in the way and to the extent the Secretary prescribes," or one does not. The Court found that while multiple willful errors about specific accounts in a single report may confirm a violation of Section 5314, even a single nonwillful mistake is enough to pose a problem.

Turning its focus to Section 5321, the Court found that as a baseline, Section 5321(a)(5) authorizes the Secretary to impose a civil penalty of up to $10,000 for "any violation" of Section 5314. The Court said that, here again, one thing is immediately apparent: the law does not speak of accounts or their number. Instead, the Court found that the statute pegs the quantity of nonwillful penalties to the quantity of "violation[s]." Given that a violation occurs under Section 5314 when an individual fails to file a report consistent with the statute's commands, the Court concluded that multiple deficient reports may yield multiple $10,000 penalties, and even a seemingly simple deficiency in a single report may expose an individual to a $10,000 penalty. But the Court found that in all cases, penalties for nonwillful violations accrue on a per-report, not a per-account, basis.

The Court found further support for its reading in the context of the BSA. The Court noted that Section 5321 also provides a penalty for a "willful" violation of Section 5314 of up to $100,000. Section 5321(a)(5)(D)(ii) then adds an even more specific rule for a subclass of willful violations - those that involve "a failure to report the existence of an account or any identifying information required to be provided with respect to an account." In such cases, the maximum penalty is the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Thus, the Court pointed out that in the context of a willful penalty, the statute does tailor penalties to accounts - but does not do so for nonwillful violations. The Court rejected the government's suggestion that because Congress explicitly authorized per-account penalties for some willful violations, the Court should infer that Congress meant to do so for analogous nonwillful violations as well. In the Court's view, the government's argument cut against the traditional rule of statutory construction that when language is included in one section of a statute but omitted from a neighboring section, the difference in language conveys a difference in meaning.

In addition, the Court found that the reasonable cause exception in Section 5321(a)(5)(B) weighed against the government's position. That exception allows an individual to escape a penalty (say for filing late) only if the violation was nonwillful, due to reasonable cause, and the report eventually filed accurately reflects each and every account. The Court saw this provision as further evidence that, when Congress wished to tie sanctions to account-level information, it knew exactly how to do so. According to the Court, Congress said that penalties for certain willful violations may be measured on a per-account basis; Congress also said that a person may invoke the reasonable cause exception only on a showing of per-account accuracy. But the Court found that one thing Congress did not say is that the government may impose nonwillful penalties on a per-account basis.

The Court also noted that in various communications regarding the FBAR filing requirement, the IRS seemed to be telling the public that the failure to file a report represents a single violation exposing a nonwillful violated to one $10,000 penalty. For example, proposed regulations issued in 2010 stated that "a person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000." In addition, instructions included with the FBAR form have cautioned that "[a] person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000." The Court noted that Boyd herself received a similarly worded letter alerting her that the penalty for failure to file the FBAR "cannot exceed $10,000." The Court said that such documents, although not controlling, were relevant to the consistency of the government's views, which courts may consider when weighing the persuasiveness of a statutory interpretation it advances in court. According to the Court, the government has repeatedly issued guidance to the public that is at odds with the interpretation it now asked the Court to adopt, and that counted as one more reason to question whether the government's current position represented the best view of the law.

The Court further found that under the rule of lenity, statutes imposing penalties are to be construed strictly against the government and in favor of individuals. As the Court explained, the rule of lenity exists in part to protect the Due Process Clause's "fair warning" requirement for penal statutes. The Court found that the government's position posed a serious fair-notice problem, given that the relevant provisions of the BSA nowhere discuss per-account penalties for nonwillful violations and the government's own public guidance documents have seemingly warned of per-report, not per-account, penalties. The Court further reasoned that question before it had criminal as well as civil ramifications because Section 5322 of the BSA provides criminal sanctions for "willfully violating" the BSA. The Court noted that if violations accrued on a per-account rather than a per-account basis under Section 5321, the same rule would apply under Section 5322. Thus, the Court concluded that in these circumstances, the rule of lenity favored a strict construction.

In a dissenting opinion joined by three other Justices, Justice Barrett wrote that the most natural reading of the BSA establishes that each failure to report a qualifying foreign account constitutes a separate reporting violation, and the government can therefore levy penalties on a per-account basis. Justice Barrett noted that under Section 5314, each relation with a foreign bank triggers the requirement to file reports, and because each relation is a matter of distinct concern under the statute, each failure to report an account violates the reporting requirement. Justice Barrett also distinguished between the "reports" referred to in Section 5314 and the annual FBAR form and reasoned that the report of a foreign account, not the FBAR itself, is the statutorily required "report."

For a discussion of FBAR penalties, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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