Nonwillful FBAR penalties apply per report, not per account

The Supreme Court, in a 5–4 decision, held that the penalty under Section 5321 of the Bank Secrecy Act (BSA) for a nonwillful violation of the reporting requirements for foreign accounts under Section 5314 of the BSA applies on a per-report, not a per-account, basis.

Background

Alexandru Bittner is an immigrant from Romania who became a naturalized U.S. citizen. After the fall of communism, Bittner returned to Romania in 1990, where he launched a successful business career. Bittner did not realize that as a dual citizen of Romania and the United States, he was required under Section 5314 of the BSA (31 U.S.C. §5314) to report his foreign financial accounts to the U.S. government even while he was living abroad. He returned to the United States in 2011, at which time he learned of the reporting requirements for foreign financial accounts, and he hired an accountant to assist him with preparing the required Report of Foreign Bank and Financial Accounts (FBARs) for each of the five years 2007 through 2011.

Besides being late, the FBARs Bittner filed did not include all the information required by Section 5314. The FBARs provided details about Bittner’s largest foreign account, but they did not provide information about 25 or more other accounts that were reportable under Section 5314 because he had signatory authority over or a qualifying interest in them.

Although the FBAR is a form issued by the Financial Crimes Enforcement Network (FinCEN), Treasury has assigned the IRS the duty of administering the filing of FBARs and enforcing violations of the foreign account reporting requirements. When the IRS informed Bittner of the deficiencies in the FBARs he had filed, he filed corrected reports.

Under the FBAR regulations, because he had 25 or more reportable accounts, Bittner was only required to check a box on the FBAR and disclose the total number of his accounts. However, Bittner went the full disclosure route and included details for each of his reportable accounts — 61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011.

The IRS did not contest that the new reports Bittner filed were accurate or argue that Bittner’s errors on the original reports were willful. However, because the original reports were not accurately or timely filed, the Service imposed penalties against him for nonwillful violations of Section 5314 (nonwillful penalties) under Section 5321, which provides the penalties for failing to meet the Section 5314 reporting requirements. Section 5321 authorizes the IRS to impose a penalty of up to $10,000 for each nonwillful violation of Section 5314. The IRS, taking the position that the $10,000 penalty applies to each account not timely or accurately reported, assessed total nonwillful penalties of $2.72 million against Bittner.

Bittner agreed that he was subject to nonwillful penalties for the years in question. However, he disagreed with the amount of the penalties the IRS assessed. Bittner contested the IRS’s determination in district court, arguing that the nonwillful penalty applied per report, the report was the annual FBAR form, and therefore the penalties assessed against him should be $50,000 — $10,000 for each untimely filed and inaccurate FBAR. The district court sided with Bittner (Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020)), but the IRS appealed its decision to the Fifth Circuit, which reversed the district court and upheld the IRS’s assessment (Bittner, 19 F.4th 734 (5th Cir. 2021)). Bittner appealed to the Supreme Court, which agreed to hear his case.

The Supreme Court’s decision

The Supreme Court held that the Section 5321 $10,000 maximum penalty for a nonwillful failure to file a report meeting the foreign account reporting requirements of Section 5314 accrues on a per-report, not a per-account, basis.

Although Sec. 5321 does not explicitly state that the nonwillful penalty applies on a per-account basis, the IRS noted in Section 5321(a)(5)(D)(ii) the penalty for willful violations of Section 5314 was tied to the number of accounts that a person had not disclosed or for which the person had not provided the required information in a report. Thus, the government argued that it should be inferred that Congress intended that the penalty should also apply per account for analogous nonwillful violations.

However, the Court found that the government’s interpretation defied the traditional rule of statutory construction that when Congress includes particular language in one section of a statute and omits it from a neighbor, the Court normally understands that the difference in language conveys a difference in meaning. Here, the Court found that Section 5321 twice showed that when Congress wished to determine the penalties according to account-level information, it knew exactly how to do so. In Sections 5321(a)(5)(C) and (D)(ii), Congress stated that penalties for certain willful violations may be measured on a peraccount basis. Also, in Section 5321(a) (5) (B)(ii), it stated that a person may invoke the reasonable-cause exception only on a showing of per-account accuracy.

On the contrary, according to the Court, Section 5321 did not say that the IRS could impose penalties for nonwillful violations on a per-account basis. Therefore, the Court said that for nonwillful violations, the FBAR penalty applied on a per-report basis.

In addition, the Court stated that it found other contextual clues that weighed against the government’s argument. First, in past guidance the IRS had repeatedly seemed to tell the public that the failure to file an FBAR is a single violation, exposing a nonwillful violator to one $10,000 penalty. While the IRS guidance did not control the Court’s analysis, courts could consider the inconsistency between the IRS’s current and past views when weighing whether an interpretation the IRS offered was persuasive.

The Court found another point that worked against the IRS’s argument was the drafting history of the nonwillful penalty provision. Originally, the BSA included penalties only for willful violations of the reporting requirements. In 1986, Congress amended it to include penalties on a per-account basis for certain willful violations. In 2004, it authorized nonwillful penalties when it again amended the law. In doing so, the Court found Congress could have simply used language from its 1986 amendment to extend per-account penalties for nonwillful violations but had not done so, indicating that it did not intend that penalties for nonwillful violations be imposed on a peraccount basis.

The Court found other evidence in the BSA statutes and the regulations under them that indicated Congress’s aim was to provide the government with a report that would apprise it of the need for further investigation regarding a person’s foreign accounts and not to provide every detail about a person’s accounts or to maximize the revenue generated by each mistake made by a person in a report. The Court stated that in Section 5311, Congress declared that the BSA’s “purpose” is “to require” certain “reports” or “records” that may assist the government in various kinds of investigations, and the section gave no indication that Congress sought to maximize penalties for every nonwillful reporting error. The Court found that the same aim was shown by Treasury’s regulations implementing the BSA, which require individuals with fewer than 25 accounts to provide details about each account, while individuals (like Bittner) with 25 or more accounts do not need to list each account or provide account-specific details unless treasury requests more “detailed information” (31 C.F.R. §1010.350(g)(1)).

Finally, the Court pointed out that the per-account interpretation might lead to anomalies, for example, subjecting willful violators to lower penalties than nonwillful violators, which would be avoided by reading the nonwillful penalty to apply on a per-report basis. The government’s reply to this point was that the per-report interpretation risks the anomaly that Treasury could require a separate report for each account and in that way effectively achieve a peraccount penalty for nonwillful violations. The Court asked, “But what does this prove? … [W]hether the [Treasury] Secretary may lawfully ordain more or fewer reports does nothing to answer the question whether the Secretary may impose nonwillful penalties on a per-report or per-account basis” (slip op. At 14).

Reflections

A dissenting opinion joined by four justices concluded that the nonwillful FBAR penalty applied on a peraccount basis. The dissent found that the majority’s “core error” was that it misread Section 5314 by conflating the “reports” referred to in the statute with the annual FBAR form. In the dissent’s view, the failure to report each separate account was a violation, and so a single FBAR could contain multiple reports and could be the source of multiple violations subject to the $10,000 maximum penalty.

The dissent also found that the majority had misread Section 5321. Observing that Congress had capped the nonwillful FBAR penalty at $10,000, the dissent found that Congress had not included any account-specific language for that penalty because, unlike the willful penalty, the nonwillful penalty amount does not depend on the balance in an account and therefore Congress had no reason to include account-specific language. In any event, the dissent argued, the language of Section 5321 merely explains the penalties, it does not change the nature of the conduct that constitutes a violation — and that conduct, in the dissent’s reading of the statute, is account-specific.

Bittner, No. 21-1195, (U.S. 2/28/23)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.