On Nov. 2, 2022, the U.S. Supreme Court will hear oral argument in Bittner v. United States. The case will decide how the penalty for failing to timely file a Foreign Bank Account Report (FBAR) is calculated when the failure is determined to not be willful. While technically not a tax penalty, because the administration of FBAR enforcement and penalty determinations has been delegated to the Internal Revenue Service the case represents the most important tax-related case during this term.
Bank Secrecy Act
The duty to file an FBAR and the penalties for failing to do so are found in the Bank Secrecy Act (BSA). First enacted in 1970, the BSA imposes a myriad of disclosure requirements on financial institutions to curb money laundering, as well as tax evasion. The BSA also imposes disclosure requirements on individual account holders. If a person has a financial interest in one or more foreign financial accounts with an aggregate balance greater than $10,000, they must report the foreign accounts on an FBAR, which is filed annually.
Non-willful Failure to File
When filed timely and accurately, there’s no payment or tax related to the FBAR. But the failure to file an FBAR will subject a person to penalties under 31 USC Section 5321(a)(5), with the amount of the penalty differing based on whether the failure to file was willful. Bittner only focuses on the circumstances when the failure was non-willful. Willfulness generally means that the person didn’t have actual or imputed knowledge of the reporting requirements and consciously chose to not comply with those requirements. Bittner deals with conduct that at most was negligent. Common fact patterns in which the IRS has assessed non-willful penalties include dual nationals or legal permanent residents, who own bank accounts in the country where they were born and raised before moving to the United States and businesspeople, like Alexandru Bittner, who own and control bank accounts in the location of their foreign business. These cases typically don’t involve numbered or aliased accounts held in Switzerland or other tax havens.
The penalty for a willful penalty can be large – the greater of 50% of the undisclosed account balances or $100,000. For willful conduct, the penalty is intended to be confiscatory. If the failure to file, though, was non-willful, the BSA originally didn’t provide any penalty. Only in 2004, a $10,000 penalty per violation was enacted. The non-willful penalty is now adjusted for inflation annually, and for 2022, the penalty amount is $14,489.
After several years of litigation and divergent results in the Ninth and Fifth Circuit Courts of Appeal, Bittner will decide how the non-willful penalty is calculated. The government position is that penalties are determined per account because each account that wasn’t reported is a separate violation, whereas those who failed to timely file an FBAR take the position that penalties are applied on a per form basis.
Alexandru Bittner, the petitioner in the case, had failed to report 272 instances of foreign account ownership during the years 2007-2011. The IRS assessed a $10,000 penalty per account per year, which resulted in a total penalty of $2.72 million. Alexandru argued that the maximum penalty should be $50,000. This case is a prime example of the significant difference in penalty amount depending on the correct interpretation of 31 USC Section 5321(a)(5).
31 USC Section 5321(a)(5)(A) provides: “The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” Simply put, the language of the statute is ambiguous as to what’s a violation.
Per Account or Per Form?
The government position is that other sections of Section 5321, which discusses penalties, and Section 5314, which mandates the filing of the report, make it clear that a violation means a failure to report an (that is, one) account. Under 31 USC 5321(a)(5)(B), there’s a reasonable cause exception to the non-willful penalty. For the exception to apply, “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.” The implication being that the account balance of one account (which may be among many accounts reported) is necessary for determining a non-willful penalty. Therefore, the violation must be the failure to report one account or this provision would not make sense. The government also contends that 31 USC Section 5314(a), which requires a report when a U.S. person “makes a transaction or maintains a relation … with a foreign financial agency,” indicates that the requirement is to report each relationship and thus a violation is the failure to report each relationship or account. The government discounts that these relationships are all reported on one FBAR form and argues that this was an administrative decision to limit paperwork but doesn’t change the underlying statute.
The government position leaves some questions unanswered. The government’s brief explains the need for Congress to have passed a new penalty in 2004, three years after the 9/11 attacks, when concern with foreign terrorism financing was heightened and how the new penalty incorporated language that supposedly had indicated a “per account” determination. But did Congress intend to penalize conduct in the millions of dollars that previously hadn’t been penalized at all? Or is it more logical to assume that the lower penalty was envisioned as it represents a much smaller incremental change? Also left unanswered is how the government’s treatment of the FBAR form is consistent with other tax forms, like Form 5471 and 3520, which ask for many discrete pieces of information on one form, yet the legal requirement focuses on the form to be filed and not each line item.
Alexandru's position is that the statute never requires reporting each account and that the only obligation in 31 USC Section 5314(a) is to “file reports.” Therefore, there can be no violation for a duty not imposed by the statute. He argues that the other statutory references on which the government relies are actually descriptions of when the reporting requirement is triggered but don’t and can’t define a violation. According to Alexandru, that the reasonable cause exception is written in the singular and refers to a single account is no bar to its argument. The exception is to be read as applying to multiple accounts (according to the Dictionary Act) and is in fact, consistent with a per form determination.
The current ideological split on the Supreme Court may not be the best predictor of how Bittner will be resolved. The case presents legitimate questions of competing canons of statutory construction and, at the same time, real concerns of extralegal government overreach and what is the correct degree of deference to the Treasury Department’s interpretation and implementation of the FBAR rules.
The impact of the decision will be broad and immediately affect the thousands of people and entities that have already been assessed non-willful penalties. As the IRS has not let up its scrutiny of international tax noncompliance in any way, it will also impact its future enforcement efforts in this area and will blunt one of the weapons that it has relied on.