Overview
On June 21, 2022, the Supreme Court granted certiorari in the appeal of the Fifth Circuit’s decision in United States v. Bittner.1 The Court will address a split between the Fifth and Ninth Circuits on whether a non-willful failure to timely file an accurate foreign bank account report, colloquially called an FBAR,2 subjects an accountholder to a single $10,0003 penalty for the failure to file the FBAR, or to separate $10,000 penalties for each account on the FBAR. A similar dispute is advancing in the Second Circuit.4
In Bittner, the Fifth Circuit held that the plain language of the non-willful penalty provision confirmed that each failure to report a qualifying foreign account constitutes a separate reporting violation subject to penalty.5 The penalty therefore applies on a per-account, not a per-form basis.6 In United States v. Boyd, however, the Ninth Circuit held that the non-willful penalty provision authorizes the government to impose only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.7 This article reviews the Fifth and Ninth Circuit’s opposing analyses of whether the penalty for a non-willful FBAR violation applies on a per-form or per-account basis.
Background
The Bank Secrecy Act of 19708 was enacted to curb the use of foreign financial accounts to evade taxes.9 The Bank Secrecy Act requires that individuals and entities report their interest in foreign financial accounts annually on an FBAR under section 5314.10 Failure to report these accounts can result in two types of penalties under section 5321(a)(5), depending on whether the violation was willful or non-willful.11 For non-willful violations, a civil penalty of $10,000 may be imposed for each violation, unless the violation was due to reasonable cause.12 For willful violations, the maximum penalty is the greater of 50 percent of the account balance, or $100,000.13
Since the non-willful penalty provision was added in 2004,14 tax practitioners and their clients have found themselves at odds with the government over how the penalties should be assessed. The government has historically argued for the per-account approach, while tax practitioners and their clients have argued for the per-form approach. Because only one FBAR must be filed per year, the per-form approach generally results in lower penalties for accountholders.
United States v. Bittner: Facts and History
Mr. Bittner was born in Romania in 1957.15 He emigrated to the United States in 1982 and became a naturalized U.S. citizen in 1987.16 In 1990, Mr. Bittner returned to Romania, where he became a successful businessman and investor.17 He earned millions of dollars and maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein.18 At issue in the case is Mr. Bittner’s failure to report foreign accounts from 2007 to 2011.19
The Bittner case demonstrates how different the penalty amounts can be under the two interpretations of the non-willful penalty provision. The government assessed $2.72 million in non-willful penalties against Mr. Bitter—$10,000 for each unreported account from 2007 to 2011, specifically 61 accounts in 2007, 51 in 2008, 53 in 2009, 53 in 2010, and 54 in 2011.20 The District Court for the Eastern District of Texas reduced the assessment to $50,000 for the five tax years at issue, holding that the $10,000 maximum penalty attaches to each failure to file an annual FBAR, not to each failure to report an account.21 The Fifth Circuit reversed, holding that the statute mandates that the penalty be applied on a per-account basis.22
Analyses of the Non-Willful Penalty Provision
The Bittner court determined the analysis hinges on what constitutes a ‘violation’ of section 5314.23 The circuit court reasoned that section 5321(a)(5)(A) penalizes a “violation of[] any provision of section 5314,” so the analysis should focus on section 5314 as opposed to the relevant regulations.24 Relying on the presumption of consistent usage, the Bittner court concluded that “[t]he use of the term ‘violation’ in other parts of section 5321(a)(5) confirms that the ‘violation’ contemplated by section 31 USC § 5321(a)(5)(A) is the failure to report an account, not the failure to file an FBAR.”25
In contrast, the Boyd court relied on Supreme Court precedent in California Bankers Association v. Shultz, which states “the [The Bank Secrecy Act’s] civil and criminal penalties attach only upon a violation of the regulations,” and therefore a violation of the non-willful penalty provision occurs when there is a failure to comply with the regulations.26 The Boyd court explained that the regulations contain two distinct reporting requirements: first, accountholders must report financial interests in foreign accounts on an FBAR, and, second, the FBAR must be filed on or before June 30th.27 Because the accountholder in Boyd merely late-filed the FBAR, she did not violate the regulation that delineates the content of the FBAR.28 She only violated the deadline.29 The Boyd court therefore held that the accountholder committed only a single non-willful violation—the failure to timely file the FBAR.30
The Bittner court disagreed and observed that the regulations distinguish between the substantive obligation under the statute to file reports disclosing each account, from the procedural obligation to file the appropriate reporting form, i.e., an FBAR.31 “By authorizing a penalty for ‘any violation of[ ] any provision of section 5314,’ as opposed to the regulations prescribed under section 5314, section 5321(a)(5)(A) most naturally reads as referring to the statutory requirement to report each account—not the regulatory requirement to file FBARs in a particular manner.”32 The Bittner court concluded that the applicable statutes and implementing “regulations impose (1) a statutory requirement to report each qualifying transaction or relation with a foreign financial agency and (2) a regulatory requirement to file these reports on an FBAR before a certain date each year (June 30).”33
The Bittner court next looked to the use of the term ‘violation’ in other parts of section 5321(a)(5), in particular the willful penalty provision. The Boyd court presumed that Congress had purposely excluded the per-account language from the non-willful penalty provision in the 2004 amendment of section 5321(a)(5)(A), because it had included such language in the previously-enacted willful penalty provision.34 The Bittner court analyzed the issue differently, focusing on the statutory rule “that identical terms within an Act bear the same meaning.”35 The Bittner court concluded that “nothing in section 5321 suggests Congress meant to define ‘violation’ one way where a person acts willfully and another way where a person does not,” and therefore ‘violation’ referred to the failure to report an account, not an FBAR.36
Lastly, the Bittner court looked to the reasonable cause exception of section 5321(a)(5)(B)(ii). The reasonable cause exception provides that no penalty attaches to a non-willful violation if “such violation was due to reasonable cause” and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”37 Again relying on the presumption of consistent usage, the Bittner court concluded that “[i]f ‘violation’ in section [5321](a)(5)(B)(ii) is transaction-or account-based, then ‘violation’ in section [5321](a)(5)(A) presumably is too.”38 In contrast, the Boyd court concluded that the inclusion of per-account language in the reasonable cause exception supports the presumption that Congress intentionally omitted per-account language from the non-willful penalty provision.39 The court reasoned that because Congress was aware of that language during the amendment process and left it out of the non-willful provision, the better view is that Congress acted intentionally when it drafted the non-willful civil penalty without reference to “account” or “balance in the account.”40
Conclusion
Determining the proper application of the non-willful FBAR penalty will have far-reaching consequences. Relying on the Bittner decision, the government is continuing to aggressively pursue non-willful penalties on a per-account basis.41 Depending on where they reside, millions of accountholders may face disparate penalties for a non-willful failure to file an FBAR. A decision by the Supreme Court resolving the circuit split would be a welcome benefit for practitioners and their clients.
Endnotes
1 United States v. Bittner, 19 F.4th 734 (5th Cir. 2021), cert. granted, No. 21-1195, 2022 WL 2203345 (U.S. June 21, 2022).
2 Since 2013, the formal title of an FBAR has been FinCEN Form 114.
3 The maximum penalty for a violation under 31 U.S.C. § 5321(a)(5) is adjusted for inflation annually.
4 See United States v. Kaufman, No. 18-cv-787, 2021 WL 83478 (D. Conn. Jan. 11, 2021).
5 Bittner, 19 F.4th at 737.
6 Id. at 737.
7 United States v. Boyd, 991 F.3d 1077, 1078 (9th Cir. 2021).
8 Bank Secrecy Act of 1970, Pub. L. No. 91-508, 84 Stat. 1114.
9 Bittner, 19 F.4th at 738 (citing California. Bankers Ass’n v. Shultz, 416 U.S. 21, 27, 94 S.Ct. 1494, 39 L.Ed.2d 812 (1974)).
10 31 U.S.C. § 5314.
11 31 U.S.C. § 5321(a)(5).
12 31 U.S.C. § 5321(a)(5)(B).
13 31 U.S.C. §§ 5321(a)(5)(C), (D).
14 American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 821(a), 118 Stat. 1418, 1586.
15 Bittner, 19 F.4th at 739.
16 Id.
17 Id.
18 Id.
19 Id.
20 Id.
21 United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020).
22 Bittner, 19 F.4th at 737.
23 Id. at 743.
24 Id. at 744 (citing 31 U.S.C. § 5321(a)(5)(A). The Fifth Circuit noted that “Congress did not refer to a ‘violation of a regulation prescribed under’ section 5314 when in amended section 5321(a)(5)(A) in 2004, even though earlier enacted penalty provisions in section 5321 do.” Id. at 744. Consequently, the Fifth Circuit decided to “focus on the text of section 5314.” Id. at 745.
25 Bittner, 19 F.4th at 746.
26 Boyd, 991 F.3d at 1081 (quoting California Bankers Ass’n, 416 U.S. at 26).
27 Id. at 1081-82. See 31 C.F.R. §§ 1010.350(a); 1010.306(c).
28 Id. at 1082.
29 Id.
30 Id.
31 Bittner, 19 F.4th at 745.
32 Id.
33 Id.
34 Boyd, 991 F.3d at 1084.
35 Bittner, 19 F.4th at 746-47 (quoting Lexon Ins. Co. v. Fed. Deposit Ins. Corp., 7 F.4th 315, 324 (5th Cir. 2021) (quoting Est. of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479, 112 S.Ct. 2589, 120 L.Ed.2d 379 (1992))).
36 Bittner, 19 F.4th at 747.
37 31 U.S.C. § 5321(a)(5)(B)(ii).
38 Bittner, 19 F.4th at 747.
39 Boyd, 991 F.3d at 1084.
40 Id.
41 Brief of Center for Taxpayer Rights as Amicus Curiae in Support of Petitioner, United States v. Bittner, 19 F.4th 734 (5th Cir. 2021) (citing Andrew Velarde, IRS Following Boyd FBAR Interpretation in Ninth Circuit Only, TAX NOTES (Feb. 7, 2022)).