Foreign Income & Taxpayers: Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.

Foreign Income & Taxpayers

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. [section]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...