As we’ve covered previously in our blog, we’ve been closely following a schism that has developed in different Circuit Courts in the US regarding the IRS’s assertion that 31 U.S.C. §5321(a)(5)(A) provides it with the authority to assert a $10,000 civil penalty (adjusted for inflation) for each account left off of, or inaccurately reported, on FINCEN Form 114, most commonly referred to as an FBAR.   Just this morning, the Supreme Court granted certiorari in the case of Bittner v. United States.  As this case concerns a topic of keen interest to the firm and the clients we represent, I’ve endeavored to provide some background information on the case before the Supreme Court (as well as cases from other circuits with differing outcomes) and discuss how I believe the Court will review and rule in Bittner’s case, which could have a dramatic impact on the IRS’s ability to punish non-willful FBAR violations in the future.

A brief background on the FBAR and the penalty regime for non-willful violations:

Passed in 1970, the Bank Secrecy Act was designed to assist U.S. government agencies in detecting and preventing money laundering.  Among other provisions, the bill required U.S. citizens and residents to report their financial interest in foreign financial accounts on FinCen Form 114 for any year in which these interests exceeded $10,000 in aggregate.  For the next few decades, the requirement to file FBARs was little known amongst the general public and tax professionals alike, and in the days before widespread digital record keeping and telecommunication, one must believe that compliance with the bill’s requirements was scarce, as were the assessment of penalties for compliance failures (Note that prior to 2004, FBAR compliance was administered directly by FINCEN, and penalties only existed for willful failures.  In 2004, FINCEN delegated that authority to the IRS and a non-willful penalty regime was established by the American Jobs Creation Act, broadening the base of taxpayer’s potential exposed to FBAR penalties).  That largely changed in 2010 with the passage of FATCA, the Foreign Account Tax Compliance Act, which required foreign financial institutions to report account information of US taxpayers that utilized their services beginning in 2014.

The implementation of FATCA led to many foreign financial institutions notifying their clients about their FBAR reporting requirements.  This along with some high profile charges related to failing to file FBARs, raised the general public’s awareness of the annual FBAR reporting requirement, which led an increasing number of taxpayers to take part in the IRS’s voluntary disclosure programs, which offered taxpayers reduced penalty exposure and immunity from criminal prosecution in exchange for voluntarily coming clean and rectifying past disclosure shortcomings.

For those that chose not to partake in one of the IRS’s disclosure programs, their prior failure to file complete and accurate FBARs by the due date for doing so left them exposed to civil penalties.  Two separate penalty regimes apply under 31 U.S.C. 5321 to the failure to timely file complete and accurate FBARs; the regime that applies is based on whether the IRS perceives a taxpayer’s failure to be willful, or non-willful.  In the case of a willful penalty, §5321 provides that “the maximum penalty… shall be… the greater of – (I) $100,000, or (II) 50% of the… balance in the account at the time of the violation.”  For non-willful violations, §5321 provides, “the amount of any civil penalty…. shall not exceed $10,000.”

The discrepancy which is at issue in Bittner and cases like it, is the IRS’s interpretation that the $10,000 civil penalty limitation imposed by §5321 applies on a per account basis, rather than to the failure to file a complete and accurate FBAR in and of itself.  In other words, Bittner argues that the maximum non-willful FBAR penalty for a given tax year is limited to $10,000, regardless of the number of foreign accounts not reported or inaccurately reported.  The IRS argues that the non-willful penalty regime is essentially uncapped.  That is, a taxpayer that fails to timely file an FBAR that should have reported 30 foreign financial accounts would potentially be subject to a $300,000 per year civil penalty under §5321.

Boyd, Bittner, and beyond:

The IRS’s insistence on its ability to assess non-willful FBAR violations on a per-account basis has been a source of litigation over the last several years, and has resulted in different Circuit Court of Appeals reaching different conclusions regarding the authority granted to the IRS by §5321 to assess non-willful penalties on a per account basis, namely the U.S. Court of Appeals for the 9th Circuit ruling against the IRS’s interpretation in United States v. Boyd in March 2021, and, more recently, the U.S. Court of Appeals for the 5th Circuit ruling in favor of the IRS’s interpretation in United States v. Bittner.

In the case of Boyd, Jane Boyd initially participated in the IRS’s Offshore Voluntary Disclosure Program (OVDP).  The OVDP, which is no longer offered by the IRS, offered the participating taxpayer the opportunity to avoid criminal prosecution and the imposition of civil penalties for foreign informational reporting failures in exchange for a Miscellaneous Offshore Penalty (MOP) equal to 27.5% of the highest aggregate balance of the unreported foreign financial accounts during the 8 year disclosure period.  The OVDP, however, provided taxpayers with the opportunity to “opt-out” of the disclosure program, and subject themselves to a full IRS examination of their disclosure and the full complement of applicable civil penalties.  In most instances, taxpayers would opt out of the OVDP if the civil penalties the taxpayers faced were projected to be less than the 27.% MOP they would be subject to within the program.  During the opt-out examination, the IRS determined that Ms. Boyd’s failure to report 13 foreign financial accounts was non-willful, and assessed a $47,279 non-willful penalty under §5321.  Boyd contested the IRS’s authority to do so. 

While the District Court agreed with the IRS’s interpretation, the 9th Circuit reversed that decision, interpreting the statute to mean that the failure is the failure to timely and accurately file the FBAR form itself, not each account reported on the FBAR, “... under the statutory and regulatory scheme, Boyd’s conduct amounts to one violation, which the IRS determined was non-willful.  Section 5321(a)(5(B)(i) authorizes one penalty per non-willful violation of §5314 not to exceed $10,000.  Because Boyd committed a single non-wilful violation, the IRS may impose only one penalty not to exceed $10,000.”

In the case of Bittner, the taxpayer in question maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein and failed to report his ownership of these accounts on FBARs, until learning of his reporting obligations in 2011.  In 2012, his CPA filed delinquent FBARs outside of any disclosure program.  The FBARs that were initially filed, however, were inaccurate, and so Bittner hired another CPA to prepare and file correct FBARs for years 2007-2011 in September 2013.  In total, Bittner was obligated to report 61 accounts in 2007, 51 accounts in 2008, 53 in 2009, 53 in 2010, and 54 in 2011.   In June 2017, the IRS assessed $2.72 million in civil penalties against Bittner for non-willful violations under §5321 – a $10,000 non-willful penalty for each account in each of the 5 years open for assessment. Bittner sued, claiming that the assessment of the penalties on a per account basis violated the provisions of §5321.  The district court agreed, and revised the penalty down to $50,000, one $10,000 penalty for each of the 5 years in question.  

The IRS appealed that decision, and upon appeal, the U.S. Court of Appeals for the 5th Circuit overturned the district court ruling, noting that, “the text of the BSA and its 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…” and that “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.” The court expressed that reading §5314 to contemplate only a single violation for filing the FBAR form itself would give the Secretary discretion to define the number of violations subject to the penalty, as the Secretary has the authority to specify the method of reporting, and it would therefore be within the Secretary’s discretion to require a separate FBAR for each bank account and, in doing so, control the maximum amount of a non-willful penalty.

How will the Supreme Court settle the matter?

Obviously, it’s difficult to predict how a court will rule on a particular issue.  The fact that there are multiple Appeals Courts with different takes on the statutory interpretation of §5321 indicates that there is plenty of ambiguity for the Supreme Court to decide one way or the other.  However, having listened to oral arguments in the cases in question and followed each of the cases and their respective courts’ interpretations, I am of the opinion that the Supreme Court will likely rule in favor of Bittner and determine that the IRS can assess only one $10,000 per year, tied to the failure to file the FBAR itself.

First, the most compelling argument against an account-centric penalty regime was elucidated by the court in U.S. v. Kaufman, “if accepted, it could readily result in disparate outcomes among similarly situated people.  For example, if penalties are assessed on a per account basis, the Court can easily envision a case in which two otherwise similarly situated non-willful violators are exposed to drastically different penalties simply because one violator has more financial accounts than the other… Perhaps more troubling is the prospect that under some circumstances, a non-willful violator could be exposed to a significantly higher penalty that a willful violator.”  It strains credulity to assert that Congress intended to create a penalty regime under which non-willful violators could be subject to greater penalties than non-willful violators.  As it currently stands, the IRS already uses the broad discretion it’s afforded itself under its construction of §5321 in assessing non-willful FBAR violations.  Take the two cases at issue here.  In the case of Boyd, Jane Boyd had 14 unreported foreign financial accounts.  The IRS assessed non-willful penalties for only one year of non-compliance (despite, by all appearances there being multiple years of non-compliance), and only assessed $47,279 in civil penalties, for, under their construction, 14 non-willful violations of §5314.  In Bittner, the IRS assessed a $10,000 non-willful penalty for a total of 272 unreported accounts over a 5 year span.  It seems probable to me that the IRS exercised discretion in assessing a smaller penalty against Boyd on account of her having initially entered into a disclosure program through which she filed the delinquent FBARs, but it goes to show you exactly how disparately the IRS has gone about asserting penalties for non-willful violations.  The Supreme Court ruling in favor of a $10,000 per year cap on FBAR penalties could go a long way towards providing some clarity as to potential exposure to taxpayers filing delinquent FBARs going forward.

Additionally, the recent Supreme Court decision in American Hospital Association appears to show a consertive-leaning Supreme Court engaged in strict statutory interpretation and somewhat eager to curtail the longstanding deference given to rulemaking agencies.  Though the unanimous decision in American Hospital Association did not overturn Chevron deference, it seems likely to me that the Court, as it stands, would be inclined to side with a more limited, form-centric non-willful penalty regime than the broad reading of the statute the IRS will undoubtedly urge them to accept, a reading which the Court in Boyd correctly asserts is unreasonable.