Part 5: Mr. FBAR’s Civil Penalty – 5321(a)(5): Bittner – Maximizing The Penalty By Imposing It On Each Account

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This Is Post 5 in a series of posts describing the statutory and regulatory history of Mr. FBAR.

These posts are organized on the page “The Little Red FBAR Book“.*

As previous posts have described, the threshold question in an FBAR civil civil penalty case governed by 5321(a)(5), is whether the violation is “willful” or “non-willful”. If “non-willful” the penalty is limited to $10,000 (appropriately adjusted for inflation). If Willful” a much higher penalty regime – the greater of $100,000 USD or 50 percent of the account balance – applies. Given the potential for FBAR penalties to be a significant “fundraiser”, the government has clear incentives to argue for “willfulness”. In Schik we are reminded that “willfulness” is a question of fact which the government must prove by a “preponderance of the evidence standard”. In Toth we saw the government greatly assisted by a judicial sanction that deemed Ms. Toth to be willful. The most egregious aspect of Toth was that the government was not even required to meet its factual burden of proof. In Bittner the government was stuck with a factual finding of non-willfulness.

Q. How can the government maximize FBAR penalties in the context of non-willfulness?

A. By imposing the FBAR penalty on each unreported account rather than on the failure to file the FBAR itself.

Such is the context of Bitter where the government:

First, imposed a $10,000 penalty on each individual account; and

Second, repeated the process for five years resulting in approximately 2.7 million in FBAR penalties.

Interestingly, the effect of this approach was that the Government could assert FBAR penalties that exceeded the maximum penalties authorized under the 5322 criminal penalty provision. Why would the government take this approach? The answer comes from the last paragraph of the Solicitor General’s brief filed in the Bittner petition for certiorari.

This case would also be a suitable vehicle in which to address the question presented, the practical consequences of which are illustrated by the facts of this case. After determining that petitioner had failed to cooperate fully with the IRS’s investigation, had apparently used nominee account holders “to hide receipt of cash,” and had taken other steps to “intentionally conceal the reporting of income, assets, or foreign activities,” C.A. ROA 587, 590, the IRS chose to assess the maximum available civil penalty for non-willful violations against petitioner for his failure to report over 200 accounts across five years. See pp. 7-8, supra. Had the same case arisen in the Ninth Circuit, the IRS would have been limited to imposing a penalty of up to $10,000 for each of petitioner’s five untimely FBARs, which is far short of the amount the agency found to be justified. Further review is warranted to ensure that the Secretary may impose appropriate penalties on individuals, such as petitioner, who fail to disclose numerous foreign financial accounts in a given reporting period.

Interesting … I understood that the purpose of 5321(a)(5) was for Congress to prescribe the range of penalties with a clear maximum. But, apparently the view of the Solicitor General is that Treasury should be permitted to “impose appropriate penalties”.

The Solicitor General in a speech given in Idaho on September 5, 2022 described the role of the Solicitor General as:

The solicitor general of the United States has a broad and challenging mission that’s tied to the Constitution and the rule of law and involves representing all three branches of government, not just the president, Boise native Elizabeth Barchas Prelogar told a crowd of more than 100 on Tuesday.

“My client is the United States of America, not a particular person, not even a particular agency or branch, but the federal government as a whole,” she said. “We end up in court a lot. … And given the enormous range of the things that the federal government does, the legal interests of the many different component parts of the federal government don’t always align.”

“So my job, in a nutshell, is to ensure the positions we’re taking in court serve the cross-cutting legal interests of the United States as a whole. Sometimes that can make me feel a little bit like a traffic cop.”

Presumably one can infer that the “legal interests of the United States as whole” are best served by interpreting 31 U.S.C. 5321(a)(5) in the most punitive way.

On to the Supreme Court Of The United States!

The 31 U.S.C. 5321(a)(5) civil FBAR penalty provision has attracted the attention of the Supreme Court of the United States. The history of the case and all of the filings are available at the link here:

https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/21-1195.html

The issue and facts as described in the Brief filed by Mr. Bittner’s lawyers include:

The Legal Issue

QUESTION PRESENTED

This case presents an important question of statutory construction under the Bank Secrecy Act, 31 U.S.C. 5311 et seq., which generally requires taxpayers to report their interests in foreign bank accounts.

Under the Act, Congress instructed the Treasury Secretary to “require a resident or citizen of the United States * * * to keep records, file reports, or keep records and file reports, when the * * * person makes a transaction or maintains a relation for any person with a foreign financial agency.” 31 U.S.C. 5314(a). The Secretary’s corresponding regulations require filing a single annual report (called an “FBAR”) for anyone with an aggregate balance over $10,000 in foreign accounts. 31 C.F.R. 1010.350(a), 1010.306(c). The Act authorizes a $10,000 maximum penalty for any non-willful violation of Section 5314. See 31 U.S.C. 5321(a)(5)(A)-(B).

In the decision below, the Fifth Circuit held that there is a separate violation (with its own $10,000 penalty) for each foreign account not timely reported on an annual FBAR; it thus authorized a penalty on “a per-account, not a per-form, basis.” In so holding, the Fifth Circuit expressly rejected a contrary decision of the Ninth Circuit, which held the failure to file an annual FBAR constitutes a single violation, “no matter the number of accounts.”

The question presented is:

Whether a “violation” under the Act is the failure to file an annual FBAR (no matter the number of foreign accounts), or whether there is a separate violation for each individual account that was not properly reported.

Introducing Mr. Bittner – The Facts

B. Facts And Procedural History

1. Petitioner was born in Romania and immigrated to the United States in his youth. He lived here for nine years, working as a dishwasher and later as a plumber. He eventually became a naturalized U.S. citizen and has retained dual Romanian-United States citizenship ever since.

Petitioner returned to Romania after the fall of communism in 1990; he lived there for over 20 years until late 2011. C.A. ROA 115, 255, 441. He was a successful businessman and had multiple non-U.S. personal bank accounts (8 or fewer each year) and owned stock in a number of Romanian corporations that also owned foreign bank accounts. C.A. ROA 257, 441, 446-481.

While living abroad, petitioner had limited contact with the United States. Like many dual citizens, he was unaware that he was required to file U.S. income tax returns reporting his foreign income. Pet. App. 5a-6a; C.A. ROA 256, 442, 729-730. He was also unaware of the existence of FBARs or his duty to file them. Pet. App. 5a-6a; C.A. ROA 255-256, 441-442, 732, 741. Shortly after returning to the United States in 2011, he discovered that he should have filed U.S. tax returns while living in Romania, reporting his world-wide income. C.A. ROA.256, 442, 729-730. He engaged a professional accountant to prepare and file those returns. C.A. ROA.256, 442, 729-730. The accountant also informed petitioner about the FBAR reporting requirement, and he likewise filed the required reports. Pet. App. 6a; C.A. ROA.256, 1331.7

The IRS determined that petitioner failed to timely file FBARs for five years (2007-2011); during those years, because petitioner had over 25 foreign accounts, he was not required to detail those accounts but was allowed to merely state the total number of foreign accounts in which he had a financial interest. 31 C.F.R. 1010.350(g). (His corrected forms nevertheless volunteered the full information. Pet. App. 6a.) The IRS concluded that petitioner’s delinquency was non-willful, but it still sought to impose a maximum penalty under the Act. Although petitioner had only failed to submit five annual forms, the IRS asserted that petitioner had violated the Act a full 272 times—once for each account that was not reported in each of those five years. See, e.g., Pet. App. 6a, 34a. The IRS accordingly assessed a $2.72 million penalty, representing a $10,000 fine for each account he ultimately reported on his untimely FBARs. Ibid.8

2. The IRS filed suit against petitioner in Texas to reduce the penalty assessment to judgment. On cross-motions for summary judgment, the district court determined that the IRS’s penalty assessment was unlawful and the proper amount was capped at $50,000—a $10,000 maximum penalty for each annual FBAR. Pet. App. 38a57a.9

In directly confronting the question presented here, the district court “conclude[d] that non-willful FBAR violations relate to each FBAR form not timely or properly filed rather than to each foreign financial account maintained but not timely or properly reported.” Pet. App. 38a-39a. The court supported that conclusion with a careful examination of the Act’s “text” and “the statutory and regulatory framework as a whole.” Id. at 39a-40a. For example, it compared Section 5321(a)(5)(A) with the Act’s provisions for “willful FBAR violations” and its “reasonable cause exception,” and flagged that the non-willful penalties alone lacked any reference to accounts—“and the Court will presume that Congress acted intentionally in doing so.” Id. at 41a-43a. It declared the government’s counterarguments “unpersuasive,” and explained that petitioner’s interpretation alone “avoid[ed] absurd outcomes that Congress could not have intended in drafting the statute.” Id. at 44a, 46a. Indeed, it found that “the text, structure, and purpose of the statute unambiguously point to the conclusion that the non-willful civil penalty applies per FBAR reporting violation rather than per account.” Id. at 51a.

It accordingly held that “non-willful FBAR reporting deficiencies constitute a single violation within the meaning of § 5321(a)(5)(A) and (B)(i) and carry a maximum annual $10,000 civil money penalty, irrespective of the number of foreign financial accounts maintained.” Pet. App. 49a. In doing so, it expressly rejected a contrary decision in California that ruled in the government’s favor: “After a careful analysis of the statute’s text and purpose, the Court is left with no choice but to respectfully disagree with the outcome in [United States v. Boyd, No. 18-803, 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019), rev’d, 991 F.3d 1077 (9th Cir. 2021)] and reach the opposite conclusion.” Id. at 54a.10

3. The Fifth Circuit reversed. Pet. App. 1a-26a. It acknowledged that “[d]istrict courts have taken diverging views on this issue,” and the Ninth Circuit went the other way in United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021). Id. at 2a & n.1. But it declared those views “unpersuasive” and reached the opposite conclusion: “We hold that each failure to report a qualifying foreign account constitutes a separate reporting violation subject to penalty,” and “[t]he penalty therefore applies on a per-account, not a per-form, basis.” Ibid. (openly “parting ways” with the 2-1 Ninth Circuit). It thus restored the government’s claim for the full $2.72 million in penalties. Id. at 1a-2a, 25a-26a.

The Fifth Circuit initially faulted the district court for “determining what constitutes a ‘violation’ under section 5314 by focusing on the regulations under section 5314 to the exclusion of section 5314 itself.” Pet. App. 15a. The Fifth Circuit recognized that the district court had relied on this Court’s decision in California Bankers Ass’n v. Shultz, 416 U.S. 21 (1974), for support, but it found Shultz inapposite. Id. at 15a-16a (declaring the “snippet” from Shultz “inconsistent with the text of the [Act] and corresponding regulations”). The Fifth Circuit instead declared that any “violation” has to be determined by “focus[ing] on the text of section 5314.” Id. at 17a. In doing so, the Fifth Circuit found that “Section 5314(a) ‘has both a substantive and a procedural element.’” Pet. App. 17a (quoting Boyd, 991 F.3d at 1088 (Ikuta, J., dissenting)). It reasoned that the core substantive obligation was reporting each qualifying transaction or account; the submission of an FBAR form was merely the “procedural” mechanism for satisfying that statutory duty. Id. at 17a-19a. And the Fifth Circuit further read “the regulations themselves” as drawing a similar line. Id. at 17a-18a. Accordingly, the court concluded, “[b]y authorizing a penalty for ‘any violation of any provision of 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.” Id. at 18a-19a.

The Fifth Circuit stated its understanding was reinforced by the Act’s “willful penalty provision[” and “the reasonable-cause exception.” Pet. App. 20a-23a (acknowledging that the district court “drew the opposite inference” from these provisions, but rejecting its views). The court found that those provisions “plainly describe a ‘violation’ in terms of a failure to report a transaction or an account”; it reasoned that the same term (“violation”) thus must carry the same meaning for “a non-willful violation of section 5314.” Id. at 21a-22a; see also id. at 22a-23a (reading the language of the reasonable-cause exception to support an “‘account-specific’” construction).

The Fifth Circuit finally rejected petitioner’s remaining arguments. It held that there was no need to construe a tax provision “strictly” against the government—as that canon had been “amply criticized” and the text anyway “leaves no doubt that each failure to report an account is a separate violation of section 5314.” Pet. App. 23a-24a. It likewise rejected petitioner’s reliance on the rule of lenity, stating that “the statute is not ambiguous and the non- willful penalty provision has no criminal application.” Id. at 24a. And it disagreed that the government’s reading would produce “‘absurd results.’” Id. at 24a-25a. On the contrary, the Fifth Circuit reasoned, “[i]t is not absurd— it is instead quite reasonable—to suppose that Congress would penalize each failure to report each foreign account.” Id. at 25a.

The Fifth Circuit consequently held that “[t]he text, structure, history, and purpose of the relevant statutory and regulatory provisions show that the ‘violation’ * * * is the failure to report a qualifying account, not the failure to file an FBAR.” Pet. App. 25a. It declared “[t]he $10,000 penalty cap therefore applies on a per-account, not a perform, basis.” Ibid.

Notably …

1. Mr. Bittner was a US citizen living outside the United States during the years he was assessed the FBAR penalites

2. Mr. Bittner had more than 25 accounts in each year and it appears that he could (but did not) file by simply indicating that he had more than 25 accounts. Yes, he chose to disclose each of the specific accounts.

3. Mr. Bitter appeared to take the initiative to file is FBARs in order to be in compliance with US laws.

Amicus Briefs

A number of groups and organizations have filed amicus briefs. Of particular interest to Americans abroad is the brief submitted on behalf of the Center For Taxpayer Rights.

All amicus briefs may be found here.

John Richardson – Follow me on Twitter @Expatriationlaw

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