Our readers may remember that last year we highlighted a potentially ground-breaking non-willful FBAR penalty case, which at that time, was pending before the United States District Court for the Eastern District of Texas—United States v. Bittner.¹ Now, despite creating a notable conflict with its sister district court in California, the court’s decision is indeed a ground-breaking win for non-willful FBAR nonfilers. With the district courts (also belonging to different circuit courts of appeal) at odds now over a matter of federal statute interpretation, which ideally should be uniformly understood nationwide,² we expect to see more cases addressing the question: does the civil penalty for non-willful FBAR violation(s) “apply per foreign financial account maintained per year but not properly or timely reported on an annual FBAR, or per annual FBAR report not properly or timely filed?”³
On June 29, 2020, the court in Bittner determined that “consistent with the plain language” of the non-willful civil penalty statute in the Bank Secrecy Act of 1970 (BSA):
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.⁴”
Importantly, the court was clear that it considered its interpretation as avoiding the “absurd outcomes that Congress could not have intended in passing the non-willful FBAR provision.” Specifically, the interpretation avoids the inequitable (1) result where a taxpayer faces punishment far exceeding his or her crime, and (2) treatment of some non-willful violators with numerous accounts, like Mr. Bittner, who end up financially penalized even more than willful violators having only one account worth even more than all of the non-willful taxpayers’ accounts added together.
Taxpayer was born in Romania and has a Master of Science in Engineering from a university in Bucharest. He moved to the U.S. in the early 1980’s and became a naturalized U.S. citizen approximately eight years later. In the U.S., he worked as a dishwasher and plumber—eventually earning a master plumber certificate in California.
Not long after becoming an American citizen, Taxpayer returned to Romania and lived there until 2011. During that time, as a Romanian – American dual citizen, Taxpayer was a successful businessman and investor—maintaining signature authority or control over multiple foreign accounts. The court notes that:
From 1996-2011, the aggregate high balance in those foreign financial accounts exceeded $10,000. This is important because United States citizens who maintain an aggregate high balance in a foreign financial account or accounts exceeding $10,000 in any given year are required by federal law to report that financial interest to the Treasury Department.”
On June 6, 2019, the government filed a complaint against Taxpayer to collect nearly $3 million in civil, non-willful FBAR penalties.⁵ Specifically, the government contended that from 2007 through 2011, Taxpayer failed to report more than 50 accounts; thus, the government assessed $10,000 per account per violation—arriving at almost $3 million in penalties and accruals. Taxpayer maintains that “the non-willful civil penalty provided under 31 U.S.C. § 5321(a)(5)(A) and (B)(i) applies per annual FBAR report not properly or timely filed, not per foreign financial account maintained.”⁶
Remarkably, Taxpayer’s amended returns for the relevant periods only resulted in a total of $625 unpaid tax—leaving Taxpayer, and many others, questioning the appropriateness of the punishment sought. Taxpayer asserted in his Answer to the Complaint, filed July 30, 2019, that the “astronomical penalties of nearly $3 million against [Taxpayer] for not timely filing 5 FBAR forms is far in excess of any appropriate punishment for his non-willful conduct with respect to those statutory violations.”
Subsequently, both parties moved for partial summary judgment. The government’s motion, “seeks only $1,770,000 in penalties, computed on the basis of the number of foreign accounts [Taxpayer] admitted to maintaining from 2007-2010.”⁷ Taxpayer’s motion maintains that: (1) non-willful FBAR violations incur civil penalties applicable per form—not per annual FBAR report, and (2) the penalty violated the Eighth Amendment prohibition against excessive fines.
Congress enacted the Bank Secrecy Act of 1970 (BSA), requiring the Secretary of the Treasury to create the reporting requirements, via regulations, applicable to U.S. persons maintaining offshore financial accounts. Significantly, 31 U.S.C. §5314 provides that:
Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency.”
According to 31 U.S.C. §5321(a)(5)(A), “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.” And 31 U.S.C. §5321(a)(5)(B)(i) provides that “[t]he the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.”
Although the Bank Secrecy Act (BSA) requires the Secretary of the Treasury to issue regulations implementing reporting requirements, only three regulations have been issued which, absent a showing of reasonable cause, can trigger penalties for:
Importantly, 31 U.S.C. §5321 also addresses “willfulness” and “reasonable cause.” First, willful FBAR violations incur a maximum penalty in an amount equal to the greater of $100,000 or 50% of: (1) either the “amount of the transaction” (where the violation involved a transaction), or (2) the “balance in the account at the time of the violation” (where the violation involved a failure to report).⁸
Under the reasonable cause exception in 31 U.S.C. §5321(a)(B)(ii): “No penalty shall be imposed . . . with respect to any violation if . . . (I) such violation was due to reasonable cause, and (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.” In other words, under this exception, a non-willful FBAR violator is not subject to a civil penalty if reasonable cause exists and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”
Again, the court’s opinion is overwhelmingly favorable for the taxpayer. Specifically, the Court agreed that the penalty for non-willful FBAR violations applies per annual FBAR report, not per account. Significantly, this means that the court expressly disagreed with its sister district court’s decision, U.S. v. Boyd,9 which held that the IRS correctly assessed a taxpayer, who non-willfully failed to timely report 14 accounts in the UK, on a per-account basis. However, the court sided with the government on the issue of whether Taxpayer had shown reasonable cause for purposes of abating the penalties.
Considering the statutory provisions in their context and the overall statutory and regulatory framework, the court first noted that 31 U.S.C. §5321(a)(5)(A) read in conjunction with 31 U.S.C. §5321(a)(5)(B)(i) discusses a “singular civil money penalty, capped at $10,000, that attaches to each violation of §5314.”¹⁰ Moreover, according to the court, since the penalties attach to Treasury’s implementing regulations, and those regulations pertain to the FBAR filing requirements, the failure to file an FBAR is the “violation” triggering the penalty.
However, the court then needed to ascertain “whether an FBAR reporting deficiency constitutes a single violation, or whether each foreign financial account not properly or timely reported on an FBAR constitutes a separate reporting violation.”¹¹ The court approached this problem by reviewing the treatment of willfulness and the reasonable exception under 31 U.S.C. §5321.
The court reiterated that 31 U.S.C. §5321(a)(5)(D)(i)-(ii) provides that the willful FBAR violations incur a maximum penalty in an amount equal to the greater of $100,000 or 50% of: (1) either the “amount of the transaction” or (2) the “balance in the account at the time of the violation.” As such, the court explained that:
Congress clearly knew how to make FBAR penalties account specific—it did so, in no uncertain terms, for willful violations. And the willfulness provision was part of the statutory scheme well before Congress amended the BSA in 2004 to add the non-willfulness provision. Congress, therefore, had a template for how to relate an FBAR reporting penalty to specific financial accounts, and the fact that it did not do so for non-willful violations is persuasive evidence that it intended for the non-willful penalties not to relate to specific accounts.¹²”
Simply put, the court found the evidence persuasive that Congress intended for the non-willful FBAR penalty to “not relate to specific accounts.”¹³
Similarly, the court considered the reasonable cause exception and clarified that the statutory language authorizes not assessing the penalty for a non-willful FBAR violation due to reasonable cause where “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”¹⁴ Thus, the court noted that:
Congress therefore related the reasonable cause exception to “balance in the account” and could have done the same when defining the non-willful FBAR violation and penalty. But it did not. Tellingly, Congress passed the non-willful civil penalty provision—§ 5321(a)(5)(B)(i) —and the reasonable cause exception together. They are part of the exact same statutory scheme, passed by the exact same Congress at the exact same time. Congress knew what it was doing when it drafted the non-willful civil penalty without any reference to “account” or “balance in the account,” and the Court will presume that Congress acted intentionally in doing so.¹⁵”
Additionally, the court studied the FBAR form and explained that it is not the fact that an individual has multiple accounts that triggers the FBAR reporting obligation; rather, the balance (the aggregate balance in the case of multiple accounts) must exceed $10,000. The court stated that:
Absent some directive from Congress indicating otherwise, it would make little sense to read § 5321(a)(5)(A) and (B)(i) to impose per-account penalties for non-willful FBAR violations when the number of foreign financial accounts an individual maintains has no bearing whatsoever on that individual’s obligation to file an FBAR in the first place.¹⁶”
Finally, the court was clear that its ruling avoids “absurd outcomes” that it did not believe Congress would have intended when drafting the statutory language. Specifically, the court described the following examples:
First, imagine two similarly situated individuals who each maintain $1 million per year in various foreign financial accounts. The first individual maintains two (2) accounts, each with $500,000; the second individual, wanting to avoid the risks of keeping too much of her money tied up in the same place, maintains twenty (20) accounts, each with $50,000. Suppose each individual non-willfully fails to file an FBAR in a certain year, but after realizing her misstep, files a late FBAR properly reporting her foreign financial accounts. Under the Government’s interpretation of § 5321(a)(5)(A) and (B)(i), the first individual would be assessed up to $20,000 in civil penalties, and the second individual would be assessed up to $200,000 in civil penalties.¹⁷”
Imagine two individuals, each with interests in twenty (20) foreign financial accounts. Suppose the first individual maintained an aggregate foreign financial account balance of $180,000 in a certain year and willfully failed to file an FBAR. And suppose a second individual maintained an aggregate foreign financial account balance of $100,000 in that same year and non-willfully failed to file an FBAR. Pursuant to § 5321(a)(5)(C) and (D), the first individual would be subject to a $100,000 penalty. But the second individual—the non-willful violator—would be subject to up to $200,000 in penalties under the Government’s interpretation of § 5321(a)(5)(A) and (B)(i). And this, despite having acted non-willfully and having less money in foreign financial accounts than the willful violator.¹⁸”
The court briefly considered Taxpayer’s argument that the rule of lenity means that any statutory ambiguity should be resolved in his favor. Noting that the rule of lenity is a statutory principle primarily applicable in the interpretation of criminal statutes,¹⁹ the court was dubious that the non-willful civil FBAR penalty was even the “kind” of statute subject to the rule of lenity. Besides, according to the court, the statute at issue is unambiguous. As such, the court merely indicated that “if such a principle were at play here, it would further support the Court’s conclusion that § 5321(a)(5)(A) and (B)(i) should be interpreted to impose the non-willful civil penalty on a per-FBAR, rather than per-account, basis.”²⁰
Taxpayer maintained that the IRS’s assessment resulted in penalties so excessive that it constituted an “excessive fine” that violated the Eighth Amendment to the United States Constitution. However, the court found that in light of its own interpretation of the non-willful FBAR penalty, the Eighth Amendment argument was moot.
Unfortunately, for Taxpayer, his argument that his FBAR violations were due to reasonable cause was not settled in his favor. The court was not persuaded by Taxpayer’s claim that he didn’t know that he had to file the FBAR. Instead, the court stated that:
[Taxpayer] was undoubtedly a sophisticated business professional, as demonstrated by his business and investment savvy. Moreover, Mr. Bittner was aware of at least some of his United States income tax obligations. Mr. Bittner cannot claim with a straight face that, as an American citizen generating millions of dollars in income abroad, he was so unaware that he might have United States reporting obligations that he did not even feel compelled to investigate the matter.²¹”
Obviously, this decision is a huge victory for Taxpayer, who triumphed in reducing the IRS’s assertion of more than $1.7 million in penalties to approximately $50,000. However, we would note that the government may still appeal this decision. Moreover, we would emphasize again that with the district courts now at odds with each other over the appropriate interpretation of the federal statute (i.e., do non-willful FBAR violations incur civil penalties applicable per account, or per annual FBAR report) we expect to see more cases addressing the issue. It is no secret that the IRS has become increasingly aggressive in its pursuit of offshore tax enforcement. With that in mind, we would strongly advise that any taxpayer, who is contemplating coming into compliance, seek expert advice with respect to their overseas bank accounts to mitigate the potentially significant civil penalties or possible criminal exposure.