My earlier blog posts discussed the split in the circuit courts whether the FBAR $10,000 civil nonwillful penalty is to be applied on a “per account” basis rather than “per form”. The crux of the matter involves conflicting statutory interpretations by the 5th and 9th circuit courts of the Bank Secrecy Act (BSA) (31 U.S.C. § 5321(a)(5)(B)(i)), particularly what constitutes a “violation” of the BSA. Section 5321(a)(5)(A) authorizes a penalty of up to US$10,000 “on any person who violates” Section 5314.
In United States v. Bittner, (No. 20-4059, 5th Cir. 11/30/21), the Fifth Circuit overruled the lower court and held that the FBAR non-willful US$10,000 penalty applies on a per account rather than a per form basis. The taxpayer was hit with a hefty penalty involving 177 FBAR “violations” (thus, US$1.77 million) since he had a financial interest in more than 25 accounts per year for each of three years. Last summer, in the lower court, Eastern District of Texas, Bittner was the first case to side with the taxpayer ruling the FBAR non-willful penalty is to be assessed on a per form rather than a per account basis. The case was overruled on appeal to the Fifth Circuit. US taxpayers are now left with greater anxiety over possible FBAR violations, especially if their case comes within the Fifth Circuit. Mr. Bittner has petitioned the United States Supreme Court to review the case (this is called a petition for writ of certiorari).
In United States v. Boyd, 991 F.3d 1077 (No. 19-55585, 9th Cir. 3/24/21), the taxpayer had fourteen financial accounts in the United Kingdom, but failed to file an FBAR for 2010, the year in issue. Since the IRS concluded her violations were not “willful”, the agency mitigated the penalties and assessed a non-willful penalty for 2010 on each of 13 accounts with a total FBAR penalty of US$47,279. The taxpayer argued that the penalty was more than that permitted by the Bank Secrecy Act, claiming that the maximum US$10,000 penalty is based on the failure to file the FBAR itself rather than per account that should have appeared on the FBAR. The district court rejected the taxpayer’s argument, but she won on appeal to the Ninth Circuit: “We reverse this judgment and conclude that § 5321(a)(5)(A) authorizes the IRS to impose only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts”.
The US Solicitor General, Elizabeth B. Prelogar, filed a brief for the respondent encouraging the United States Supreme Court to grant certiorari; available here. Below are some excerpts from that brief (emphasis added by me), indicating the Government agrees with the taxpayer in that the issue is very important and should be addressed by the Justices to resolve the current conflicting circuit court views.
Solicitor General Brief at page 16:
The court of appeals correctly determined that the Bank Secrecy Act authorizes the Secretary of the Treasury to impose a civil penalty of up to $10,000 on a U.S. person for each foreign financial account that the person fails to report as required by the Act and its implementing regulations, because each failure to report a qualifying account is a separate “violation,” 31 U.S.C. 5321(a)(5)(A), for which the Secretary may impose a separate penalty. Yet, as petitioner explains (Pet. 13- 25), the decision below conflicts with a recent decision by a divided panel of the Ninth Circuit in United States v. Boyd, 991 F.3d 1077 (2021). The question presented is important and will often recur, and this case would be an appropriate vehicle in which to address it. Accordingly, the petition for a writ of certiorari should be granted.
Further, the Solicitor General’ Brief stated at pages 18-19:
The division of authority between the Fifth and Ninth Circuits on the question presented is recent, and no other court of appeals has yet addressed whether the Secretary may assess a civil penalty of up to $10,000 for each foreign account that a U.S. person fails to report on a single FBAR. Nonetheless, the question presented is important and likely to recur, and the government agrees with petitioner that the issue—a fairly straightforward and discrete question of statutory construction—warrants this Court’s review at this time.
The brief also makes some compelling statements as to why the relevant BSA provisions should be interpreted to mean that “each failure to report an account is a separate violation of section 5314 subject to penalty.”
For example, Solicitor General Brief at page 14
“Treating the failure to file a timely FBAR as a single violation when a U.S. person fails to report multiple foreign accounts would be inconsistent with the statutory and regulatory requirements to report each foreign account. The essence of the statutory ‘violation’ contemplated by Section 5321(a)(5)(A) is failing to inform the government of the existence of any foreign financial account to which the reporting obligation applies, not failing to file the FBAR form.”
And at pages 14-15
“Any doubt that each unreported account constitutes a separate ‘violation’ for purposes of Section 5321(a)(5)(A) is dispelled by two adjacent provisions, which use the term ‘violation’ in account-specific ways. First, Section 5321(a)(5)(B)(ii) provides that the Secretary may not impose a civil penalty under Section 15 5321(a)(5)(A) ‘with respect to any violation’ if ‘such violation’ was due to reasonable cause and ‘the balance in the account’ was properly reported. 31 U.S.C. 5321(a)(5)(B)(ii)(I) and (II). That language ‘equates a ‘violation’ with failing to report * * * the balance’ in a discrete account. Pet. App. 22a. If a U.S. person had reasonable cause for failing to report two accounts but only properly reported the balance of one of them, the statute would provide a reasonable-cause defense with respect to one unreported account (i.e., one violation) but not the other—even if both accounts should have been reported on the same FBAR. Second, Subparagraphs (C) and (D) of Section 5321(a)(5) prescribe a maximum penalty for a willful ‘violation involving a failure to report the existence of an account” that depends on ‘the balance in the account at the time of the violation.’ 31 U.S.C. 5321(a)(5)(D)(ii). That language ‘plainly describes a ‘violation’ in terms of a failure to report * * * an account,’ not a failure to file an FBAR.”
At p. 23 “The erroneous decision in Boyd threatens to significantly weaken the deterrent effect of the penalty provisions within the Ninth Circuit….”
At p. 20 “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.”
Amicus Curiae Weigh In
Amicus Curiae brief was submitted by the Center for Taxpayer Rights (Center) in support of Mr. Bittner. The Center is a not-for-profit corporation dedicated to furthering taxpayers’ awareness of, and access to, taxpayer rights. The Center accomplishes its mission, in part, by educating the public and government officials about the role taxpayer rights play in promoting compliance and trust in systems of taxation. Nina E. Olson, the former National Taxpayer Advocate, is the Executive Director of the Center.
Relevant excerpt below:
“The Center believe[s] that the conflicting statutory interpretations of 31 U.S.C. § 5321(a)(5)(B)(i) of the U.S. Courts of Appeals for the Fifth and Ninth Circuits, respectively, regarding the application of penalties for non-willfully failing to report offshore bank accounts, create significant confusion and uncertainty and allow for disparate treatment of similarly situated taxpayers. Moreover, the statutory interpretation adopted by the Fifth Circuit, and followed by the Internal Revenue Service (“IRS”), causes significant economic harm to the least culpable taxpayers, is arbitrary and disproportionate to the violation being penalized, and is in conflict with [the] IRS’s internal policy requiring penalties to be proportionate to delinquent conduct.”
Watch this Space
I will keep readers advised of developments.
Want more information about FBAR? Check the FBAR category on my US international tax blog. If you have FBAR issues, IRS has procedures in place and there may be a penalty-free way to regain compliance. FBAR penalties can wipe out your overseas accounts, but worrying about it is simply not productive. Contact me if you have FBAR matters that need resolution. Send an email to arrange a consultation firstname.lastname@example.org
Watch and Listen – More on Mr. FBAR
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Posted May 26, 2022
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