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” rather than “per form” basis. The Fifth and Ninth circuit courts disagree on the statutory interpretation 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)of the BSA authorizes a penalty of up to US$10,000 “on any person who violates” Section 5314. Is the “violation” the failure to report an account or is it the failure to file the FBAR Form 114?
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 resulting in a whopping FBAR penalty of USD 1.77 million (per account over a few years meant 177 FBAR “violations”). The United States Supreme Court just recently granted a writ of certiorari to review the Bittner case. By granting certiorari in Bittner, we will finally have a definitive answer to this important question.
Last night as I was falling asleep, a related question floated through my brain: If the US Supreme Court decides that the FBAR penalty is limited to only $10,000 per form, will the individuals who had to pay a penalty of $10,000 per account be entitled to a refund? In legal terms, the question is whether such a decision would be applied with retroactive effect. This is a question with no simple or clear answer, especially in civil cases such as posited here by my hypothetical.
Before delving into this issue, I must warn readers that I am not a Constitutional scholar and Constitutional Law has always rattled my brain. Nonetheless, here’s my stab at the question:
Retroactive or Prospective Application?
Prior Supreme Court precedent was set out in Chevron Oil Co. v. Huson, 404 U.S. 97 (1971). There the issue whether the court decision should be applied retroactively or prospectively was to be determined by a balancing of the equities. To be limited only to prospective effect, the decision must have established a new principle of law. The new principle of law could come about either by overruling clear past precedent on which persons had previously relied or by deciding an issue of first impression the resolution of which had not been clearly foretold. In balancing the equities, the court would examine the prior history of the rule in question, determine the purpose for which it was enacted and look at whether applying it retroactively would enhance or thwart its operation. Then, the courts must look to whether applying its decision with retroactive effect will result in substantial inequity. Id. at 106–07. American Trucking Assn’s v. Smith, 496 U.S. 167, 179–86 (1990).
Apparently, the Court (barely) shifted away from the Chevron Oil approach in civil cases when it decided Harper v. Virginia Department of Taxation, 509 U.S. 86 (1993). I say “barely” because the decision was by a 5 to 4 vote, with four Justices continuing to adhere to Chevron Oil. As applied to civil cases, the rule is: “When this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.” 509 U.S. at 97.
What does it mean for a case to be “open on direct review”? Generally, a new legal precedent will be applied to undecided cases that have not yet been litigated, regardless of whether the relevant events occurred before or after the new precedent was announced. There are practical limits, however, on the scope of such decisional retroactivity. The relevant statute of limitations, for example, may limit retroactive application of the new precedent; and furthermore, the doctrines of res judicata and collateral estoppel may also prevent revisiting cases and issues that have been finally decided before the new precedent was announced.
From what I can gather, in the criminal context it means that the new rule will not overturn prior convictions even if those convictions were obtained in violation of the Constitution. Edwards v. Vannoy 593 U.S. ___, (May 17, 2021). In Edwards, the Court explained that applying a new rule retroactively would essentially open the floodgates and mean overturning decades of convictions; relitigating cases would be far too costly and with regard to older cases it would be impossible to relitigate since the evidence will have grown stale or may even be lost.
FBAR Refunds Possible?
Based on all of the above, I’m not holding out terribly much hope for a refund of “nonwillful” FBAR penalties assessed on a per account basis even if the Court determines the “violation” under the Bank Secrecy Act means a failure to file the FBAR form, rather than a failure to list an account. If the taxpayer has the statute of limitations on his side, it may be possible to successfully initiate a refund claim, especially if the matter has not been decided in a court case. Those who entered the prior IRS OVDI and OVDP initiatives may be out of luck since penalties were pursuant to the particular IRS fixed penalty framework rather than imposed under the BSA itself. The reality is that for many benign actors harsh treatment was the result for participation in these various IRS offshore voluntary disclosure programs for offshore accounts. Many entered the program due to fears the FBAR penalty would apply on a “per account” basis.
I say all of this with full awareness of a possible (although unlikely to succeed) constitutional claim that the FBAR fines imposed per account are excessive and in violation of the Eighth Amendment. (For those who are wondering, the Eighth Amendment applies not only to criminal matters but also protects against excessive civil fines. Hudson v. United States, 522 U.S. 93 (1997)). Tax penalties generally have been held to fulfill a “remedial” purpose and it has been held that they are not subject to the Excessive Fines Clause. See Helvering v. Mitchell, 303 U.S. 391 (1938), McNichols v. Comm’r of Internal Revenue, 13 F.3d 432, 434 (1st Cir. 1993).
While it is not impossible, realistically I cannot see the Court permitting the already overwhelmed IRS to be embroiled in FBAR refund cases. But, I am putting the cart before the horse… let’s see what the Court decides. Per account or per form?
July 7, 2022
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