The U.S. Supreme Court has ruled that the $10,000 penalty for a nonwillful violation of the foreign bank account reporting rules in the Bank Secrecy Act applies on a “per-form” basis, not a “per-account” basis, handing individuals an important victory.
Summary
In Bittner v. United States, No. 21-1195 (February 28, 2023), the Supreme Court issued a 5-4 decision authored by Justice Gorsuch holding that the $10,000 Bank Secrecy Act (“BSA”) penalty for nonwillful failure to file Foreign Bank Account Reports (“FBARs”) applies to each FBAR, regardless of how many foreign bank accounts the individual did not properly report on the FBAR. The penalty does not apply to each and every account not properly reported on the FBAR.
The BSA requires certain individuals to file an annual report with the government disclosing foreign bank accounts. 31 U.S.C. § 5314. It also imposes a penalty in the amount of $10,000 for nonwillful violations of that requirement. 31 U.S.C. § 5321.
Different courts applied this penalty differently and therefore created different results based solely on the location of the individuals making the report. For instance, the Ninth Circuit Court of Appeals held that the government could apply only one penalty with respect to each FBAR, regardless of the number of bank accounts improperly reported, or not reported on the FBAR. However, the Fifth Circuit Court of Appeals held that the government could apply the $10,000 to each and every account not properly reported on an FBAR.
The difference is more than pedantic – in Bittner, the individual failed to properly report 272 foreign bank accounts over five years. The question for the Court was whether Mr. Bittner was subject to five penalties of $10,000 each (a total of $50,000) for improperly filing five FBARs or 272 penalties of $10,000 each (a total of $2,720,000) for improperly reporting 272 foreign bank accounts.
The Supreme Court determined that the better statutory reading required application of the penalty on a per-form basis and not a per-account basis, concluding that, “[b]est read,” the failure to correctly file an FBAR constitutes one violation, “not a cascade of [ ] penalties calculated on a per-account basis.” As a result, the Court found for Mr. Bittner, resulting in him owing a penalty of only $50,000, not $2,720,000.
The Court’s Opinion
Section 5314 does not reference accounts or account numbers, establishing that the relevant legal duty under the BSA, the duty subject to a violation, is filing “reports.” The BSA therefore creates a “binary choice” – a individual either files the FBAR properly or not, and the only distinction between the two instances is the appropriate penalty.
Reviewing the related penalty provisions for nowillful violations under Section 5321, the Court again noted that the BSA does not reference accounts or account numbers, but instead links the penalty to the failure to properly file the FBAR. Thus, “…in all cases, penalties for nonwillful violations accrue on a per-report, not a per-account, basis.”
Other language in Section 5321 supports this conclusion. For instance, willful FBAR violations are explicitly subject to penalties on a per-account basis. The Court concluded that the lack of account related language in the nonwillful penalty provisions evidenced that while Congress intended for willful penalties to apply on a per-account basis it also intended for nonwillful penalties apply on a per-account basis. The Court concluded similarly with respect to the reasonable cause exception for nonwillful penalties, which provided a waiver of the penalty if, in relevant part, the late-filed FBAR accurately reflects each account; this language provided “further evidence” that when Congress wished to address account-level penalties it knew how to do so – and it did not do so when imposing the nonwillful FBAR penalty.[1]
The Court also looked to the drafting history of the BSA penalty regime for support. When established in 1970, the BSA only included penalties for willful FBAR violations. In 1986, Congress changed the BSA to impose penalties on a per-account basis for certain willful violations. In 2004, when Congress added penalties for nonwillful violations, it would have “been the simplest thing” for Congress to model the new penalties on the per-account based willful FBAR penalties. Instead, the 2004 language “bears scant resemblance” to the per-account language applicable to willful penalties.
Other contextual clues supported the Court’s decision.[2]
- The government repeatedly advised the public in various ways that failure to file an FBAR could result in a single $10,000 penalty, not that the amount of the penalty would vary depending on the number of erroneously reported or omitted accounts. The government’s inconsistency here weighed against its argument.
- The BSA’s purpose is to require the filing of foreign bank account reports, not maximizing penalties for nonwillful mistakes.[3]
- The Court also referenced the BSA regulations, specifically the provisions that require less detailed account information on the FBAR for individuals with more than 25 accounts. From this, the Court concluded that the “law aims to provide the government with a report sufficient to tip it to the need for further investigation, not to ensure the presentation of every detail or maximize revenue for each mistake” (emphasis in original).
- The Court also provided various scenarios exemplifying its concern that imposing a penalty on a per-account basis would create anomalies that Congress did not intend. On brief, the government countered by noting it could simply require a separate form for every foreign bank account. While acknowledging that the government could change its reporting process, in the manner the government suggested or otherwise, the Court concluded that the government’s argument nonetheless did not answer the question regarding application of the penalty on a per-form or per-account basis.
Conclusion
The Court’s conclusion that the BSA imposes its $10,000 penalty on a per-form basis, not a per-account basis, turned the $2,720,000 penalty in Bittner into a $50,000 penalty. For the rest of us, rest assured that tax advisors and accountants are more aware than ever of the FBAR filing requirement – but if there is an error, we can all breathe easier knowing that the penalty, for a nonwillful violation at least, will result in a penalty capped at $10,000 for the annual FBAR filing – at least until the government changes the regulations to require separate forms for every foreign bank account!
[1] The Court rejected the dissent’s argument that two provisions of Section 5321 referencing account-specific language (willful penalties and the reasonable cause exception for nonwillful penalties) implies that the third provision (imposition of nonwillful penalties) should apply at the account-level. Instead, the Court found that “just because two provision in the law are similar does not mean we may ignore differences found in a third.”
[2] Justice Gorsuch also made a brief argument in support of the Court’s prior analysis by referencing the rule of lenity, holding that “statutes imposing penalties are to be ‘construed strictly’ against the government and in favor of individuals. Commissioner v. Acker, 361 U.S. 87, 91 (1959). Noting that this rule of lenity applied to all Federal statutes, Justice Gorsuch found that it supported individuals subject to nonwillful penalties because individuals are “not to be subjected to a penalty unless the word of the statute plainly impose it.” Importantly, only Justice Jackson joined this portion of the Opinion, with the Chief Justice, Justice Alito, and Justice Kavanaugh, as well as the four dissenters – Justices Barrett, Thomas, Kagen, and Sotomayor – declining to join it.
[3] Interestingly, though perhaps not surprisingly for an opinion supported by Chief Justice Roberts and Justices Gorsuch, Alito, and Kavanaugh, the Court referenced an article by former Justice Scalia to support the use of a purpose clause as an indicator of meaning
[View source.]
