The U.S. Supreme Court Limits Penalties for Taxpayers With Foreign Accounts Who Non-Willfully Fail to File Required Reports
On February 28, 2023, the U.S. Supreme Court, in a narrow 5-4 opinion, determined that taxpayers who non-willfully fail to file annual Foreign Bank Account Reports (FBARs) face a maximum $10,000 penalty for each report they failed to file. The ruling resolved a circuit split over whether the $10,000 penalty could be assessed on a per report or a per account basis. Although the Court did not address the question of whether taxpayers who already paid penalties on a per account basis can seek refunds from the government, taxpayers with open refund requests pending with the IRS and/or acting within the statute of limitations may be entitled to request a refund from the IRS.
The Bank Secrecy Act (BSA) requires those who possess foreign accounts with an aggregate balance of more than $10,000 to file an annual report on an FBAR form. The government argued that the statute authorizes a maximum $10,000 penalty for each account that the taxpayer non-willfully fails to report, which could aggregate to many thousands or millions of dollars in potential liability for taxpayers with many foreign accounts. The Court rejected the government’s position and provided clear guidance to taxpayers that the penalty is per-report and not per-account. Thus, taxpayers face only a maximum aggregate $10,000 penalty for any non-willful failure to file a report or to disclose an account, as opposed to a $10,000 penalty for each individual omission on a single report. This question had created inconsistency in the IRS’s practices and generated a circuit split. In 2021, the Ninth Circuit in United States v. Boyd, 991 F.3d 1077, 1079 (9th Cir. 2021), concluded that the penalties for a non-willful violation accrued on a per-report basis. However, the Fifth Circuit in Mr. Bittner’s case interpreted the penalty as applying on a per-account basis.
The facts of one of the cases before the Court demonstrate the significance of the ruling. Alexandru Bittner, a dual U.S. and Romanian citizen, returned to his home country of Romania following the fall of communism and launched a successful business career. He was not aware of his obligation to file FBARs even while overseas, but became aware after returning to the U.S. in 2011, at which time he retained an accountant to help him prepare and file FBARs for tax years 2007–2011. While these late-filed FBARs disclosed Bittner’s largest overseas accounts, they failed to disclose 25 or more other accounts. Although Bittner ultimately corrected all his filings and provided additional details relating to the accounts beyond the statutory and regulatory requirements, the question arose over the appropriate penalty. If per-report, Bittner would face up to $50,000 in liability—$10,000 for each tax year Bittner failed to make full disclosure of his overseas accounts. Instead, the IRS imposed a $2.72 million penalty on the theory that each undisclosed account constituted a separate violation. The Court ultimately sided with Bittner.
Two provisions of the BSA are germane. Section 5314 states that the Secretary of Treasury “shall” require certain persons to file reports when they have a relationship with a foreign financial agency. Section 5321, in turn, penalizes the non-compliant taxpayer up to $10,000 for non-willful violations of the FBAR reporting requirement. The question before the Court was whether the $10,000 penalty can be imposed a single time for an FBAR, regardless of how many accounts the FBAR omits, or whether each omitted account constitutes a separate violation permitting the assessment of a separate penalty.
The Court’s Reasoning
Writing for the majority, Justice Gorsuch reasoned that the text of the BSA does not speak of accounts or numbers of accounts, just of a binary: either the taxpayer complies and files the report in the way prescribed by the Secretary of the Treasury or he does not and faces a penalty. Congress could easily have specifically provided for per-account penalties and had in fact done so in other provisions.
The Court also noted the inconsistent positions the Treasury Department has taken in its guidance purporting to interpret the provision as a per-report penalty. In a 2010 proposed rulemaking, for instance, the Treasury Department indicated that a person who non-willfully fails to properly file an FBAR faces a civil penalty “not to exceed $10,000.”
The Court pointed to the drafting history of the FBAR regulations. When Congress adopted the BSA, the law included penalties only for willful violations capped at $1,000. Congress eventually authorized the Secretary of the Treasury to impose penalties for certain willful violations on a per-account basis. Only afterwards did Congress add the penalty provision for non-willful violations but it did not adopt the per-account language of the prior amendment, indicating Congress did not intend to adopt a per-account penalty.
The Court further noted the purpose of the FBAR regulations—to require certain reports and records to assist the government in various criminal and tax intelligence initiatives—and concluded that the information-seeking purpose of the provisions are accomplished with a per-report penalty. The Court also noted that if non-willful violations are accrued per-account, it could lead to absurd consequences in certain situations where a willful violator would incur a lesser penalty than a non-willful violator.
In a section of the opinion joined only by Justice Jackson, Justice Gorsuch employed the rule of lenity to support a per-report reading. This rule stems from the Constitution’s Due Process Clause and holds that individuals must have fair notice of what the law forbids before being penalized for their actions. Because the government’s public materials and prior agency guidance indicated a per-report penalty, or was at best ambiguous on this point, the rule of lenity requires the BSA’s non-willful penalty provision to be interpreted on a more lenient per-report basis.
The dissent, authored by Justice Barrett, highlights textual arguments to the contrary, arguing for a per-account reading of the provision. The dissent focuses on the language of section 5314, which requires FBAR reporting when an individual has a relationship with a foreign financial agency or an account with a foreign bank. Because the focus is on the relationship, the dissent claims, it is each relationship that triggers a separate penalty for non-willful violation. Further, recordkeeping obligations for FBAR filers indicate that the importance is on the information supplied (the account information) and not on the act of filing.
This seemingly straightforward issue regarding statutory interpretation could have broad implications. First, the decision settles the issue conclusively for taxpayers—a non-willful violation of the annual FBAR requirement will subject the taxpayer to a maximum $10,000 civil penalty for each missing report no matter the number of foreign accounts the taxpayer holds unless and until Congress provides otherwise.
The decision also generated an unusual coalition of Justices. Justice Gorsuch wrote the majority opinion which Chief Justice Roberts and fellow Justices Kavanaugh, Alito, and Jackson joined. Justice Barrett wrote the dissenting opinion, joined by Justices Thomas, Kagan, and Sotomayor. And only Justices Gorsuch and Jackson favored the argument concerning lenity. Both sides employed similar textual, contextual, and statutory interpretation to reach opposite conclusions.
The decision is also interesting for its limited scope of applicability. It expressly declines to consider what mens rea the government must prove in order to impose a non-willful penalty, just that it accrues on a per-report basis. 31 U.S.C. § 5321(a)(5)(C) and (D)(ii). It is entirely possible that the IRS may become more aggressive in its determinations of what constitutes a willful penalty, given the significantly enhanced penalties for willful cases. The decision also does not address explicitly how to treat taxpayers who have already paid the penalty on a per-account basis, though taxpayers with open refund requests pending with the IRS and/or acting within the statute of limitations for requesting a refund may be entitled to request a refund from the IRS based on this ruling.
© Arnold & Porter Kaye Scholer LLP 2023 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.