In more detail

The Bank Secrecy Act (BSA) of 1970 was enacted to curb the use of foreign financial accounts to evade taxes. The BSA requires that an individual report his or her interest in foreign bank accounts annually on a Foreign Bank Account Report (FBAR) under 31 U.S.C. § 5314. Failure to report these accounts is a violation that can result in a penalty under 31 U.S.C. § 5321. In 2004, Congress amended section 5321 to include non-willful violations of section 5314. Section 5321, in part, authorizes the Secretary to "impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314."

Moreover, "the amount of any civil penalty imposed … shall not exceed USD 10,000" but no penalty attaches if the "violation was due to reasonable cause and the amount of the transaction or balance in the account was properly reported." Section 5321(a)(5).

The Fifth and Ninth Circuit take opposing interpretations as to whether a non-willful violation is: (1) a failure to report a foreign account, resulting in a maximum USD 10,000 penalty per account; or (2) a failure to file a form in accordance with the regulations, where multiple accounts are on a single report form, with a maximum USD 10,000 penalty per report form. This article reviews the Fifth Circuit decision United States v. Bittner, 128 AFTR 2d 2021-6760 (5th Cir. 2021), and the Ninth Circuit's decision United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), on non-willful FBAR violations and the opposing statutory interpretation in each circuit court's analysis.

The facts and holding

Alexandru Bittner was Romanian, born but a citizen of the United States. While living in Romania, Bittner became a successful businessman and investor, as such, he accumulated many foreign accounts to manage his growing wealth. Throughout this time, Bittner never filed a FBAR as required by section 5314. Once Bittner returned to the United States and realized he failed to file FBARs in compliance with the BSA, he hired an accountant to file the outstanding FBARs.

In question was Bittner's 272 foreign accounts during the 2007 - 2011 tax years that Bittner failed to report. The IRS assessed a USD 10,000 penalty per-account for the non-willful failure to report foreign financial accounts under section 5321, resulting in a USD 2.72 million fine. On a per-form basis this results in a USD 50,000 fine, which is USD 10,000 for each form not filed for five tax years in question. The Bittner court held that the non-willful violation is a per-account basis, as a result, Bittner is subject to the USD 2.72 million fine.

Prior to Bittner, the Ninth Circuit on 24 March 2021 in US v. Boyd also ruled on non-willful FBAR violations. The facts are as follows: Jane Boyd failed to report 13 foreign accounts during a single tax year, the IRS assessed a penalty of USD 47,279, and the government sued Boyd to obtain a judgment. Boyd argued that the maximum penalty should be USD 10,000 for a single non-willful violation for failure to file a FBAR form with all accounts on the form. The Boyd court held that a non-willful violation should be on a per-form basis and therefore, Boyd is subject to a maximum USD 10,000 fine.

The justifications

Both courts used statutory interpretation to determine whether the non-willful violation should be on a per-account or per-form basis. The courts considered what constitutes a non-willful violation of section 5314 that can be subject to a penalty under section 5321. The Ninth Circuit in Boyd relied on Supreme Court precedent in California Bankers Association v. Shultz, which states "the [BSA] civil and criminal penalties attach only upon a violation of the regulations" and therefore a violation occurs when there is a failure to comply with the regulations, not the statute. The first relevant regulation, Treas. Reg. § 1010.350(a), requires citizens to report financial interests in foreign accounts, and to provide the information in a reporting form prescribed under section 5314. The second regulation, Treas. Reg. § 1010.306(c), prescribes a deadline for filing the FBAR. The Boyd court explained that since the violation was missing the deadline to file the report under Treas. Reg. § 1010.306(c) and not a failure to accurately report under Treas. Reg. § 1010.350(a), Boyd had only committed one violation under the regulations so a maximum penalty of USD 10,000 may be assessed.

The Fifth Circuit in Bittner takes a different approach. The Bittner court states that Schultz "does not interpret any penalty provision of the BSA and its regulations… it addressed constitutional challenges to the BSA and its regulations." Therefore, Bittner does not use Shultz in its analysis and proceeds to the interpretation of the statute. Section 5321(a)(5)(A) penalizes a violation of any provision of section 5314 so the analysis, according to Bittner, should focus on section 5314 as opposed to the relevant regulations.

Next, the Bittner court looked to the 2004 amendment of section 5321(a)(5)(A) where Congress created non-willful violations of section 5314. The Bittner court observed that the non-willful violation language of section 5321 does not refer to a "violation of a regulation prescribed under" even though the earlier enacted section 5321 penalty provisions for violations of other sections of the BSA, such as section 5318, do. Moreover, the regulations and the statutes distinguish the substantive obligations to file reports on foreign accounts under the statute and the procedural obligations to file the reporting forms that the Secretary prescribes. Therefore, when read together, section 5321(a)(5)(A) "[authorizes] a penalty for 'any violation of any provision of section 5314,' as opposed to the regulations prescribed under section 5314, [thus] section 5321(a)(5)(A) most naturally reads as referring to the statutory requirement to report each account— not the regulatory requirement to file FBARs in a particular manner." The Fifth Circuit therefore held that a violation under section 5321(a)(5)(A) is a failure to report an account, which means that Bittner failed to report 272 accounts and is subject to the USD 2.72 million fine. The Boyd court did not discuss the "regulation prescribed under" language.

The courts then looked to the willful penalty provision for FBAR violations in section 5321. The willful penalty provision provides a penalty amount on the balance of any account willfully misreported or not reported. The Boyd court determined that since "Congress generally acts intentionally when it uses particular language in one section of a statute but omits it in another," it is presumed that "Congress purposely excluded the per-account language from the non-willful penalty provision" and therefore a violation is on a per-form basis. The Bittner court takes the opposite approach. The Bittner court explains that since the willful violation provision came first, and that this language describes a willful violation in terms of a failure to report a transaction or an account, it should follow that a non-willful violation is a failure to report a transaction or account. The dissent in Boyd also has similar reasoning.

Lastly, the Boyd court noted that since Congress intentionally included the per-account language in the reasonable cause exception to a non-willful violation (see above), while excluding it from the non-willful provision, the violation is on a per-form basis. The Bittner court took the opposite position: since the reasonable cause exception for a non-willful violation is on a per account basis, it follows that a non-willful violation should be on a per-account basis.

Reasonable cause

The Bittner court also discussed the reasonable cause exception for non-willful violations. The BSA provides a reasonable cause exception when a penalty is non-willful. Section 5321(a)(5)(B)(ii) states that no penalty will be imposed if (1) the violation was due to reasonable cause, and (2) the amount of the transaction or the balance in the account at the time of the transaction was properly reported. The BSA and relevant regulations do not define reasonable cause.

The Bittner court used statutory interpretation to determine that reasonable cause "requires showing that the individual exercised ordinary business care and prudence, considering all pertinent facts and circumstances on a case-by-case basis." The most important factor of reasonable cause is the extent of the taxpayer's effort to assess his proper liability.

Bittner conceded that he never inquired about his tax liability in the United States while living in Romania. The district court observed that Bittner was a sophisticated business professional with interests in dozens of companies and has inquired about tax implications in the past. The Fifth Circuit concluded that Bittner is a savvy businessman and therefore his ignorance of any US obligations was unreasonable. The court noted that even though Bittner was unaware of his reporting obligations, had minimal contact with the United States during the 2007 - 2011 tax years, and promptly filed his outstanding FBARs upon learning of his obligations, it did not change the calculus that Bittner acted unreasonably and therefore could not claim reasonable cause for the non-willful failure to report foreign accounts.

Conclusion

The Fifth Circuit in Bittner interprets a non-willful FBAR violation on a per-account basis, while the Ninth Circuit in Boyd interprets it to mean a per-form basis using the same facts. As it stands, Bittner and Boyd are irreconcilable, which makes the interpretation of a non-willful FBAR violation ripe for Supreme Court review. Additionally, a third case in District Court for the Southern District of Florida where the taxpayer is facing USD 200,000 in non-willful penalties, United States v. Solomon, 128 AFTR 2d 2021-6537, interpreted the statute in favor of the government in holding that the FBAR violation is on a per-account basis. Solomon was appealed to the Eleventh Circuit.