Frost Law
For years, most tax practitioners have emphatically argued that non-willful failures to file the annual Report of Foreign Bank and Financial Accounts (or “FBAR”) should only incur a single $10,000 non-willful penalty per unfiled FBAR. On the other hand, the IRS and some courts across the nation have maintained that the penalty is actually $10,000 per foreign account that should have been properly disclosed on a compliant FBAR.
On February 28, 2023, in a divided 5-4 opinion, the U.S. Supreme Court issued its highly anticipated answer to the long-standing question regarding the appropriate penalty framework for the non-willful failure to file a compliant FBAR.1 Specifically, in Bittner v. United States, the Court held that the Bank Secrecy Act’s “$10,000 maximum penalty for the nonwillful failure to file a compliant report accrues on a per-report, not per-account, basis.”2
Certainly, the ruling impacts those U.S. taxpayers who have undisclosed offshore bank accounts by substantially limiting the penalties for non-willful FBAR violations. And this is indeed a welcome relief to the overwhelming majority of those individuals who own foreign accounts which actually have rather humble origins in contrast to the general public perception that “offshore accounts only belong to very wealthy individuals.” Consider, for example, first-generation U.S. citizens who inherit funds held in foreign banks from their non-U.S. parents, or immigrants who accumulated modest wealth before coming to the US. However, the ruling also leaves taxpayers and practitioners with some important questions, including whether: (1) a potential refund opportunity exists for those taxpayers who already paid FBAR penalties on a per-account basis which exceeded what would have been due on a per-report basis, and (2) some taxpayers should brace themselves for a more aggressive IRS approach where it increasingly argues that FBAR violations are willful.
For years, Frost Law has diligently followed this case and reported as to how the issue has divided courts across the nation (i.e., splitting the Fifth and Ninth Circuits).3 Here, we offer our readers a review of the Bittner saga that has ended in a $2,000,000-plus win for Alexandru Bitter and briefly outline some outstanding implications of this decision.
The Bank Secrecy Act of 1970 (BSA), codified in Title 31 of the United States Code, grants Treasury the authority to require U.S. persons to maintain records and file reports related to certain foreign transactions and accounts.4 Using that power, Treasury issued regulations which require U.S. persons that have a financial interest in, or signature or other authority over, foreign bank or financial accounts to annually report all such accounts if their aggregate value exceeds $10,000 at any point in time throughout the calendar year. This report is made using the FinCEN Form 114, Report of Foreign Bank and Financial Accounts, more commonly referred to as an “FBAR.”5
The BSA also authorizes penalties for the failure to file compliant FBARs. In the case of “non-willful” violations, the BSA imposes a maximum civil penalty of up to $10,000;6 however, the statute doesn’t actually define such violation. More specifically, it fails to provide whether each failure to report a foreign account constitutes a separate reporting violation subject to a maximum penalty of $10,000 (i.e., a per-account basis), or whether each annual failure to file a compliant FBAR incurs maximum penalty of $10,000 (i.e. a per-report basis). This statutory omission has been the basis for the Fifth and Ninth Circuit split and why Bittner ultimately landed in the Supreme Court’s hands.
Alexandru Bittner was born and raised in Romania but eventually became a naturalized U.S. citizen in the 1980’s. During his time in the U.S., he worked as a dishwasher and plumber. However, in 1990, Bittner returned to Romania and remained there until 2011 as a successful businessman and investor where he maintained signature authority or control over numerous foreign accounts. According to the Court, “like many dual citizens, he did not appreciate that U.S. law required him to keep the government apprised of his overseas financial accounts even while he lived abroad.”7 Thus, Bittner failed to file annual, compliant FBAR forms for multiple years.
In 2011, Bittner returned to the United States, learned of his reporting obligations, and engaged an accountant to help him file the required FBARs for 2007 through 2011. The IRS assessed a $2.72 million penalty. The amount was calculated using the per account analysis—$10,000 per unreported account for each tax year from 2007 through 2011.
Bittner’s late-filed FBARs provided details about his largest account, but “neglected to address 25 or more other accounts over which he had signatory authority or in which he had a qualifying interest.”8 The government informed Bittner about this deficiency, and Mr. Bittner hired a new accountant to file corrected FBARs. However, rather than simply checking a box to disclose these accounts as permitted under regulations, Mr. Bittner and his accountant “volunteered details” for each of his accounts.
The government did not dispute the accuracy of the corrected FBARs, nor did it accuse Bitter of any willful violation regarding the previous errors. But the government did maintain that “nonwillful penalties apply to each account not accurately or timely reported, and because Mr. Bittner’s late-filed reports for 2007-2011 collectively involved 272 accounts, the government thought a fine of $2.72 million was in order.”9 Bittner disagreed and argued that the maximum authorized penalty for non-willful violations is $10,000 per report, not per account. Simply, vastly different penalty amounts resulted here depending on the proper method allowed for determining the penalties for non-willful failure to file compliant FBARs—$50,000 (per form) versus $2.72 million dollars (per account).
The especially large number of accounts and disparate penalty amounts involved in Bittner’s matter placed the core problem—i.e., the lacking statutory language (which permitted different interpretations of the definition of a violation)—in the spotlight and propelled it through the courts. The district court agreed with Bittner’s position,10 but the Fifth Circuit favored the government’s interpretation.11
According to the Supreme Court, it was tasked with answering the following question: “Does the BSA’s $10,000 penalty for nonwillful violations accrue on a per-report or a per-account basis?”12 In order to answer this question, the Court began its analysis by reviewing 31 U.S.C. §5314, which the Court noted delineates the legal duty to file reports but “does not speak of accounts or their number.”13 After considering that §5314 is violated regardless of the number of non-willful errors, the Court turned its attention to 31 U.S.C. §5321, which outlines the penalties for failure to comply with reporting requirements. Again, the Court found it significant that the law remained silent as to the number of accounts. Rather, as the Court explained it, per §5314:
[A] violation occurs when an individual fails to file a report consistent with the statute’s commands. So multiple deficient reports may yield multiple $10,000 penalties, and even a seemingly simple deficiency in a single report may expose an individual to a $10,000 penalty. But in all cases, penalties for nonwillful violations accrue on a per-report, not a per-account, basis.14
Moreover, the Court stated that §5321(a)(5)(B)(ii) contains a reasonable cause exception which protects one from incurring a penalty so long as the violation was nonwillful (i.e., due to reasonable cause), and the final report accurately reflects every account. According to the Court, this was evidence that Congress knew exactly how to clearly tie penalties to account-level information if it desired to achieve that result. However, in the context of imposing non-willful FBAR penalties, Congress did not include per-account language.
The Court also expressed that certain other “contextual clues”—apart from the §5314 and §5321 provisions—were problematic for the government’s per-account position. For instance, the Court viewed the government’s own archive of publicly issued guidance in the FBAR context as being “at odds” with a per-account position. Furthermore, the Court stated that the non-willful penalty provision’s drafting history “undermines” the per-account theory. And, perhaps most striking to the Court was the incongruity displayed scenarios like this one outlined in the opinion:
Consider someone who has a $10 million balance in a single account who nonwillfully fails to report that account. Everyone agrees he is subject to a single penalty of $10,000. Yet under the government’s theory, another person engaging in the same nonwillful conduct with respect to a dozen foreign accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.15
Of course, the Court did not fail to highlight the fact that in some fact patterns, the government’s per-account position could even result in non-willful violators facing much higher penalties than their willful counterparts.
At this point, the Court emphasized that “a venerable principle,” known as the “rule of lenity,” could be used to erase any remaining doubt in the matter. According to the Court, under the rule of lenity, “statutes imposing penalties are to be ‘construed strictly’ against the government and in favor of individuals.”16 As such, the Court clarified that in this case, the rule of lenity “requires us to favor a per-report approach that would restrain BSA penalties over a per-account theory that would greatly enhance them.”17 Accordingly, the Court held that the BSA imposes a $10,000 maximum penalty for the non-willful failure to file a compliant FBAR— accruing per-report, not per-account.
Again, the direct result of this ruling is that U.S. persons who non-willfully fail to file compliant FBARs will be subject to a maximum single, $10,000 per-report penalty. However, the Bittner ruling begs the obvious question: What does this mean for those U.S. persons who recently paid non-willful penalties determined under a per-account approach?
Additionally, we join many practitioners in projecting the concern that the Bittner ruling will trigger a more aggressive IRS response to classify a larger number of FBAR violations as “willful” than it did pre-Bittner. We will be watching this development carefully, as well.
Finally, for our more technical readers, we anticipate the possibility that further litigation in willful penalty cases may be critically impacted by the Court’s reasoning in the Bittner case. Although Bittner involves non-willful penalties, we indicated above how important it was to the Court’s analysis that it found no reference to “account” in the applicable non-willful statute. However, the applicable willful penalty statutory language does reference “account.” While it is beyond the scope of this article to fully discuss the willful penalty structure, we will note here that it contains two prongs: the maximum penalty (which now by directed cross-reference to the non-willful statute and post-Bittner simply equals $10,000) is increased to the greater of (i) $100,000, or (ii) 50% of the balance in the account when the violation occurred.18 Note that the reference to “account” is only tied to the second prong. Post-Bittner—applying the Court’s logic –it may be much harder to argue that the maximum penalty for a willful violation is not the greater of $100,000 per report or 50% of account balance at the time of the violation.
So, after years, we finally arrive at the Bittner End—appreciating the value of the uniform approach settled on by the Supreme Court regarding the penalty cap for non-willful FBAR violations. However, we also remain mindful of the important questions left unanswered by the ruling. Of course, we will continue to follow how this decision impacts FBAR cases going forward, and we encourage our readers to follow along for updates and contact us if with questions or concerns regarding FBAR reporting.
For years, most tax practitioners have emphatically argued that non-willful failures to file the annual Report of Foreign Bank and Financial Accounts (or “FBAR”) should only incur a single $10,000 non-willful penalty per unfiled FBAR. On the other hand, the IRS and some courts across the nation have maintained that the penalty is actually $10,000 per foreign account that should have been properly disclosed on a compliant FBAR.
On February 28, 2023, in a divided 5-4 opinion, the U.S. Supreme Court issued its highly anticipated answer to the long-standing question regarding the appropriate penalty framework for the non-willful failure to file a compliant FBAR.1 Specifically, in Bittner v. United States, the Court held that the Bank Secrecy Act’s “$10,000 maximum penalty for the nonwillful failure to file a compliant report accrues on a per-report, not per-account, basis.”2
Certainly, the ruling impacts those U.S. taxpayers who have undisclosed offshore bank accounts by substantially limiting the penalties for non-willful FBAR violations. And this is indeed a welcome relief to the overwhelming majority of those individuals who own foreign accounts which actually have rather humble origins in contrast to the general public perception that “offshore accounts only belong to very wealthy individuals.” Consider, for example, first-generation U.S. citizens who inherit funds held in foreign banks from their non-U.S. parents, or immigrants who accumulated modest wealth before coming to the US. However, the ruling also leaves taxpayers and practitioners with some important questions, including whether: (1) a potential refund opportunity exists for those taxpayers who already paid FBAR penalties on a per-account basis which exceeded what would have been due on a per-report basis, and (2) some taxpayers should brace themselves for a more aggressive IRS approach where it increasingly argues that FBAR violations are willful.
For years, Frost Law has diligently followed this case and reported as to how the issue has divided courts across the nation (i.e., splitting the Fifth and Ninth Circuits).3 Here, we offer our readers a review of the Bittner saga that has ended in a $2,000,000-plus win for Alexandru Bitter and briefly outline some outstanding implications of this decision.
The Bank Secrecy Act of 1970 (BSA), codified in Title 31 of the United States Code, grants Treasury the authority to require U.S. persons to maintain records and file reports related to certain foreign transactions and accounts.4 Using that power, Treasury issued regulations which require U.S. persons that have a financial interest in, or signature or other authority over, foreign bank or financial accounts to annually report all such accounts if their aggregate value exceeds $10,000 at any point in time throughout the calendar year. This report is made using the FinCEN Form 114, Report of Foreign Bank and Financial Accounts, more commonly referred to as an “FBAR.”5
The BSA also authorizes penalties for the failure to file compliant FBARs. In the case of “non-willful” violations, the BSA imposes a maximum civil penalty of up to $10,000;6 however, the statute doesn’t actually define such violation. More specifically, it fails to provide whether each failure to report a foreign account constitutes a separate reporting violation subject to a maximum penalty of $10,000 (i.e., a per-account basis), or whether each annual failure to file a compliant FBAR incurs maximum penalty of $10,000 (i.e. a per-report basis). This statutory omission has been the basis for the Fifth and Ninth Circuit split and why Bittner ultimately landed in the Supreme Court’s hands.
Alexandru Bittner was born and raised in Romania but eventually became a naturalized U.S. citizen in the 1980’s. During his time in the U.S., he worked as a dishwasher and plumber. However, in 1990, Bittner returned to Romania and remained there until 2011 as a successful businessman and investor where he maintained signature authority or control over numerous foreign accounts. According to the Court, “like many dual citizens, he did not appreciate that U.S. law required him to keep the government apprised of his overseas financial accounts even while he lived abroad.”7 Thus, Bittner failed to file annual, compliant FBAR forms for multiple years.
In 2011, Bittner returned to the United States, learned of his reporting obligations, and engaged an accountant to help him file the required FBARs for 2007 through 2011. The IRS assessed a $2.72 million penalty. The amount was calculated using the per account analysis—$10,000 per unreported account for each tax year from 2007 through 2011.
Bittner’s late-filed FBARs provided details about his largest account, but “neglected to address 25 or more other accounts over which he had signatory authority or in which he had a qualifying interest.”8 The government informed Bittner about this deficiency, and Mr. Bittner hired a new accountant to file corrected FBARs. However, rather than simply checking a box to disclose these accounts as permitted under regulations, Mr. Bittner and his accountant “volunteered details” for each of his accounts.
The government did not dispute the accuracy of the corrected FBARs, nor did it accuse Bitter of any willful violation regarding the previous errors. But the government did maintain that “nonwillful penalties apply to each account not accurately or timely reported, and because Mr. Bittner’s late-filed reports for 2007-2011 collectively involved 272 accounts, the government thought a fine of $2.72 million was in order.”9 Bittner disagreed and argued that the maximum authorized penalty for non-willful violations is $10,000 per report, not per account. Simply, vastly different penalty amounts resulted here depending on the proper method allowed for determining the penalties for non-willful failure to file compliant FBARs—$50,000 (per form) versus $2.72 million dollars (per account).
The especially large number of accounts and disparate penalty amounts involved in Bittner’s matter placed the core problem—i.e., the lacking statutory language (which permitted different interpretations of the definition of a violation)—in the spotlight and propelled it through the courts. The district court agreed with Bittner’s position,10 but the Fifth Circuit favored the government’s interpretation.11
According to the Supreme Court, it was tasked with answering the following question: “Does the BSA’s $10,000 penalty for nonwillful violations accrue on a per-report or a per-account basis?”12 In order to answer this question, the Court began its analysis by reviewing 31 U.S.C. §5314, which the Court noted delineates the legal duty to file reports but “does not speak of accounts or their number.”13 After considering that §5314 is violated regardless of the number of non-willful errors, the Court turned its attention to 31 U.S.C. §5321, which outlines the penalties for failure to comply with reporting requirements. Again, the Court found it significant that the law remained silent as to the number of accounts. Rather, as the Court explained it, per §5314:
[A] violation occurs when an individual fails to file a report consistent with the statute’s commands. So multiple deficient reports may yield multiple $10,000 penalties, and even a seemingly simple deficiency in a single report may expose an individual to a $10,000 penalty. But in all cases, penalties for nonwillful violations accrue on a per-report, not a per-account, basis.14
Moreover, the Court stated that §5321(a)(5)(B)(ii) contains a reasonable cause exception which protects one from incurring a penalty so long as the violation was nonwillful (i.e., due to reasonable cause), and the final report accurately reflects every account. According to the Court, this was evidence that Congress knew exactly how to clearly tie penalties to account-level information if it desired to achieve that result. However, in the context of imposing non-willful FBAR penalties, Congress did not include per-account language.
The Court also expressed that certain other “contextual clues”—apart from the §5314 and §5321 provisions—were problematic for the government’s per-account position. For instance, the Court viewed the government’s own archive of publicly issued guidance in the FBAR context as being “at odds” with a per-account position. Furthermore, the Court stated that the non-willful penalty provision’s drafting history “undermines” the per-account theory. And, perhaps most striking to the Court was the incongruity displayed scenarios like this one outlined in the opinion:
Consider someone who has a $10 million balance in a single account who nonwillfully fails to report that account. Everyone agrees he is subject to a single penalty of $10,000. Yet under the government’s theory, another person engaging in the same nonwillful conduct with respect to a dozen foreign accounts with an aggregate balance of $10,001 would be subject to a penalty of $120,000.15
Of course, the Court did not fail to highlight the fact that in some fact patterns, the government’s per-account position could even result in non-willful violators facing much higher penalties than their willful counterparts.
At this point, the Court emphasized that “a venerable principle,” known as the “rule of lenity,” could be used to erase any remaining doubt in the matter. According to the Court, under the rule of lenity, “statutes imposing penalties are to be ‘construed strictly’ against the government and in favor of individuals.”16 As such, the Court clarified that in this case, the rule of lenity “requires us to favor a per-report approach that would restrain BSA penalties over a per-account theory that would greatly enhance them.”17 Accordingly, the Court held that the BSA imposes a $10,000 maximum penalty for the non-willful failure to file a compliant FBAR— accruing per-report, not per-account.
Again, the direct result of this ruling is that U.S. persons who non-willfully fail to file compliant FBARs will be subject to a maximum single, $10,000 per-report penalty. However, the Bittner ruling begs the obvious question: What does this mean for those U.S. persons who recently paid non-willful penalties determined under a per-account approach?
Additionally, we join many practitioners in projecting the concern that the Bittner ruling will trigger a more aggressive IRS response to classify a larger number of FBAR violations as “willful” than it did pre-Bittner. We will be watching this development carefully, as well.
Finally, for our more technical readers, we anticipate the possibility that further litigation in willful penalty cases may be critically impacted by the Court’s reasoning in the Bittner case. Although Bittner involves non-willful penalties, we indicated above how important it was to the Court’s analysis that it found no reference to “account” in the applicable non-willful statute. However, the applicable willful penalty statutory language does reference “account.” While it is beyond the scope of this article to fully discuss the willful penalty structure, we will note here that it contains two prongs: the maximum penalty (which now by directed cross-reference to the non-willful statute and post-Bittner simply equals $10,000) is increased to the greater of (i) $100,000, or (ii) 50% of the balance in the account when the violation occurred.18 Note that the reference to “account” is only tied to the second prong. Post-Bittner—applying the Court’s logic –it may be much harder to argue that the maximum penalty for a willful violation is not the greater of $100,000 per report or 50% of account balance at the time of the violation.
So, after years, we finally arrive at the Bittner End—appreciating the value of the uniform approach settled on by the Supreme Court regarding the penalty cap for non-willful FBAR violations. However, we also remain mindful of the important questions left unanswered by the ruling. Of course, we will continue to follow how this decision impacts FBAR cases going forward, and we encourage our readers to follow along for updates and contact us if with questions or concerns regarding FBAR reporting.
