On February 28, 2023, the Supreme Court decided Bittner v. United States—a rare Supreme Court foray into Financial Crimes Enforcement Network or FinCEN reporting of foreign bank and financial accounts under the Bank Secrecy Act (“BSA”). The BSA is codified under Title 31 (Money and Finance) of the United States Code rather than Title 26 (the Internal Revenue Code) so the section references in this post are to Title 31. At issue was how to calculate penalties for nonwillful violations of the BSA’s recordkeeping and reporting obligations for foreign transactions and accounts. By a narrow 5-4 majority, the Supreme Court held that the penalty for a nonwillful violation of the reporting requirements shall be assessed on a per-form basis rather than a per-account basis, a result favorable for those taxpayers with nonwillful failures.
Background on BSA Reporting Requirements
The BSA requires certain U.S. persons to “keep records, file reports, or keep records and file reports” related to transactions and accounts with a foreign financial agency. The statute provides that the records and reports must contain certain information as prescribed by the Secretary of the Treasury. As described in the FBAR Reference Guide, U.S. persons are required to report information related to their foreign financial accounts on FinCEN Form 114 if the value of the person’s aggregate foreign bank and financial accounts exceeded $10,000 at any time during the calendar year. Further, U.S. persons are required to report accounts in which they have a financial interest or have signature or other authority. However, if a U.S. person has either a financial interest in or signature or other authority over 25 or more accounts, the filer needs to only check a box and state the number of accounts in each category.
The Secretary has authority to impose civil penalties on any person who violates required BSA reporting and recordkeeping requirements. In general, a civil penalty that does not exceed $10,000 may be imposed for a nonwillful violation. For nonwillful violations, the applicable statute provides a reasonable cause exception stating that no penalty shall be imposed when the violation “was due to reasonable cause” and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.” However, the statute provides for a higher penalty for willful violations, the maximum penalty for which is increased to the greater of $100,000 or 50 percent of the amount of a transaction or the balance of the account. The reasonable cause exception does not apply to willful violations.
The Bittner Decision
In Bittner, the Supreme Court was asked to rule on whether the $10,000 civil penalty for a nonwillful violation should be assessed on a per-form or per-account basis. At issue was $2.72 million in penalties against Alexandru Bittner, who immigrated to the United States from Romania in 1982 and later became a citizen. After the fall of communism in 1990, Mr. Bittner returned to Romania and had a successful business career, amassing considerable financial assets. Mr. Bittner did not understand his FBAR reporting obligations until returning to the United States in 2011. Shortly thereafter, he engaged an accountant to prepare FBARs for 2007 through 2011.
After the government identified an error in the reports, Mr. Bittner hired a second accountant to correct his filings, ultimately disclosing details on 272 foreign accounts. The government then assessed a fine of $2.72 million, applying the $10,000 civil penalty per-account even though some of the accounts had negligible balances. Mr. Bittner successfully challenged the penalty in U.S. District Court in Texas, but on appeal the Fifth Circuit reversed and upheld the penalty assessment. Since the Fifth Circuit decision conflicted with a Ninth Circuit decision in a similar case, the Supreme Court took the case to resolve the circuit split.
The Majority Opinion
In a 5–4 decision written by Justice Gorsuch and perfect for fans of statutory interpretation, the Court held that the civil penalty should be assessed on a form basis—reducing Mr. Bittner’s penalty from $2.72 million to $50,000, $10,000 for each year of failed reporting. The Court reasoned that 31 USC 5314 “does not speak of accounts or their number” and instead the duty is to “file reports” and explained that the duty to file such reports attaches irrespective of the number of accounts a person has. One either is or is not required to file a report. Moreover, the Court continued, 31 USC 5321 imposes a civil penalty on a violation of 31 USC 5314, and because 31 USC 5314 is violated when a person fails to accurately file a report, the civil penalties accrue on a per-report, not a per-account, basis. The Court further reasoned that although the penalty for willful violations and the reasonable cause exception to nonwillful violations explicitly refer to accounts, that does not mean that nonwillful violations accrue on a per-account basis. Instead, the Court held that the fact that Congress expressly referenced account information in the other sections makes the absence of such per-account language in the provision on nonwillful violations meaningful.
In support of its position, the Court cited to prior IRS guidance stating that a failure to file an FBAR properly may result in a civil penalty not to exceed $10,000, including IRS Letter 3709 and IRS Fact Sheet–2014–7. Although the Court stressed that these representations are not controlling, the consistency of the IRS’s views impacts the “persuasiveness of any interpretation it proffers in court.” Finally, Justice Gorsuch cited the rule of lenity as further support for construing the statute against the government and as support noted that the IRS guidance indicating a per-form penalty cuts against any semblance of fair warning to the taxpayer. On this point, only Justice Jackson joined that portion of the opinion.
Justice Barrett authored the dissent, which criticized the majority opinion for conflating the reference to “reports” under 31 USC 5314 with the annual FBAR form. The dissent highlights that the statute requires certain U.S. persons to do more than just file reports – the law also requires keeping records and providing reports containing certain information in a manner consistent with the manner and extent required by the Secretary. Thus, the dissent asserts that each account with a foreign bank triggers the requirement to file reports and each failure to report an account violates the reporting requirement, a point highlighted in the BSA’s implementing regulations. In other words, according to the dissent, the BSA requires “one report per year of each qualifying foreign financial account.” The fact that all of those reports are filed on the same form is irrelevant for how violations of those reporting requirements accrue.
The dissent also questioned the majority’s reliance on prior IRS guidance, stating that the “guidance materials add little, if anything, to the interpretive enterprise when the traditional tools of construction supply an answer.” Moreover, the dissent noted that, in contradiction to the guidance cited by the majority, prior IRS guidance had also explained that FBAR penalties may be assessed per account.
The Court’s decision brings much needed uniformity to the law on this issue. As highlighted by Mr. Bittner’s situation, the potential penalties on a per-account basis could be vastly greater than the per-form basis provides. The decision—holding that violations accrued on a per-form basis—caps penalties for taxpayers who commit nonwillful violations of the BSA’s FBAR reporting requirements to $10,000 per year for the filed report. Additionally, the case may be just as important for what it says about reliance on administrative guidance when such guidance contradicts an agency’s current position—exercise caution.