INSIGHT: Non-Willful Foreign Bank Account Reporting Penalties Are on ‘Per-Form,’ Not ‘Per-Account’ Basis

The penalty for a non-willful failure to file a Report of Foreign Bank and Financial Accounts (FBAR) is applied per report and not per account, a federal trial court in Texas recently ruled.

Alexandru Bittner, a dual Romanian-American citizen, after belatedly consulting a CPA, discovered he owed penalties for not reporting his foreign accounts. The U.S. District Court for the Eastern District of Texas wasn’t convinced that Bittner had reasonable cause for failing to report his accounts more than 16 years after he should have first filed an FBAR. However, the court also did not agree with the government’s argument that he should be subject to the $10,000 penalty for every account that he failed to report for a total of $1.77 million. (Bittner v. United States, No. 4:19-cv-0415, 2020 BL 241326 (E.D. Tex. 6/29/20))

Congress enacted the Bank Secrecy Act (BSA) as 31 U.S.C. Section 5314, which provides that the Secretary of the Treasury shall require a resident or citizen to keep records, file reports when the resident or citizen makes a transaction or maintains a relation for any person with a foreign financial agency, the court said. In other words, Section 5314 directs Treasury to require residents or citizens to file reports when they maintain foreign bank accounts.

The Secretary promulgated regulations implementing Section 5314: “Each United States person having a financial interest in…a…financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons. The form prescribed is the [FBAR], or any successor form.” U.S. residents or citizens maintaining foreign bank accounts with an aggregate balance exceeding $10,000 must file an FBAR form by June 30 of the year following the year to be reported.

31 U.S.C. Section 5321 authorizes Treasury to penalize U.S. residents or citizens who violate the regulations. From 1996-2011, Bittner was a U.S. citizen and maintained an aggregate balance of more than $10,000 in foreign financial accounts. But he did not timely file FBARs for any of those years until May 2012. In June 2017, the Internal Revenue Service assessed penalties against Bittner for “non-willful” FBAR violations.

The government filed a motion for partial summary judgment seeking $1.77 million in penalties computed on the basis of the number of foreign accounts Bittner admitted to maintaining from 2007-2010. Bittner argued that the non-willful civil penalty provided under Section 5321(a)(5)(A) and (B)(i) applied per annual FBAR report not properly or timely filed, not per foreign financial account maintained. The government argued that the penalty applied per foreign financial account maintained but not properly or timely reported on an annual FBAR. The question was: Does the civil penalty apply per foreign financial account maintained per year but not properly or timely reported on an annual FBAR, or per FBAR report not properly or timely filed?

What Is the ‘Violation?’

Subparagraph (A) of the statute begins by providing that “the Secretary may impose a civil monetary penalty on any person who violates…any provision” of Section 5314. The following subsection then provides that ”the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.“ See Section 5321(a)(5)(B)(i). Thus, the statute provides for a singular penalty, capped at $10,000, that attaches to each violation of Section 5314. The question then becomes: What constitutes a ”violation“ within the meaning of the statute? It is violations of Treasury’s implementing regulations to which Section 5321(a)(5)’s civil penalties attach. Those regulations provide that ”the form prescribed under Section 5314 is the FBAR…and that such form must be filed…with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.“ Accordingly, it is the failure to file an annual FBAR that is ”the violation“ contemplated and that triggers the civil penalty provisions of Section 5321.

Up to that point, the parties agreed. They disagreed about whether an FBAR reporting deficiency constituted a single violation, or whether each foreign financial account not reported on an FBAR constituted a separate reporting violation. In other words, they disagreed about whether the number of “violations” that occur when an account holder commits an FBAR reporting deficiency varies with the number of accounts maintained by that account holder that were not properly reported.

The willfulness provision provides a penalty for “willful” FBAR violations in an amount equal to the greater of: $100,000 or 50 percent of…the balance in the account at the time of the violation. Thus, Congress knew how to make FBAR penalties account specific—it did so for willful violations. The willfulness provision was part of the statutory scheme well before Congress amended the BSA in 2004 to add the non-willfulness provision. Congress, therefore, had a template for how to relate an FBAR penalty to specific financial accounts, and the fact that it did not do so for non-willful violations is persuasive evidence that it intended for non-willful penalties not to relate to specific accounts, the court said. Under Section 5321(a)(5)(B)(ii), an individual who commits a non-willful FBAR violation is not assessed a civil penalty if that violation was due to reasonable cause and the amount of the balance in the account was properly reported.

Congress, therefore, related the reasonable cause exception to the “balance in the account” and could have done the same when defining the non-willful FBAR violation and penalty, the court said. But it did not. The penalty for a “violation” within the meaning of Section 5321(a)(5)(A) relates to the FBAR form, rather than to each individual account maintained.

The Government argued that, because the reasonable cause exception forgives the penalty for a non-willful FBAR violation and references the “balance in the account,” the non-willful violation itself must relate to each account. That is, if the exception applies on an account-by-account basis, then the violation which the exception forgives must also apply on an account-by-account basis. The court was unpersuaded. The government, it noted, had not provided any good reason for why the exception to a rule should somehow inform the calculation of the penalty for a violation of that rule.

The government also argued that, because the penalty for willful violations “simply modifies the penalty for non-willful violations, the underlying penalty must also be the same. And because ‘the willful variant of the penalty is assessed with reference to each account,’ the non-willful variant of the penalty should also be understood to relate to each account.” This argument, the court observed, overlooked the fact that ”Congress may have had perfectly good reasons for choosing to compute the penalty for willful violations different from the penalty for non-willful violations.“

Ultimately, the most the court could safely do was rely on the plain language that appears in the statute; because the penalty for willful violations includes explicit reference to the balance in the account while the penalty for non-willful violations does not, the court can infer that Congress intended the penalty for willful violations to relate to specific accounts and the penalty for non-willful violations not to. Non-willful FBAR reporting deficiencies constitute a single violationand carry a maximum annual $10,000 civil money penalty, irrespective of the number of foreign financial accounts maintained, the court said.

In contrast, in United States v. Boyd, the IRS assessed the defendant 13 separate FBAR penalties after it determined that she had non-willfully failed to report her financial interest in 14 foreign financial accounts. The court, without any explanation, held that the government “has advanced the more reasonable explanation.” The court here disagreed with the reasoning and outcome in Boyd. Congress knew how to make the non-willful FBAR penalty vary with the number of foreign financial accounts maintained, but it did not do so. That is the end of the road. Non-willful FBAR penalties are on a “per-form,” rather than “per-account,” basis.

Bittner was therefore obligated to pay a maximum $10,000 penalty for each year he non-willfully failed to timely or properly file an FBAR.