Within days of each other, taxpayers on both coasts scored major victories last spring against the Internal Revenue Service in separate cases involving the issue of the taxpayers’ alleged non-willful failure to file a proper Foreign Bank Account Report (FBAR). Both courts interpreted the non-willful penalty provisions of the Bank Secrecy Act in favor of the taxpayers, and the results should encourage other taxpayers and their accountants to consider fighting similar penalties or to seek refunds of previously-paid penalties.
On the East Coast, the U.S. District Court for the District of New Jersey ruled in favor of the taxpayer in United States v. Giraldi. In Giraldi, the defendant owned four foreign financial accounts during the four tax years at issue. It was undisputed that Giraldi had failed to file a timely FBAR in any of those years, and he later entered the IRS voluntary disclosure program and self-reported that failure. After Giraldi withdrew from the voluntary program, the IRS imposed maximum non-willful penalties of $10,000 per year on a per-account basis, totaling $160,000. After the IRS denied Giraldi’s administrative appeal, Giraldi paid $60,000 and the government sued for the remainder plus interest.
On the West Coast, the U.S. Court of Appeals for the Ninth Circuit Court decided United States v. Boyd, which involved similar facts. In Boyd, the defendant had a financial interest in 14 foreign financial accounts in 2010 and did not file an FBAR in that year. Boyd subsequently entered the IRS voluntary disclosure program and, after she withdrew from the program, the IRS imposed separate non-willful penalties for 13 of her foreign accounts that Boyd should have listed on an FBAR form in 2010, totaling $47,000.
Taxpayers who hold an interest in a covered foreign financial account must electronically file an FBAR form with the Treasury Department’s Financial Crimes Enforcement Network. If the taxpayer owns up to 25 reportable accounts, the taxpayer is required to identify each account separately on a single FBAR form. If the taxpayer has a financial interest in more than 25 covered accounts, the taxpayer does not have to list each account separately, but must maintain records of the information.
The Bank Secrecy Act authorizes the government to “impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” Although the statute originally provided for penalties only for willful violations, Congress amended the statute in 2004 to authorize the IRS to issue penalties for non-willful violations. Importantly, however, the statutory penalty language differs.
The statute provides that the maximum penalty for a non-willful violation “shall not exceed $10,000,” whereas the maximum penalty for willful violations is the greater of $100,000 or 50% of the balance in the account at the time of the violation. (31 U.S.C. Section 5321(a)(5)) In other words, Congress elected to penalize willful violations based on the value of the accounts, but elected not to use account-specific penalty language for a non-willful failure.
The question in both cases was whether the Bank Secrecy Act empowered the IRS to impose a separate penalty for each account that allegedly should have been listed on an FBAR form, or a single per-form basis.
Both courts found that the difference in language for willful and non-willful violations, while not directly addressing the issue was nevertheless significant. In Boyd, the Ninth Circuit determined that “Congress generally acts intentionally when it uses particular language in one section of a statute but omits it in another.”
In Giraldi, the court likewise reasoned that “When Congress amended the BSA in 2004, nearly three decades after the BSA’s enactment, it undoubtedly ‘had a template for how to relate an FBAR reporting penalty to specific financial accounts’” and that “Congress’s failure to incorporate similar account-specific language in the non-willful provision ‘is persuasive evidence’ that it did not intend the provision to yield account-specific penalties.”
Both courts also looked to the statute’s reasonable cause exception, which Congress passed at the same time it added the non-willful penalty provision. Under the reasonable cause exception, penalties cannot be imposed when a non-willful violation is “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.” (31 U.S.C. Section 5321(a)(5)(B)(ii)) In both lawsuits, the IRS argued that because the exception expressly related to the balance in the account, it implicitly indicated that the non-willful penalty provision also applied on a per account basis. But both courts disagreed.
The Giraldi court, for example, found it was “logical to conclude that Congress intentionally omitted account-specific language when crafting the non-willful provision because it simultaneously created an exception that expressly depends on the proper reporting of either the “balance in the account” or the transactional amount.”
The Boyd court similarly found that the inclusion of per-account language in the reasonable cause exception “supports that Congress intentionally omitted per-account language from the non-willful penalty provision.” The panel added that “[s]ince we know Congress was aware of that language during the amendment process and left it out of the non-willful penalty provision, we think the better view is that Congress acted intentionally when it drafted the non-willful civil penalty with no reference to ‘account’ or ‘balance in the account.’”
The Giraldi court also reasoned that government’s statutory interpretation was not logical when considering other scenarios. In one such scenario, the Giraldi court reasoned that the government’s interpretation would result in substantially disparate treatment of similarly situated taxpayers who hold the same financial interest in foreign accounts but spread those funds across a different number of accounts. The Giraldi court reasoned: “The Government presents nothing to suggest that Congress intended to create such vast penalty discrepancies when individuals maintain the same or similar balances across a different number of accounts.”
The decisions in Boyd and Giraldi now bring in line all of the federal courts that have addressed the government’s interpretation of the non-willful penalty provision. The only other courts to have addressed the issue in contested cases—United States v. Bittner (E.D. Tex. 2020) and United States v. Kaufman (D. Conn. 2021)—reached the same result. While the Bittner case is currently on appeal before the U.S. Court of Appeals for the Fifth Circuit, the government presently cannot point to a single contested case where its interpretation has prevailed.
Similarly situated taxpayers and their accountants should be encouraged by the fact that the federal courts have uniformly rejected the government’s statutory interpretation. Taxpayers who paid such penalties may now be entitled to pursue a claim for unlawful exaction, and those who are currently facing per-account penalties should consider contesting the penalties upfront.
This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.
The authors are attorneys with Archer & Greiner, P.C. Mr. Oberstaedt serves as Assistant Chair of the firm’s Business Litigation Practice Group and represented the defendant in United States v. Giraldi. Mr. Ahl, who concentrates his practice in taxation and business and individual tax planning, estate planning, and trust and estate administration, is tax counsel to the defendant in United States v. Giraldi.
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