On February 28, 2023, the United States Supreme Court issued a decision clarifying the penalty for non- willful violations of the Bank Secrecy Act’s (“BSA”) requirement to report certain foreign bank accounts. That reporting requirement applies to US persons who maintain foreign bank accounts with an aggregate balance of greater than $10,000.00 during the calendar year. The BSA imposes penalties for both willful and non-willful violations of this reporting requirement, but only non-willful violations were at issue in this case. The penalty for those violations is a maximum of $10,000.00. The question before the Court was whether that penalty applies per report or per account. The Circuit Courts had reached different answers to that question, so the Supreme Court heard the case to resolve that split.
Mr. Bittner is a dual citizen in the US and Romania. He immigrated to the US in the 1980s and became a naturalized citizen. In 1990, he returned to Romania and became a successful businessperson. Naturally, he maintained bank accounts outside of the US. When he returned to the US in 2011, he learned of his obligation to report those accounts, and he and his professional advisors worked to file the Reports of Foreign Bank & Financial Accounts (“FBAR”). The government identified issues with his initial attempt, but he eventually filed complete and accurate FBARs.
The government assessed the non-willful penalty against Mr. Bittner for his late-filed FBARs for 2007- 2011. Mr. Bittner maintained an average of slightly more than 50 accounts during each of those years. In total, Mr. Bittner should have reported 272 accounts in his FBARs across those years (i.e. 61 accounts in 2007; 51 accounts in 2008; etc.). Because the government asserted that the non-willful penalty applied on a per account basis, it assessed a penalty of $2.72 million against Mr. Bittner.
The government sued Mr. Bittner in the Eastern District of Texas to recover the penalties. Mr. Bittner argued that the government should have calculated the penalty based on the number of FBARs that he failed to file, which would limit the penalty to $50,000. The district court agreed with Mr. Bittner, and the government appealed. The Court of Appeals for the Fifth Circuit reversed, holding that the language of the BSA supports a per account penalty of $2.72 million.1 The Supreme Court granted certiorari to determine whether the per account or per form approach to the non-willful penalty is correct.
To answer that question, the Court looked to the language of the BSA, specifically sections 5314 and 5321. Under section 5314, the Secretary of the Treasury must require certain people to keep records, file reports, or both with regards to certain transactions and relationships with foreign banks. That section goes on to specify what information should be provided in the records or reports and grants the Secretary the authority to determine how the reports should be made or the records kept. Section 5321 provides the penalty for violating section 5314.
The Court noted that section 5314 does not mention the word “account,” and neither does section 5321 until it addresses willful violations. Thus, Congress provided for account-based penalties, but only in the context of willful violations. By not using similar language for the non-willful penalties, Congress showed that those were not based on the number of accounts that were not reported. Similarly, the reasonable cause exception also provides a per account analysis, which is further evidence that Congress’s omission of the per account language in the non-willful penalty was purposeful.
The Court also noted that Treasury Department guidance for FBARs suggested that the non-willful penalty for failing to file an FBAR would not exceed $10,000.00, and at no point provided that there could be multiple penalties for a single report. The implication being that failing to file the Form triggered the penalty, not each account that was not reported. While these materials are not binding, they cut against the interpretation the government was arguing for in this case.
The Court then looked to the legislative history of the non-willful penalty, which Congress added in 2004. Prior to 1986, even willful violations of these reporting requirements were subject to a single fine. Congress added the per-account penalties that year for certain willful violations. When Congress added the non-willful penalties, the statutory language is nothing like that used to add the account-based penalties in 1986, providing further support to the argument that non-willful penalties are not account based.
The regulations also support that conclusion. Under the regulations, individuals with more than 25 accounts must provide the total number of accounts and some other basic information. They only need to provide detailed information upon request. Finally, the Court examined some hypotheticals that would require greater penalties for non-willful violations if the government’s per-account theory were adopted. That result would be contrary to Congress’s intent to provide greater penalties for willful violations.2
The Court held that the best reading of the BSA’s non-willful penalty provision is that it is based on the number of reports that were not properly filed, not the number of accounts.
This decision is an important win for US persons who maintain foreign bank accounts because it limits the potential penalty exposure for non-willful violations of the BSA’s reporting requirements. As the numbers in this case show, if the penalties were calculated on a per-account basis they could be astronomical.
US persons should still be cognizant of their obligations under the BSA, as well as foreign reporting requirements under the Internal Revenue Code, and ensure compliance with them because the penalties can be substantial. They should also be aware that the BSA provides a reasonable cause defense to these penalties that the petitioner abandoned in this case.
US persons who have previously paid non-willful FBAR penalties may be able to file suit for a refund. However, individuals that participated in the Offshore Voluntary Disclosure Program may be without recourse because the program ended in 2018 and there is a six-year statute of limitations for claims against the United States. Also, the program generally required participants to sign a closing agreement, which are binding absent fraud, malfeasance, or misrepresentation of material fact. Similarly, individuals who participated in the IRS Streamlined Domestic Offshore Procedures may be precluded from seeking a refund because the certification required to participate in the procedures required waiving the right to seek a refund.
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1. As noted, there was a recent opinion out of the Court of Appeals for the Ninth Circuit, United States v. Boyd, 991 F.3d 1077, 1078 (9th Cir. 2021), that reached the opposite conclusion.
2. Justice Gorsuch also discussed how the rule of lenity favored Mr. Bittner’s argument, but only Justice Jackson joined that part of the opinion.
Eduardo Chung, Principal
Andrew Lendrum, Senior