FBAR Failure to File Penalty: Bittner v. U.S.

The following is a reprint from the 2023 University of Illinois Federal Tax Workbook, Chapter 12: Rulings and Cases. The video is a discussion of the case by instructor Jerry Brune during Fall Tax School.

Facts

Alexandru Bittner, is a dual citizen of Romania and the United States. He emigrated to the United States in 1982, obtained American citizenship, and lived there until 1990 when he moved back to Romania. Between 1990 and 2011, Mr. Bittner invested in various assets in Romania, earning over $70 million. During this time, he maintained dozens of Romanian and other foreign accounts, each having high balances exceeding $10,000.

According to the Bank Secrecy Act of 1970 (BSA) and 31 CFR §1010.306, a U.S. citizen or resident with foreign accounts exceeding $10,000 are required to report those accounts to the IRS. Under previous rules, they were required to file an FBAR, Report of Foreign Bank and Financial Accounts, form by June 30 of the following year. Under current rules, they are required to file Form FinCEN 114, Report of Foreign Bank and Financial Accounts, by the due date for federal tax returns. Failure to disclose foreign accounts properly or in a timely manner can result in penalties.

Mr. Bittner was unaware of the FBAR filing requirement and failed to file FBARs for his foreign accounts until May 2012. These FBARs did not accurately report all of Mr. Bittner’s foreign accounts, however, so another tax professional filed amended FBARs that properly reported in 2013 all of Mr. Bittner’s foreign accounts. In 2017, the IRS calculated civil penalties of $2,720,000 against Mr. Bittner for his nonwillful violation of failing to timely disclose 272 instances of maintaining foreign accounts between 2007 and 2011. Mr. Bittner admitted to maintaining 177 of the undisclosed accounts from 2007 to 2010. The United States filed a motion for partial summary judgment, requesting $1,770,000 for those accounts.

Mr. Bittner disputed the penalties, claiming a reasonable-cause exception and denying liability. He argued that the penalty under §5321 of the BSA applies per failure to file an annual FBAR, not per account. The United States argued that Mr. Bittner’s penalties should be based on the 177 separate violations. Both parties asked the district court to interpret BSA §5321.

The district court denied Mr. Bittner’s defense of reasonable cause and found him liable for BSA violations. However, it held that the penalty for violating the BSA applies to each failure to file an annual FBAR, reducing Mr. Bittner’s penalties to $50,000 for the five FBAR returns.

The United States appealed the district court’s ruling to the Fifth Circuit Court of Appeals. The Fifth Circuit affirmed Mr. Bittner’s liability but reversed the ruling on penalties, stating that failure to report each qualifying foreign account constitutes a separate violation of the BSA.

Mr. Bittner filed a petition for a writ of certiorari with the U.S. Supreme Court to challenge the Fifth Circuit’s reversal ruling.

Issues

The issues in this case are the following.

• Whether the nonwillful failure to report multiple foreign accounts during a single reporting period constitutes a single violation or multiple violations under the BSA
• Whether a violation under the BSA is defined as the failure to file an annual FBAR, regardless of the number of foreign accounts, or if there is a separate violation for each individual account that was not properly reported
• Whether the penalty for nonwillful failure to file applies on a per-account basis or per-form basis

Analysis

The Court began its interpretation of the law by distinguishing the differences between §§5314 and 5321 of the BSA. The Court stated that §5314 outlines an individual’s legal responsibilities to file a report. Therefore, the Court interpreted that a violation of §5314 is that an individual failed to file a report, and that any omissions or errors contained in a filed report would constitute as one violation. BSA §5321, on the other hand, describes the penalties for violations of §5314, where the Secretary of the Treasury may impose a civil penalty of up to $10,000 for “any violation.” Because the Court found that §5314 describes a violation as a failure to file a report subject to the BSA’s requirements, one error or multiple errors constitute a single violation. Regarding the penalty, §5321 differentiates between willful and nonwillful violations, where willful violation penalties include a per-account stipulation, but nonwillful violation penalties make no such specification. In the eyes of the Court, this differentiation is proof that the intent of the law is that nonwillful violation penalties should be made on a per-report basis instead of a per-account basis.

Furthermore, the Court provided examples of communication to the public from the Department of Treasury and other government agencies that do not specify that the $10,000 penalty is on a per-account basis, including the instructions to the FBAR itself. While the Court acknowledged that such documents do not control or dictate the Court’s interpretation of the law, courts in general may consider an agency’s views and communications on the subject matter that it brings before a court.

The Court also stated that when Congress amended the law for penalties for nonwillful violations in 2004, it did not include language to mirror the penalties for willful violations specifying that such penalties were to have per-account stipulations. In addition to this argument of intent, the Court found that the purpose of the reports is to provide the government with information to aid in investigations, not to profit from penalties for every nonwillful mistake. Reinforcing this interpretation was the Court’s example showing that the government’s interpretation of a per-account basis for nonwillful violations creating higher penalties compared to willful violations, which the Court argued did not make sense and would deviate from Congress’s intent.

The Court asserted the rule of lenity for doubt regarding the best interpretation of the law. This principle consists of a court applying law that is unclear or ambiguous in the most favorable way to a defendant. The Court stated that the Code and other federal statutory law does not impede the rule of lenity and described two reasons why it should apply to this case. First, under due process, individuals must receive fair warning in a way that is commonly understood. Not only do the BSA provisions not explicitly discuss per-account penalties for nonwillful violations, but accounting professionals were also confused as to the interpretation of those provisions, indicating that a “common understanding” would not be achieved if professionals specializing in the accounting field lacked an understanding. Second, if the government’s interpretation is that nonwillful violation penalties should be on a per-account basis, the criminal sanctions associated with them would give rise to unintended severe criminal violations that would include prison time.

Holding

The Court held that nonwillful failure to report multiple foreign accounts during a single reporting period constitutes a single violation under the BSA. The Court further held that a violation under the BSA is a failure to file an annual report regardless of the number of foreign accounts described in said report. Finally, the Court held that penalties for nonwillfully failing to file FBARs are on a per-form basis instead of a per-account basis. Consequently, the Court reversed the Fifth Circuit’s reversal ruling, concluding Bittner’s penalties are $50,000 instead of $1,770,000.

Note. The IRS has updated its procedures for FBAR examinations to incorporate the Supreme Court’s decision in the Bittner case to provide clear language consistent with the Court’s holding.34

Sources:

• USC §5314(a).
• Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, PL 114-41, §2006(b)(11).
• Skidmore v. Swift & Co., 323 U.S. 134 (1944).
• American Jobs Creation Act of 2004, PL 108-357, §821(a).
• 31 USC §5311.
• Rule of lenity. May 2022. Cornell Law School. [www.law.cornell.edu/wex/rule_of_lenity] Accessed on Jul. 26, 2023.
• Interim Guidance on FBAR Examination Case Procedures Due to Supreme Court Decision (Bittner v. US) — SBSE-04-0723-0034. Lauer, Daniel. Jul. 6, 2023. IRS. [irs.gov/pub/foia/ig/sbse/sbse-04-0723-0034-redacted.pdf] Accessed on Jul. 26, 2023.