Case Background
Petitioner Alexandru Bittner immigrated to the United States (U.S.) in 1982, working as a dishwasher and then as a plumber. Although Mr. Bittner became a U.S. citizen, he returned to Romania in 1990. During this period outside of the U.S., Mr. Bittner failed to file Foreign Bank Account Report (FBAR) forms. Upon his return to the U.S. in 2011, Mr. Bittner became aware of his filing obligations and attempted to rectify the matter by preparing and filing the required reports for tax years 2007 through 2011.
The stated purpose of the Bank Secrecy Act (BSA) is “to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.” Section 5314 of the BSA directs U.S. residents or citizens to file reports when they maintain foreign and/or offshore bank accounts.
After Mr. Bittner filed the FBAR reports, the government identified that there were errors in the reports – namely that 25+ accounts over which Mr. Bittner either had a “financial interest in” or “signature authority over” were not disclosed. After being notified of this error, Mr. Bittner hired a new accountant to assist in amending these FBARs.
Despite the regulations that allow filers with either a “financial interest in” or “signature authority over” more than 25 accounts to simply disclose the number of accounts, Mr. Bittner and his new accountant reported details of every account – 61 in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011. Although the IRS did not question their accuracy, they accepted these updated filings and assessed a $2.72 million non-willful penalty under Section 5321 of the BSA.
Section 5321 of the BSA directs the Secretary of the Treasury to penalize those U.S. residents or citizens who violate the regulations and § 5318(a) has given the Secretary of the Treasury authority to administer these penalties.
Mr. Bittner challenged the penalty arguing that the BSA authorizes a maximum penalty for non-willful violations of $10,000 per report, not $10,000 per account. The District Court agreed with Mr. Bittner, but upon appeal, the Fifth Circuit upheld the IRS’s $2.72 million assessment. In the decision, the Fifth Circuit stated, “any violation of any provision of Section 5314.” Accordingly, the term violation “most naturally reads as referring to the statutory requirement to report each account – not the regulatory requirement to file FBARs in a particular manner.”
The Supreme Court’s decision, which was delivered by Justice Gorsuch, reversed the Fifth Circuit’s decision, and held that, under the BSA, a taxpayer’s failure to file a compliant FBAR should be treated as one violation – not as a separate violation for each foreign account not timely reported. The Court concluded that “best read, the BSA treats the failure to file a legally compliant report as one violation… not a cascade of such penalties calculated on a per-account basis.”
The Court further noted that it was “no surprise [that] the government seeks to turn this feature of the law to its advantage. Because Congress explicitly authorized per-account penalties for some willful violations, the government asks us to infer that Congress meant to do so for analogous non-willful violations as well.” The Court was also unpersuaded by the IRS’s argument noting “when Congress includes particular language in one section of a statute but omits it from a neighbor, we normally understand that difference in language to convey a difference in meaning (expressio unius est exclusio alterius).”
In addition to the Court’s analysis of statute construction, stated purpose of the statute, and legislative intent, it was also interesting to see that the human side of the law’s application was also considered. Justice Gorsuch noted that “the answer makes a difference, especially for immigrants who hold accounts abroad and Americans who make their lives outside the country,” thereby acknowledging (to a certain extent) the compliance burdens for those with international pixels in their tax picture.
What this Means for Taxpayers
Practitioners in this international space should be bolstered by this decision as it allows for a much more reasonable and measurable penalty structure for those non-willful taxpayers looking to come into compliance. There are questions, however, that practitioners must now consider:
- What is to be done in current/open cases where FBAR penalties have been agreed to but not yet paid?
- What is to be done in situations where cases are now closed, and penalties have been paid since Bittner was filed?
- The question at the forefront of our minds — can taxpayers file FBAR penalty refund claims to reclaim penalties paid more than the standard now decided on, and how far back can those claims go?
It remains to be seen how the IRS will clarify these points of contention since no comment has been made. Analysts in the international tax space have noted that while the IRS allows for the claiming of refunds via the filing of Form 843, the FBAR penalty is authorized under the BSA, which falls outside the parameters of the Internal Revenue Code. So, the question remains, would that be the approach to recover seemingly over-paid penalties? The Court’s decision at least offers some optimism for a more generous interpretation of FBAR penalties moving forward.
We will continue to deliver updates on relevant tax changes in the international space. For individuals seeking compliance options for unreported offshore accounts or foreign assets, please reach out to the International Tax Team at Wolf & Company.
