Supreme Court Rules For Bittner, Limits FBAR Penalties

Supreme Court Rules in Favor of Bitter, Limits FBAR Penalties

FBAR Penalties Limited to ‘Per Form’

2023 Case Update:

Today, US Taxpayers across the globe can breathe a sigh of relief regarding penalties for failing to report foreign bank and financial accounts. The Supreme Court issued a very important decision today in the world of unreported foreign bank and financial accounts. In the case of Bittner, the taxpayer was staring down the IRS barrel of more than $3M in FBAR penalties. The taxpayer disputed the outcome and took his case all the way to the Supreme Court, where the Justices decided in a 5-to-4 ruling that ultimately, the Taxpayer should have his penalty limited to a per form and not a per account penalty. This reduces the penalty from nearly $3,000,000 down to about $50,000 – $60,000.

Supreme Court Ruling FBAR

• • • The Bank Secrecy Act (BSA) and its implementing regulations require U. S. persons with certain financial interests in foreign accounts to file an annual report known as an “FBAR”—the Report of Foreign Bank and Financial Accounts. The statute imposes a maximum $10,000 penalty for nonwillful violations of the law. These reports are designed to help the government trace funds that may be used for illicit purposes and identify unreported income that may be subject to taxation. Petitioner Alexandru Bittner—a dual citizen of Romania and the United States—learned of his BSA reporting obligations after he returned to the United States from Romania in 2011, and he subsequently submitted the required annual reports covering five years (2007 through 2011).

    • The government deemed Bittner’s late-filed reports deficient because the reports did not address all accounts as to which Bittner had either signatory authority or a qualifying interest. Bittner filed corrected FBARs providing information for each of his accounts—61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011. The government neither contested the accuracy of Bittner’s new filings nor suggested that Bittner’s previous errors were willful. But because the government took the view that nonwillful penalties apply to each account not accurately or timely reported, and because Bittner’s five latefiled annual reports collectively involved 272 accounts, the government calculated the penalty due at $2.72 million. Bittner challenged that penalty in court, arguing that the BSA authorizes a maximum penalty for nonwillful violations of $10,000 per report, not $10,000 per account.

    • The Fifth Circuit upheld the government’s assessment. Held: The BSA’s $10,000 maximum penalty for the nonwillful failure to file a compliant report accrues on a per-report, not a per-account, basis. Pp. 4–14, 16. 2 BITTNER v. UNITED STATES Syllabus (a) The Court begins with the terms of the most immediately relevant statutory provisions—31 U. S. C. §5314, which delineates an individual’s legal duties under the BSA, and §5321, which outlines the penalties that follow for failing to discharge those duties. Section 5314 provides that the Secretary of the Treasury “shall” require certain persons to “keep records, file reports, or keep records and file reports” when they “mak[e] a transaction or maintai[n] a relation” with a “foreign financial agency.” The statute states that reports “shall contain” information about “the identity and address of participants in a transaction or relationship,” “the legal capacity in which a participant is acting,” and “the identity of real parties in interest,” along with a “description of the transaction.” Section 5314 does not speak of accounts or their number but rather the legal duty to file reports which must include various kinds of information about an individual’s foreign “transaction[s] or relationship[s].” Violation of §5314’s reporting obligation is binary: One files a report “in the way and to the extent the Secretary prescribes,” or one does not; multiple willful errors may establish a violation of §5314 but even a single mistake, willful or not, constitutes a §5314 violation.

    • The only distinction the law draws between a report containing a single mistake and one containing multiple mistakes concerns the appropriate penalty. Section 5321 authorizes the Secretary to impose a civil penalty of up to $10,000 for “any violation” of §5314. The “nonwillful” penalty provision in §§5321(a)(5)(A) and (B)(i) does not speak in terms of accounts but rather pegs the quantity of nonwillful penalties to the quantity of “violation[s].” Section 5314 provides that a violation occurs when an individual fails to file a report consistent with the statute’s commands. Multiple deficient reports may yield multiple $10,000 penalties, and even a seemingly simple deficiency in a single report may expose an individual to a $10,000 penalty. But penalties for nonwillful violations accrue on a per-report, not a per-account, basis. To be sure, for certain cases that involve willful violations, the statute does tailor penalties to accounts. Section 5321 specifically addresses a subclass of willful violations that involve “a failure to report the existence of an account or any identifying information required to be provided with respect to an account.” §5321(a)(5)(D)(ii). In such cases, the Secretary may impose a maximum penalty of either $100,000 or 50% of “the balance in the account at the time of the violation”—whichever is greater. §5321(a)(5)(C) and (D)(ii).

    • The government maintains that because Congress explicitly authorized per-account penalties for some willful violations, the Court should infer that Congress meant to do so for analogous nonwillful violations. But the government’s interpretation defies a traditional rule of statutory construction: When Congress includes particular language in one section Cite as: 598 U. S. ____ (2023) 3 Syllabus of a statute and omits it from a neighbor, the Court normally understands that difference in language to convey a difference in meaning (expressio unius est exclusio alterius). Here the statute twice provides evidence that when Congress wished to tie sanctions to account-level information, it knew exactly how to do so. Congress said in §§5321(a)(5)(C) and (D)(ii) that penalties for certain willful violations may be measured on a per-account basis. And Congress said in §5321(a)(5)(B)(ii) that a person may invoke the reasonable cause exception only on a showing of per-account accuracy. But Congress did not say that the government may impose nonwillful penalties on a peraccount basis. Pp. 5–8.

    • (b) The Court finds a number of additional contextual clues that cut against the government’s theory in this case. First, the government has repeatedly issued guidance to the public—in various warnings, fact sheets, and instructions—that seems to tell the public that the failure to file a report represents a single violation exposing a nonwillful violator to one $10,000 penalty. While the government’s guidance documents do not control the Court’s analysis, courts may consider the inconsistency between the government’s current view and its past views when weighing the persuasiveness of any interpretation it offers. Skidmore v. Swift & Co., 323 U. S. 134, 140. Second, the drafting history of the nonwillful penalty provision undermines the theory the government urges the Court to adopt. In 1970, the BSA included penalties only for willful violations. In 1986, Congress authorized the imposition of penalties on a per-account basis for certain willful violations. When Congress amended the law again in 2004 to authorize penalties for nonwillful violations, Congress could have, but did not, simply use language from its 1986 amendment to extend per-account penalties for nonwillful violations. Still other features of the BSA and its regulatory scheme suggest the law aims to provide the government with a report sufficient to tip it to the need for further investigation, not to ensure the presentation of every detail or maximize revenue for each mistake. Consider that Congress declared that the BSA’s “purpose” is “to require” certain “reports” or “records” that may assist the government in various kinds of investigations. §5311.

    • Absent is any indication that Congress sought to maximize penalties for every nonwillful mistake. Similarly, the Secretary’s regulations implementing the BSA require individuals with fewer than 25 accounts to provide details about each account while individuals (like Bittner) with 25 or more accounts do not need to list each account or provide account-specific details unless the Secretary requests more “detailed information.” 31 CFR §1010.350(g)(1). Finally, the government’s per-account penalty reading invites anomalies—for example, subjecting willful violators to lower penalties than 4 BITTNER v. UNITED STATES Syllabus nonwillful violators—avoided by reading the nonwillful penalty to apply on a per-report basis. The government replies that the per-report interpretation risks the anomaly that the Secretary could formulate reporting requirements to require a separate report for each account and in that way effectively achieve a per-account penalty for nonwillful violations. What this proves is unclear, as the Secretary’s discretion to require more (or fewer) reports is not at issue here, and in any event does not answer whether the Secretary may impose nonwillful penalties on a per-report or per-account basis. Pp. 9–14. (c) Best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000. P. 16. 19 F. 4th 734, reversed and remanded.”

Late-FBAR Filing Submission Procedures

The Supreme Court ruling will undoubtedly have an impact on how taxpayers should prepare for getting into offshore compliance for missed FBAR reporting.

Let’s review the basics of the different delinquent FBAR late-filing submission procedures:

Delinquent FBAR Submission Procedures (DFSP)

When a Taxpayer does not have to make any substantive changes to their tax return involving unreported income, they may qualify for the Delinquent FBAR Submission Procedures. This program is typically limited to Taxpayers who have no unreported income and are not required to file other delinquent forms in addition to the FBAR. For Taxpayers who qualify for these submission procedures, there is generally no penalty applied for prior-year noncompliance.

Delinquent International Information Return Submission Procedures (DIIRSP) 

Up until November of 2020, Taxpayers who had no unreported income (but missed filing international information reporting forms) could sidestep any offshore penalties by filing delinquent forms under DIIRSP. In November of 2020, the IRS rules changed and the IRS does not guarantee that filing delinquent forms will circumvent penalties — although with the right set of facts and circumstances, the Taxpayer may avoid penalties by showing reasonable cause (see further below).

Streamlined Domestic Offshore Procedures (SDOP)

The Streamlined Domestic Offshore Procedures are IRS procedures designed for Taxpayers who do not qualify as foreign residents, are non-willful, and filed their original tax returns timely. Under these procedures, a Taxpayer can opt to pay a 5% Title 26 Miscellaneous Offshore Penalty in lieu of all the other delinquent FBAR and FATCA penalties.

Streamlined Foreign Offshore Procedures (SFOP)

The Streamlined Foreign Offshore Procedures are probably the best of all the offshore tax programs for Taxpayers who qualify as eligible. This is because if a Taxpayer qualifies as a foreign person and is non-willful, they can avoid all offshore penalties under these procedures. In addition, Taxpayers can file original tax returns.

IRS Voluntary Disclosure Program (VDP) for Delinquent FBAR & FATCA

The IRS Voluntary Disclosure Program (VDP) has been in existence for many years. From 2009 to 2018, there was an offshoot of the VDP program — which was referred to as the Offshore Voluntary Disclosure Program (OVDP) — and was primarily for Taxpayers with undisclosed foreign income and assets.  In 2018, the IRS closed this program — but also expanded the traditional voluntary disclosure program on matters involving foreign and offshore income and asset disclosures.

Under the prior version of OVDP for delinquent FBAR, FATCA, etc. — even non-willful Taxpayers would submit to the program in order to both receive a closing letter and almost always avoid an audit (unless they opted-out). The new version of the VDP program is geared primarily for Taxpayers who are willful or are unable to certify under penalty of perjury that they are non-willful. It is still a great program in which Taxpayers can almost always avoid criminal prosecution — and it rarely if ever would have any impact on a person’s immigration status (unless the Taxpayer was also “criminally” willful and the government pursued that criminality against the Taxpayer, which is extremely rare).

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.