On November 30, 2021, the Fifth Circuit parted ways with the taxpayer friendly decision of the Ninth Circuit that non-willful penalties are capped at $10,000 per FBAR filing instead of the $10,000 per unreported bank account argued by the government. District courts in New Jersey, Connecticut, and Texas had all ruled in the taxpayer’s favor that non-willful penalties were capped at $10,000 per form. In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the Ninth circuit reversed the district court’s per-account determination and made the per-form cap the law within the 9th Circuit. United States v. Bittner, No. 20-40597 (5th Circuit), was on appeal from a taxpayer friendly decision reducing the $2.7 Million dollar penalty to $50,000 based on a $10,000 per form cap on non-willful FBAR penalties. Although not guaranteed, it appeared that the momentum was in the taxpayer’s favor for an affirmance of the reduction. However, the Fifth Circuit reversed the favorable district court decision and held that the “$10,000 penalty cap therefore applies on a per-account, not a per-form basis.”
Taxpayer Jane Boyd was a U.S. citizen and had fourteen bank accounts in the United Kingdom that increased in value when she received an inheritance from her father’s death. Boyd failed to report the interest and dividends from these accounts on her 2010 income tax return. Boyd participated in the Offshore Voluntary Disclosure Program (OVDP) but opted out and was subject to a full examination by the IRS. The result of that examination was that Boyd, although non-willful, had committed thirteen violations for each account that should have been reported but wasn’t. The resulting penalty was $47,279.
Alexandru Bittner was a Romanian immigrant who naturalized in 1987 and returned to Romania in 1990 and became a successful businessman and investor. Bittner maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein. Although Bittner had accountants maintaining compliance with Romanian tax laws he argued that he was unaware that as a U.S. citizen he still had to report his interests in certain foreign accounts and never filed FBARs while living in Romania. When he returned to the United States in 2011 he hired a CPA who filed corrected FBARs in 2012 but only listed his largest account and didn’t list his interest in 25 or more qualifying accounts. Bittner hired a new CPA in 2013 who filed corrected FBARs listing all foreign bank account information and balances. The accounts for each unreported year was in excess of 50 separate accounts.
Both Boyd and Bittner argued that they committed only one non-willful violation, not multiple violations based on the number of accounts, and that the maximum penalty allowed by the statute was $10,000 for the failure to file the FBAR form each year. Boyd was unsuccessful at the district court level and that decision was reversed by the Ninth Circuit. Bittner was successful at the district court level and that decision is now reversed by the Fifth Circuit. The appeals saved one taxpayer and has destroyed the other taxpayer’s favorable result.
The government is allowed to impose a civil penalty on any person violating any provision of the Bank Secrecy Act (BSA) pursuant to 31 U.S.C. §5321(a). There are two types of penalties depending on whether the violation was willful or non-willful. See 31 U.S.C. §5321(a). The maximums for the penalty are also different depending on whether the violation was non-willful (capped at $10,000) or willful (capped at the greater of $100,000 or 50% of the balance in the account at the time of the violation). Non-willful violations also contain a provision preventing penalties if the violation was “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.” The non-willful penalty does not explicitly prevent multiple violations, but it doesn’t authorize it either and that is what appears to have caused the dispute. The government argued, in both cases, that the term “any” means multiple. The government also argued that, although bank accounts are only specifically mentioned in the willful penalty, Congress intended both penalties to be treated similarly. The taxpayers, in both cases, pointed to the fact that non-willful violations are dealt with separately and have separate requirements outlined in both the statute and the regulations. The Ninth Circuit presumed that Congress purposely excluded the per-account language from the non-willful portion. However, the Fifth Circuit determined that multiple violations can be implied from a reading of the whole statutory framework even if not specifically mentioned.
Further complicating the issue is that the per-account analysis can lead to a clearly strange result. An admittedly non-willful taxpayer can pay a larger penalty than a willful violator merely because of the number of accounts involved. This absurdity was raised in Bittner, but summarily dismissed by the Fifth Circuit as not absurd because of the government’s goal “to crack down on the use of foreign financial accounts to evade taxes.” However, the Fifth Circuit never addresses why a calculation system that can punish non-willful actions more severely than similar willful actions is not absurd or at least evidence that Congress deliberately left out the designation of number of accounts to prevent that result. Perhaps Bittner will seek further appeal to clarify this issue. However, for now, the decision creates a split in the circuits where taxpayers in the Ninth Circuit receive way more favorable treatment when facing non-willful FBAR penalties assessed by the government. Taxpayers have other defenses to FBAR penalties and will need to rely on those defenses until the decision is overturned or changed by subsequent cases.