In a recent case, the Fifth Circuit analyzed whether the $10,000 maximum non-willful FBAR penalty cap applies for each failure to file an annual FBAR or each failure to report an account.
In an opinion that reversed the district court and that departs from a recent 9th Circuit opinion, the Fifth Circuit held that each failure to report a qualifying account is a separate violation. As such, the $10,000 penalty limit for non-willful violations applies on a per-account basis.
In the case, as the court explains, the taxpayer “non-willfully failed to report his interests on annual FBAR forms . . . .” The government had assessed over $2 million in FBAR penalties, which consisted of $10,000 for each unreported account for years 2007 to 2011. The district court, however, eventually reduced that to $50,000—that is, a $10,000 maximum penalty for each failure to file an annual FBAR (not each failure to report an account).
On appeal, the Fifth Circuit focused on two issues: (1) a reasonable-cause defense, and (2) the application of the FBAR penalty (is it per form or per account). This post will focus on the second issue only.
The Bank Secrecy Act (BSA) provides, among other things, that “the Secretary of the Treasury shall require a resident or citizen of the United States . . . to keep records, file reports, or keep records and file reports, when the . . . person makes a transaction or maintains a relation for any person with a foreign financial agency.” 31 U.S.C. § 5314(a). Two implementing regulations were relevant in the case.
The first provides that a person with a “financial interest in . . . [a] financial account in a foreign country shall report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists and shall provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 to be filed by such persons.” 31 C.F.R. § 1010.350(a).
The second provides that “[r]eports required to be filed by § 1010.350 shall be filed . . . on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.” 31 C.F.R. § 1010.306(c).
On the FBAR, a person discloses information about each qualifying foreign account. When the number of accounts exceeds 25, however, the person discloses the number of accounts—but may be required to provide additional information if requested. 31 C.F.R. § 1010.350(g).
As the court explained, the taxpayer was a naturalized citizen who was living overseas. Upon returning to the United States and becoming aware of the FBAR reporting obligations, he hired CPAs to prepare the FBARs.
As noted earlier, the IRS assessed penalties for non-willful violations of § 5314 for each unreported account for years 2007 to 2011. The district court held, however, that a non-willful FBAR reporting deficiency penalty is, in effect, a per-year penalty and not a per-account penalty.
On appeal, among other issues, the Fifth Circuit had to address whether the violation resulting in a non-willful penalty is not filing the annual FBAR or the failure to report a particular account.
31 U.S.C. § 5321(a)(5)(A) provides that “The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” Importantly, the court noted that Congress “did not refer to a ‘violation of a regulation prescribed under’ section 5314 . . . .” Thus, the court continued, the analysis should focus on the statute and its text.
The court noted that § 5314(a) has both a substantive and procedural element. Substantively, it requires the Secretary to require persons to file reports under certain conditions. Procedurally, it provides that those reports shall contain certain information required by the prescribed regulations. The court further emphasized that the regulations map to the substantive obligation—to file reports disclosing each account—and the procedural obligation—to file the right form.
As such, the court synthesized the statutory text and the regulations to impose “(1) a statutory requirement to report each qualifying transaction or relation with a foreign financial agency and (2) a regulatory requirement to file these reports on an FBAR before a certain date each year (June 30).”
Consequently, the court reasoned that, because the penalty is assessed for “any violation of[] any provision of section 5314”—and not the regulations under § 5314—the section “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 Fifth Circuit explained that the district court had held that the violation attached to the filing of a single report. The Fifth Circuit disagreed.
The court also explained that “term ‘violation’ in other parts of section 5321(a)(5) confirms that the ‘violation’ contemplated by section 5321(a)(5)(A) is the failure to report an account, not the failure to file an FBAR.”
The court pointed to the willful-penalty provisions, which increases the penalty up to 50% of the account balance “in the case of a violation involving a failure to report the existence of an account . . . .” 31 U.S.C. § 5321(a)(5)(C)(i) , (D). Thus, the “violation” here is speaking to failing to report a transaction or an account. Because the willful-penalty provisions involve a violation for a failure to report a transaction or account, the Fifth Circuit reasoned that the term “violation” should be read similarly for non-willful penalties. In short, the definition of “violation,” according to the court, “means the same thing whether willful or non-willful.”
Similarly, the Fifth Circuit found that the language in the reasonable-cause exception also “equates a ‘violation’ with failing to report the amount of the transaction or the balance in an account.”
Summarizing its holding with respect to the definition of “violation,” the court stated, “[t]he text, structure, history, and purpose of the relevant statutory and regulatory provisions show that the ‘violation’ of section 5314 contemplated by section 5321(a)(5)(A) is the failure to report a qualifying account, not the failure to file an FBAR. The $10,000 penalty cap therefore applies on a per-account, not a per-form, basis.”
The case is United States v. Bittner, No. 20-40597 (5th Cir. Nov. 30, 2021); you can read the case here
This is only a summary of the case and some portions—including facts, issues, citations, or analysis—may have been omitted or edited; if you need advice in this area, please review the case in its entirety and consult an attorney.