Same Statute, Same Form, Different Penalties: Welcome to FBAR Litigation
- In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the U.S. Court of Appeals for the Ninth Circuit held that the non-willful penalty as to the "Report of Foreign Bank and Financial Accounts" (FBAR) applies on a per form basis and not on the number of foreign accounts a person controls.
- Eight months later, on Nov. 30, 2021, the Fifth Circuit in United States v. Bittner, 19 F.4th 734 (5th Cir. 2021) held that the non-willful FBAR penalty applies per account rather than per form.
- This Holland & Knight alert explores these decisions and how interpreting the clear language of the statute can lead to divergent conclusions.
The "Report of Foreign Bank and Financial Accounts" (FBAR) penalty has been the subject of much litigation. This Holland & Knight alert focuses on the non-willfulness element of 31 U.S.C. § 5321(a)(5)(B). Both the U.S. Court of Appeals for the Ninth Circuit and the Fifth Circuit claim the statutory language provides for one result and yet they reached opposite conclusions. Why?
United States v. Boyd: The Facts
Ms. Boyd had a financial interest in multiple financial accounts in the United Kingdom. She received interest and dividends from these accounts, but she did not report such income on her 2010 federal income tax return or disclose the accounts to the Internal Revenue Service (IRS). In 2012, Ms. Boyd participated in the IRS Offshore Voluntary Disclosure Program and submitted an FBAR listing her 14 foreign accounts for 2010. Further, Ms. Boyd amended that year's tax return to include the interest and dividends from those accounts. Ms. Boyd later opted out of the program and the IRS examined her income tax return. The IRS concluded that Ms. Boyd had committed 13 non-willful violations of the FBAR reporting requirements under 31 U.S.C. § 5314 — one for each account she failed to timely report for 2010. The United States then sued Ms. Boyd to collect civil penalties under 31 U.S.C. § 5321(a)(5)(A).
Ms. Boyd argued that she had committed only one non-willful violation, not 13, for failure to file an accurate form, and that the maximum penalty allowed by the statute for that single non-willful violation was $10,000. The District Court agreed with the government. The Ninth Circuit agreed with Ms. Boyd.
United States v. Bittner: The Facts
Alexandru Bittner was born and raised in Romania. He emigrated to the United States in 1982 and became a naturalized U.S. citizen in 1987. In 1990, Mr. Bittner returned to Romania and became a successful businessman. He earned millions of dollars and maintained foreign bank accounts across Europe. Mr. Bittner was unaware that as a U.S. citizen, despite living in Romania, he was required to disclose his foreign accounts to the U.S. government. He returned to the United States in 2011 and, upon learning of his reporting obligations, hired a CPA to file his outstanding FBARs. The delinquent FBARs were insufficient in that not all accounts were reported. In 2013, Mr. Bittner filed corrected FBARs for 2007 to 2011. In June 2017, the IRS assessed $2.72 million in penalties against Bittner for non-willful violations of 31 U.S.C. § 5314 — $10,000 for each unreported account from 2007 to 2011 (specifically 61 accounts in 2007, 51 in 2008, 53 in 2009, 53 in 2010 and 54 in 2011). Mr. Bittner argued that he had committed only one non-willful violation and that the maximum penalty allowed by the statute for that single non-willful violation was $10,000 per year. The District Court agreed with Mr. Bittner. The Fifth Circuit agreed with the government.
Statutory Language at Issue
31 U.S.C. § 5321(a)(5) provides as follows:
(5) Foreign financial agency transaction violation.—
(A) Penalty authorized.—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.
(B) Amount of penalty.—
(i) In general.—Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.
(ii) Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—
(I) such violation was due to reasonable cause, and
(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.
(C) Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
(I) $100,000, or
(II) 50 percent of the amount determined under subparagraph (D), and
(ii) subparagraph (B)(ii) shall not apply.
(D) Amount.—The amount determined under this subparagraph is—
(i) in the case of a violation involving a transaction, the amount of the transaction, or
(ii) in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.
Boyd and Bittner applied the following statutory analysis.
- The Ninth and Fifth Circuits both agreed that examining the plain language of the text is the first step in interpreting a statute.
- Boyd applied the test set forth in United States v. Ron Pair Enters., Inc., 489 U.S. 235, 240 (1989) – if the "language at issue has a plain and unambiguous meaning with regard to the particular dispute in the case" the inquiry ceases as long as the statutory scheme is consistent. Per Boyd, this required that the statutory and regulatory framework be analyzed as a whole.
- As to any undefined terms, Boyd applied the ordinary and plain meaning of that word, i.e., the term is defined as set forth in the dictionary. Taniguchi v. Kan Pac. Saipan, Ltd., 132 S. Ct. 1997, 2002-03 (2012). Boyd then defined the term "provision" based on the definition found in the dictionary.1
- Bittner applied the test set forth in Dolan v. U.S. Postal Serv., 546 U.S. 481, 486 (2006): "Interpretation of a word or phrase depends upon reading the whole statutory text, considering the purpose and context of the statute, and consulting any precedents or authorities that inform the analysis."
- Both courts analyzed and interpreted 31 U.S.C. § 5321(a)(5)(A), which provides: "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."
- The courts' paths diverged when selecting the particular term that was the point of emphasis of their respective analyses.
Boyd emphasized the phrase "any provision of section 5314". Bittner concentrated on the word "violates/violation" – i.e., as to the classic sentence structure (subject-verb-object), Bittner focused on the verb and Boyd focused on the object.
The Ninth Circuit, by focusing on the object, the penalty, decided that the penalty was limited to $10,000. 31 U.S.C. § 53142 and its conforming regulations contain two distinct reporting requirements: 1) a U.S. person is required to report on an FBAR his or her financial interests in foreign financial accounts for each year in which such relationship exists, and 2) the FBAR 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." See 31 C.F.R. § 1010.350(a); § 1010.306. Thus, the Ninth Circuit found that Ms. Boyd accurately reported all of her foreign accounts.3 However, the FBAR form was filed late, i.e., the 2010 FBAR that had to be filed by June 30, 2011, was not filed until 2012. Thus, the court found that a single non-willful violation had occurred — the failure to timely file the single FBAR form.
Bittner focused on the verb "violation" and the statutory rule "that identical terms within an [a]ct bear the same meaning." See Est. of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479 (1992). The Fifth Circuit, by focusing on the term "violates" and its derivatives, for all practical purposes was able ignore the object of the statue at issue, i.e., the requirements of 31 U.S.C. § 5314. To define the term "violate," Bittner focused on the willful provision in 31 U.S.C. § 5321(a)(5)(c).
In contrast, Boyd noted that the non-willful and willful are two distinct penalties of which Congress was fully aware. Thus, the following statutory test applies: When Congress uses particular language in one section of a statute but omits it in another section of the same statue, it is presumed that Congress acted "intentionally and purposely in the disparate inclusion or exclusion." See Dean v. United States, 556 U.S. 568, 573 (2009). Reliance on the verb "violate" allowed the Bittner court to ignore this statutory test.
Lastly, Bittner looked to the reasonable cause exception at 31 U.S.C. § 5321(a)(5)(B)(ii) to define "violation." 31 U.S.C. § 5321(a)(5)(B)(ii) provides in part that no penalty attaches to a non-willful violation if "such 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." Bittner found that this language equates a "violation" with failing to report the amount of the transaction or the balance in an account. In contrast, Boyd again focused on the statutory test of explicit omission to support the argument that Congress intentionally omitted per-account language from the non-willful penalty provision. Boyd could have applied not only 31 U.S.C. § 5314 and its implementing regulations but also the Internal Revenue Manual (IRM). For example, IRM 18.104.22.168.4 – Non-Willfulness Penalty (07-01-2008) arguably supports Boyd's analysis that a late-filed FBAR that reports all of the accounts generally can be non-willful and subject to a penalty of $10,000. Stated differently, a delinquent FBAR that fails to report all accounts cannot be deemed non-willful and thus, it would be willful violation and subject to a willful penalty based on account balances.
Boyd and Bittner applied certain statutory interpretation rules to reach their respective conclusions. The next step in Bittner could be a petition to the U.S. Supreme Court, where the Court conducts its own statutory analysis. Congress, not the courts, should step in and clarify the FBAR penalties. What is clear is that FBAR penalties are subject to the whims and interpretations of government litigants and an agency that seemingly changes its position when the need arises.4 Such a system is unsustainable, creates inconsistent results and will result only in more litigation.
For additional information or questions regarding FBAR penalties, compliance and litigation, please contact the authors.
1 A provision is "an article or clause (as in a contract) that introduces a condition" or "a condition, requirement, or item specified in a legal instrument."
2 31 U.S.C. § 5314 contains several provisions, including:
(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:
(1) the identity and address of participants in a transaction or relationship.
(2) the legal capacity in which a participant is acting.
(3) the identity of real parties in interest.
(4) a description of the transaction.
3 The Internal Revenue Manual (IRM) in effect during the years at issue arguably supported Boyd's position. IRM 22.214.171.124.4 - Non-Willfulness Penalty (07-01-2008) provides as follows:
1. For violations occurring after October 22, 2004, a new penalty applies to individuals as well as businesses. 31 U.S.C. § 5321(a)(5)(A). A penalty, not to exceed $10,000, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements.
2. The penalty should not be imposed if:
A. The violation was due to reasonable cause, and
B. The balance in the account was properly reported on an FBAR. This means that the examiner must receive the delinquent FBARs from the nonfiler in order to avoid application of the non-willfulness penalty. (Emphasis added.)
4 Compare IRS CCA 200603026 (January 2006) (willfulness is a subjective standard) and U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012) (willfulness is reckless applying an objective standard) with IRS Fact Sheet, Offshore Income and Filing Information for Taxpayers with Offshore Accounts, FS-2014-7 (June 2014) (Non-willful penalty is up to $10,000 for failure to file), and positions taken by the U.S. government in Boyd and Bittner.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.