BSA, Bittner, and FBARs: the United States Supreme Court will soon decide, but does it have ALL the facts it needs?

In an article posted on June 22, 2022, $73 million penalty? Or $18.25 million? Or $118.25 million? The US Supreme Court will doon decide, I introduced the Bittner case. This article provides a more fullsome description of Bittner and its competing case, US v Boyd, and walks through the 52-year history of the requirement to report foreign bank accounts – and the penalties for failing to do so.

The U.S. Supreme Court is considering a case that will impact the Bank Secrecy Act. In Bittner v. U.S., the specific issue relates to how civil penalties are assessed for failing to report interests in, or signing authority over, foreign accounts. The Court’s ruling could have broader implications.

But does the Court have all the information it needs to make a fully informed decision?

It may not.

The issue – described in great detail below – can be distilled down to this: the law requires a person to report all of their foreign bank accounts on a single annual form, and the maximum penalty for failing to report those accounts by failing to file the form is $10,000. Is that penalty imposed on a “per form” basis or on a “per account” basis.

Based on what I’ve been able to find, none of the parties in one case that made its way to a Federal Court of Appeals, and none of the parties in another case that made its way to the Supreme Court (including three parties that filed amicus briefs), went back to the original form that was required by the original 1972 regulation. Instead, they all started with the form that was first created by the 1977 regulation. In other words, everybody missed what I believe is a key fact that could, in fact, push the Supreme Court to adopt a “per account” basis.

United States v. Bittner – US Supreme Court Docket Number 21-1195.

From the Supreme Court’s “case summary”:

“This case presents a direct and acknowledged conflict regarding an important question of statutory construction under the Bank Secrecy Act, 31 U.S.C. 5311 et seq., which generally requires taxpayers to report their interests in foreign bank accounts. Under the Act, Congress instructed the Treasury Secretary to ‘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).

The Secretary’s corresponding regulations require filing a single annual report (called an ‘FBAR’) for anyone with an aggregate balance over $10,000 in foreign accounts. 31 C.F.R. 1010.350(a), 1010.306(c).

The Act authorizes a $10,000 maximum penalty for any non-willful violation of Section 5314. See 31 U.S.C. 5321(a)(5)(A)-(B). In the decision below, the Fifth Circuit held that there is a separate violation (with its own $10,000 penalty) for each foreign account not timely reported on an annual FBAR; it thus authorized a penalty on ‘a per-account, not a per-form, basis.’ In so holding, the Fifth Circuit expressly rejected a contrary decision of the Ninth Circuit, which held the failure to file an annual FBAR constitutes a single violation, ‘no matter the number of accounts.’

This critical issue arises all the time, and the Act’s penalties for identically situated parties will now turn on whether the taxpayer is from California or Texas.

The question presented is:

Whether a “violation” under the Act is the failure to file an annual FBAR (no matter the number of foreign accounts), or whether there is a separate violation for each individual account that was not properly reported.”

This summary appears to favor a “per form” approach. For example, it mischaracterizes the language in 31 C.F.R. 1010.350(a), 1010.306(c) – those regulations do not require a report for “foreign accounts” but a report for “each account”.

Amicus briefs were filed by the US Chamber of Commerce, the American College of Tax Counsel, and the Center for Taxpayer Rights – all favoring the “per form” approach advocated by the petitioner Bittner.  The petitioner and two of the amicus parties characterized the 5th Circuit’s Bittner case and the 9th Circuit’s Boyd case as having fact patterns “materially indistinguishable” from each other. Indeed, the facts are materially different …

The Boyd Decision – 9th Circuit “per form” approach: 13 accounts on 1 FBAR that was untimely but otherwise accurate

Beginning in 2004, Jane Boyd, an American citizen living in the United States, had a financial interest in financial accounts in the United Kingdom. After her father died in 2009 and she gained an inheritance, the amounts in these accounts increased to amounts over the FBAR reporting threshold of $10,000 between 2009 and 2011. Boyd received interest and dividends from fourteen of these accounts and did not report the interest and dividends on her 2010 federal income tax return or disclose the accounts to the IRS. In 2012, Boyd asked to participate in the IRS’s Offshore Voluntary Disclosure Program—a program that allows taxpayers to voluntarily report undisclosed offshore financial accounts in exchange for predictable and uniform penalties. After the IRS accepted Boyd into the program, she submitted, in October 2012, an FBAR listing her fourteen foreign accounts for 2010 and amended her 2010 tax return to include the interest and dividends from these accounts. The FBAR was due by June 30, 2011, so it was untimely. However, it was accurate and on the prescribed form, TD F 90-22.1.

For unknown reasons, Boyd asked for, and was granted permission by the IRS, to opt out of the program in 2014. The IRS then examined Boyd’s income tax return and concluded that she committed thirteen FBAR violations—one violation for each account she failed to timely report for calendar year 2010 (the IRS determined that one of the accounts was used to fund several other accounts and therefore did not impose a separate penalty on the fourteenth account). The late-submitted FBAR was complete and accurate. The IRS concluded that Boyd’s violations were non-willful, and it assessed a total penalty of $47,279. In 2018, the government sued Boyd seeking to obtain a judgment against her for the $47,279 plus additional late-payment penalties and interest.

The District Court imposed a “per account” penalty. A three-judge panel of the Ninth Circuit Court of Appeals imposed a “per form” penalty.

The complaint in Boyd, filed on January 31, 2018, appears to be the first time the United States asserted in a court filing that multiple non-willful FBAR penalties apply to a single untimely, but otherwise accurate, FBAR.

The Bittner decision – 5th Circuit “per account” approach: 272 accounts, 5 FBARs that were untimely, inaccurate, and incomplete

Alexandru Bittner was born in Romania and moved to the United States in 1982. He became a naturalized citizen in 1987. He moved back to Romania in 1990 (with the fall of the Soviet Union). He became a successful businessman, with 38 companies, including holding companies in London and Geneva, and $70 million in income. He had dozens of bank accounts in Romania, Switzerland, and Liechtenstein, including “numbered accounts to hide his name” and “nominee accountholders”. He moved back to the United States in 2011.

While living in Romania, Bittner filed, or caused to be filed, at least six US income tax returns. In each, he did not check the box indicating he had accounts at foreign financial institutions. He never filed an FBAR until May 2012, when he filed untimely, inaccurate, and incomplete FBARs for the years 1996 to 2010 (the 2011 FBAR was inaccurate, incomplete, but timely.

After filing those FBARs, he hired a new accountant and refiled FBARs for tax years 2007 – 2011. The prior years’ FBAR penalties were time-barred, as 31 USC s. 5321(b)(1) has a six-year limitations period.

Bittner had more than 50 foreign accounts each of the five years:

Year    Accounts        Maximum total value

2007         61                 $10,127,860

2008         51                 $10,420,152

2009         53                 $  3,053,884

2010         53                 $16,058,319

2011         54                 $15,137,405

272          272                $54,797,620

The IRS sought a penalty of $10,000, the maximum, for each of the 272 accounts, for a total of $2,720,000.

The District Court for the Eastern District of Texas struck down the IRS’s statutory interpretation, holding that the non-willful FBAR penalty must be applied “per-form.” United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020). Reversing, the Fifth Circuit parted company with the Ninth Circuit (relying in part on Judge Ikuta’s dissent in Boyd), holding that the statute mandates that the FBAR penalty be applied on a “per-account” basis. United States v. Bittner, No. 20- 40597 (5th Cir. Nov. 30, 2021). The 5th Circuit distinguished the “substantive obligations” to report accounts in 31 USC 5314 from the “procedural obligations” to report those accounts on FBARs in 31 CFR 1010.350. The 5th Circuit also noted the singular “a relation” with a foreign financial agency in 31 USC 5314, with the singular indicating each account, which matches the language in 31 CFR 1010.350(a). It wrote that reporting each foreign account on a single annual FBAR was an “administrative convenience”.

Foreign Bank Account Reporting

Legislative and Regulatory History: Four Key Dates

The following page provides a detailed legislative and regulatory timeline for foreign bank account reporting. But there are four key developments:

1970 – Legal requirement to report interests in foreign financial accounts. Criminal penalties for violations, but no civil penalties.

1972 – Regulatory requirement to file an annual report setting out all interests in foreign financial accounts.

1986 – Civil penalties for willful violations.

2004 – Civil penalties for non-willful violations.

Both Boyd and Bittner involve the penalty provisions for non-willful violations of the foreign bank account reporting requirements.

Legislative and Regulatory History: All Major Developments

1970 – Section 241 of chapter 4 of the Currency & Foreign Transactions Reporting Act, PL 91-508 (the original “Bank Secrecy Act”) provided “… having due regard also for the need to avoid burdening unreasonably persons who legitimately engage in transactions with foreign financial agencies, shall by regulation require” a person who “maintains any relationship, directly or indirectly, on behalf of himself or another, with a foreign financial agency to maintain records or to file reports, or both, setting forth” certain information. No amount was set out, no penalty provisions. Title II of the Act was originally codified at 31 U.S.C. §§ 1051–1122. In 1982, these sections were renumbered as 31 U.S.C. §§ 5311 to 5322.

1972 – First regulation – 31 CFR s. 103.24 – required the report to be made as part of the taxpayer’s income tax return. No civil penalty provisions.

1977 – 31 CFR 103.24 revised in two ways. First, the income tax form was changed to include a check-box whether the taxpayer had foreign accounts, and if so, to file a separate form (later called the Foreign Bank Account Report, or FBAR). Second, those with interests in, or signing authority over, more than 25 foreign accounts need only report the existence of those accounts, not the details, on the FBAR. If details were sought by the IRS, the taxpayer was required to disclose them.

1982 – The BSA was recodified without substantive changes. The new FBAR section was 31 USC s. 5314; the new penalty provision was 31 USC s. 5321. Section 5321 still did not apply any civil penalties for violations of section 5314.

1984 – Section 5321 as revised but still no civil penalties for violations of section 5314.

1986 – Section 5321(a)(5) was added by the Money Laundering Control Act of 1986. This change added civil penalties for willful violations of section 5314. The penalty was imposed for two different reporting failures: a failure to report the existence of an account, or the failure to report any required information with respect to such account. The maximum penalty was based on the balance in “such” account, not to exceed $100,000.

1992 – Civil penalties for willful violations of section 5314 were enhanced, but still no penalties for non-willful violations.

1994 – Civil penalties for willful violations of section 5314 were enhanced, but still no penalties for non-willful violations.

2001 – Section 361 of the USA PATRIOT Act required Treasury to submit three annual reports to Congress on enhancing the section 5314 requirements. None of the reports referred to penalties for violating section 5314.

2004 – American Jobs Creation Act of 2004 amended 31 USC section 5321(a)(5). The changes increased the civil penalties for willful violations and added civil penalties for non-willful violations, capped at $10,000. Included a “reasonable cause” exception. The result is that Congress greatly increased the penalties for willful violations, but capped non-willful violations at $10,000. The  “reasonable cause exception” was based, in part, on “the amount of the transaction or the balance in the account at the time of the transaction was properly recorded”. This is a poorly worded clause, but it appears Congress was focused on the accounts being reported, not the reports.

There were multiple Congressional reports that referenced the penalty provisions: none of the parties in Bittner referred to these Congressional reports. My reading of those reports indicates that Congressional intent was on the failure to report an interest in foreign financial accounts, and not on the failure to submit Treasury Department Form TD F 90-22.1

October 26, 1970 – Currency & Foreign Transactions Reporting Act – PL 91-508, Title II, 84 Stat. 1118*

*Title I of PL 91-508 did not have a named title. Chapter 2 of Title I gave the Secretary the power to impose recordkeeping and reporting requirements on money transmitters and currency exchangers (money services businesses). Title II of the Act was originally codified at 31 U.S.C. §§ 1051–1122. In 1982, these sections were re-enacted without substantive change as 31 U.S.C. §§ 5311 to 5322, with applicable regulations at 31 C.F.R. § 103.11 et seq (re-issued without substantive change in 2011 as 31 CFR Part X).

Chapter 1 – General Provisions

  1. 202 – Purpose is “to require certain reports or records where such reports or records have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.
  2. 204 – “The Secretary (of the Treasury) shall prescribe such regulations as he may deem appropriate to carry out the purposes of this chapter.”
  3. 207(a) – Civil penalty “for each willful violation” but only by a financial institution or any officer of a financial institution. No mention of violations by persons failing to report foreign financial accounts (section 241).
  4. 209 – Criminal penalty (a) of not more than $1,000 against “whoever willfully violates any provision of this title or any regulation under this title”.

Chapter 4 – General Provisions

  1. 241 – Records and reports required – (a) “… having due regard also for the need to avoid burdening unreasonably persons who legitimately engage in transactions with foreign financial agencies, shall by regulation require” a person who “maintains any relationship, directly or indirectly, on behalf of himself or another, with a foreign financial agency to maintain records or to file reports, or both, setting forth” certain information.

Those regulations were prescribed on April 5, 1972.

April 5, 1972 – Original reporting and recordkeeping regulations for foreign financial accounts – 37 FR 6913

  1. 103.24 – Each person having a financial interest in, or signature or other authority over a foreign financial account shall report such account on his Federal income tax return.
  2. 103.32 – Each person shall maintain a record of a foreign financial account for 5 years. In computing that time, disregard any period beginning when that person is criminally charged for filing a false tax return.
  3. 103.47 – Civil penalty for any willful violation but only by a financial institution or any officer of a financial institution. No mention of violations of 103.24.
  4. 103.49 – Criminal penalty (a) of not more than $1,000 against “any person who willfully violates any provision of this part; and (c) of not more than $10,000 against “any person who knowingly makes any false, fictitious or fraudulent statement or representation in any report required by this part …”.

None of the five parties that have filed briefs in the Supreme Court case in Bittner made reference to this first foreign account reporting requirement: that those accounts be reported on the taxpayer’s Federal income tax return. Indeed, this first foreign account reporting requirement was not mentioned in any of the District or Appeals Court filings in Bittner or Boyd: it was also missed by the drafters of a Congressional Research Service Legal Sidebar of June 29, 2022, titled “Supreme Court to Address Foreign Account Reporting Penalties”.

September 21, 1973 – First revision to civil penalties for violating “foreign currency reports”

December 20, 1977 – Revised reporting and recordkeeping requirements for foreign financial accounts – 42 FR 63774

Two changes were made to section 103.24. First, instead of reporting foreign accounts on a Federal income tax form, they would be reported in a reporting form prescribed by the Secretary. Second, an exemption to reporting details of foreign accounts was added: persons having a financial interest in 25 or more foreign accounts need not report the details of those accounts on the reporting form, but are required to provide those details concerning each account when so requested by the Secretary or his delegate.

No changes were made to civil or criminal penalties.

For the first five years (1972 – 1977), foreign bank accounts were reported on an annual income tax filing. Beginning in 1978, the annual reporting requirement was changed so that notice of the accounts was given on the individual income tax return, but the details of the accounts were set out in a separate annual form, the Foreign Bank Account Report or FBAR. Although nothing can be found in the Federal Register, it is likely that the change to reporting those accounts on a separate, but still annually-filed, form came from these tax return origins. This supports the position that the penalties should be on a “per account” basis and not on a “per form” basis.

September 13, 1982 – Revised reporting and recordkeeping requirements for foreign financial accounts

PL 97-258 introduced a new Chapter 53, Subchapter II to Title 31 – 31 USC ss. 5311-5322 Records and reports on monetary transactions – effectively shifting the existing BSA laws into new sections without making substantive changes.

The FBAR provisions were in section 5314: As prescribed by regulation, US persons shall “keep records, file reports, or keep records and file reports, when the [person] … maintains a relation for any person with a foreign financial agency …”.

Civil penalties were in section 5321: for any willful violation but only by a financial institution or any officer of a financial institution. The civil penalty provisions made no mention of violations of 5314. Subsection 5321(a) originally had three sub-parts: (1) for penalties against financial institutions and their officers; (2) penalties for violating the transportation of monetary instruments; and (3) penalties for violating the foreign transaction reporting requirements. Sub-parts (4) and (5) were added in 1986.

October 12, 1984 – Revised civil and criminal penalties – PL 98-473, Title II, chapter IX, section 901, 98 Stat. 2135

This law revised 31 USC ss. 5311-5322. Notably, civil penalties in section 5321 were increased from $1,000 to $10,000 but only against a financial institution or any officer of a financial institution. Like in 1982, there was no mention of violations of 5314.

October 27, 1986 – First civil penalties for violating foreign bank account reporting requirements – PL 99-570, Anti-Drug Abuse Act of 1986, Title II, Subtitle H – Money Laundering Control Act (MLCA) of 1986

The MLCA added new offenses of money laundering (18 USC ss 1956, 1957) and structuring (21 USC s. 5324). Section 1357 of the MLCA added civil penalties for structuring in 31 USC s. 5321(a)(4), and it increased civil penalties imposed on financial institutions from $10,000 to “greater of the amount (not to exceed $100,000) involved in the transaction or $25,000”. Subsection 1357(c) added a “separate civil money penalty for violation of section 5314” by adding 31 USC 5321(a)(5). This was the first civil money penalty for violating the foreign bank reporting requirements.

31 USC s. 5321(a)(5)(A) – penalty for willful violations of section 5314.

31 USC s. 5321(a)(5)(B)(ii) – penalty “in the case of violation of such section [5314] involving a failure to report the existence of an account or any identifying information required to be provided with respect to such account, the greater of (I) an amount (not to exceed $100,000) equal to the balance in the account at the time of the violation; or (II) $25,000.”

The penalty was imposed for two different reporting failures: a failure to report the existence of an account, or the failure to report any required information with respect to such account. The maximum penalty was based on the balance in “such” account, not to exceed $100,000.

October 28, 1992 – Congress enhances “willful” language – Pub. L. 102–550, title XV, §1535(a)(2), 106 Stat. 4066

September 13, 1994 – Congress continues to enhance the “willful” language – Pub. L. 103–322, title XXXIII §330017(a)(1), 108 Stat. 2149

October 26, 2001 – USA PATRIOT Act of 2001 – Pub. L. 107–56, title III, section 363(a), 115 Stat. 332

Congress required Treasury to “study methods for improving compliance with” the FBAR reporting requirements, and report to Congress. The Act made no mention of civil money penalties. That report was submitted to Congress on April 26, 2002.

April 26, 2002 – Treasury Report to Congress on FBAR reporting, USC s. 5314

Nothing of relevance given that there were no penalties for non-willful activity in 2002.

https://www.fincen.gov/sites/default/files/shared/ReportToCongress361.PDF

October 22, 2004 – American Jobs Creation Act of 2004: penalties for non-willful violations

The American Jobs Creation Act of 2004, like many large, bipartisan bills, included a number of provisions that had little, if anything, to do with the main substance of the bills. This bill was no different. In order to gain the support of enough members of Congress, a number of provisions were added. One of those was penalties for non-willful failures to file reports of ownership of or signing authority over foreign bank accounts. The Congressional record is important, then, to see what was discussed. In this case there were two Committee reports that referred to FBAR violations and penalties.

June 16, 2004 – House Committee Report H. Rep. 108-548

Title VI of the Jobs Act involved “Revenue Provisions”.  The Committee discussed Item 10: section 621 of the bill and section 5321 of Title 31 of the US Code, described as “penalty on failure to report interests in foreign financial accounts”. It was not described as a penalty on failure to file the annual FBAR.

This bill added penalties for non-willful violations. In the June 2004 version of the bill, the penalty for a non-willful violation was $5,000. The final bill (and law) raised that to $10,000. ($5,000 came from the House; $10,000 from the Senate).

The original language for the maximum penalty for willful violations was “the greater of (I) $25,000,or (II) the amount (not exceeding $100,000) determined under subparagraph (D) …”. For willful violations, the final maximum penalty language was “the greater of: (I) $100,000, or (II) 50 percent of the amount determined under subparagraph (D)”. The Senate proposed the higher penalties.

Congress included its reasons for adding a “non-willful” failure to report:

“The Committee believes that imposing a new civil penalty for failure to report an interest in foreign financial accounts that applies (without regard to willfulness) will increase the reporting of foreign financial accounts.”

Congressional intent was on the failure to report an interest in foreign financial accounts, and not on the failure to submit Treasury Department Form TD F 90-22.1

October 7, 2004 – House Committee Report H. Rep. 108-755

Like the previous report, this report refers to the FBAR report submitted to Congress.  The Committee alluded to an account-centric approach to the penalty (rather than a report-centric approach) in its reference to a penalty waiver “if any income from the account was properly reported on the income tax return and there was reasonable cause for the failure to report.”

Congressional intent was on the failure to report an interest in foreign financial accounts, and not on the failure to submit Treasury Department Form TD F 90-22.1

October 22, 2004 – Added non-willful violations and increased penalties for willful violations – Pub. L. 108–357, title VIII, §821(a), 118 Stat. 1586

Prior to this legislative change, only willful violations were penalized, and the maximum penalty of $100,000 was based on value of each account.

This legislation added non-willful violations with a maximum penalty of $10,000. It included a “reasonable cause” exception. Penalties for willful violations increased to the greater of $100,000 of 50 percent of the value in the account at the time of the violation.

The result is that Congress greatly increased the penalties for willful violations, but capped non-willful violations at $10,000. The  “reasonable cause exception” was based, in part, on “the amount of the transaction or the balance in the account at the time of the transaction was properly recorded”. This is a poorly worded clause, but it appears Congress was focused on the accounts being reported, not the reports.

July 1, 2008 – IRS takes a “per account” approach to civil FBAR penalties*

Internal Revenue Manual (“IRM”), taking the position that “FBAR penalties are determined per account, not per unfiled FBAR.” IRM 4.26.16.4(7) (July 1, 2008).

May 13, 2015 – IRS reaffirms its “per account” approach to civil FBAR penalties*

Interim Guidance for Report of Foreign Bank and Financial Accounts (FBAR) Penalties, SBSE-04-0515-0025

*Both are cited in the amicus brief filed in Bittner by the American College of Tax Counsel.

In 2015, following the issuance of interim guidance for FBAR penalties, the IRS once again took the position that a non-willful FBAR penalty can be applied on a per account basis, but specifically noted that this approach should only be taken in unusual cases: (1) After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion.

February 26, 2010 – FinCEN proposes changes to the FBAR – 75 FR 8844

The proposed rule:

  • Includes provisions intended to prevent persons from avoiding reporting requirements.
  • Defines a “United States person” required to file the FBAR and defines the types of reportable accounts such as bank, securities, and other financial accounts.
  • Exempts certain persons with signature or other authority over, but no financial interest in, foreign financial accounts from filing FBARs.
  • Exempts certain low-risk accounts e.g., the accounts of a government entity or instrumentality for which reporting will not be required.
  • Exempts participants/beneficiaries in certain types of retirement plans and includes a similar exemption for certain trust beneficiaries.
  • Clarifies what it means for a person to have a “financial interest” in a foreign account.
  • Permits summary filing by persons who have a financial interest in 25 or more foreign financial accounts, or signature or other authority over 25 or more foreign financial accounts. Also permits an entity to file a consolidated FBAR on behalf of itself and the subsidiaries of which it owns more than a 50 percent interest.

The FBAR filing requirements, authorized under one of the original provisions of the Bank Secrecy Act, have been in place since the early 1970s. In August 2009, the Treasury Department announced its intent to issue regulations clarifying the FBAR filing requirements and sought public comment on related issues. No references made to the penalty provisions.

March 5, 2013 – FinCEN proposes changes to the FBAR – 78 FR 14415

At the time of this notice, FinCEN had recently converted its other BSA reports to an electronic-filing format.  With this notice, FinCEN was proposing to “update the current TD F 90–22.1 report to standardize it with other BSA electronically filed reports and add the capability for a third party preparer to file the report should the owner of the foreign account wish to employ this option.”

FinCEN included the following statement in the background section of the notice:

“The information collected on Form TD F 90–22.1 (as well as other BSA reporting and recordkeeping requirements that are not the subject of this notice) assist Federal, state, and local law enforcement in the identification, investigation, and prosecution of individuals involved in money laundering, the financing of terrorism, tax evasion, narcotics trafficking, organized crime, fraud, embezzlement, and other crimes.”

Although grammatically awkward, it appears that FinCEN is writing that it is the information on the form, not the form, that assist(s) law enforcement.

July 31, 2015 – FBAR annual filing date changed from June 30 to April 15 … sort of.

Section 2006(b)(11) of the Surface Transportation and Veterans Healthcare Choice Improvement Act of 2015, PL 114-41, 129 Stat. 458 provided:

The due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5. For any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary.

Note that the June 30th remains the filing date in the BSA regulation – 31 CFR s. 1010.306(c).

July 12, 2016 – Senate Report S. Rep. No. 114-298 on Taxpayer Protection Act of 2016

This report refers to both willful and non-willful failures “to file the FBAR”. The penalties for both are dependent, in part, on the amount or balance “in the account”. The American College of Tax Counsel used this language as support for a “per form” or “per report” approach.

Current Law – 31 USC ss. 5314, 5321(a)(5)

31 USC §5314. Records and reports on foreign financial agency transactions

(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.

(b) The Secretary may prescribe-

(1) a reasonable classification of persons subject to or exempt from a requirement under this section or a regulation under this section;

(2) a foreign country to which a requirement or a regulation under this section applies if the Secretary decides applying the requirement or regulation to all foreign countries is unnecessary or undesirable;

(3) the magnitude of transactions subject to a requirement or a regulation under this section;

(4) the kind of transaction subject to or exempt from a requirement or a regulation under this section; and

(5) other matters the Secretary considers necessary to carry out this section or a regulation under this section.

(c) A person shall be required to disclose a record required to be kept under this section or under a regulation under this section only as required by law. ( Pub. L. 97–258, Sept. 13, 1982, 96 Stat. 997 .)

31 USC §5321(a)(5). Civil penalties

  • 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.

Current Regulations – 31 CFR s. 1010.350, 1010.820, 1010.821

Reports of foreign financial accounts – 31 CFR § 1010.350 Reports of foreign financial accounts.

  • In general. Each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other 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 USC 5314 to be filed by such persons. The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts (TD-F 90-22.1), or any successor form. See paragraphs (g)(1) and (g)(2) of this section for a special rule for persons with a financial interest in 25 or more accounts, or signature or other authority over 25 or more accounts.
  • United States person [detail not included]
  • Types of reportable accounts [detail not included]
  • Foreign country [detail not included]
  • Financial interest [ detail not included]
  • Signature or other authority [detail not included]

(g) Special rules

(1) Financial interest in 25 or more foreign financial accounts. A United States person having a financial interest in 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report, but will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.

(2) Signature or other authority over 25 or more foreign financial accounts. A United States person having signature or other authority over 25 or more foreign financial accounts need only provide the number of financial accounts and certain other basic information on the report, but will be required to provide detailed information concerning each account when so requested by the Secretary or his delegate.

(3) Consolidated reports. An entity that is a United States person and which owns directly or indirectly more than a 50 percent interest in one or more other entities required to report under this section will be permitted to file a consolidated report on behalf of itself and such other entities.

(4) Participants and beneficiaries in certain retirement plans. Participants and beneficiaries in retirement plans under sections 401(a), 403(a) or 403(b) of the Internal Revenue Code as well as owners and beneficiaries of individual retirement accounts under section 408 of the Internal Revenue Code or Roth IRAs under section 408A of the Internal Revenue Code are not required to file an FBAR with respect to a foreign financial account held by or on behalf of the retirement plan or IRA.

(5) Certain trust beneficiaries. A beneficiary of a trust described in paragraph (e)(2)(iv) of this section is not required to report the trust’s foreign financial accounts if the trust, trustee of the trust, or agent of the trust is a United States person that files a report under this section disclosing the trust’s foreign financial accounts.

Civil Penalties – 1010.820, 821

The main civil penalty section is section 1010.820: this section does not provide for penalties of 1010.350

31 CFR § 1010.820 Civil penalty.

(a) For any willful violation, committed on or before October 12, 1984, of any reporting requirement for financial institutions under this chapter or of any recordkeeping requirements of §§ 1010.311, 1010.313, 1020.315, 1021.311 or 1021.313, the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed $1,000.

(b) For any willful violation committed after October 12, 1984 and before October 28, 1986, of any reporting requirement for financial institutions under this chapter or of the recordkeeping requirements of § 1010.420, the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed $10,000.

(c) For any willful violation of any recordkeeping requirement for financial institutions, except violations of § 1010.420, under this chapter, the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed $1,000.

(d) For any failure to file a report required under § 1010.340 or for filing such a report containing any material omission or misstatement, the Secretary may assess a civil penalty up to the amount of the currency or monetary instruments transported, mailed or shipped, less any amount forfeited under § 1010.830.

(e) For any willful violation of § 1010.314 committed after January 26, 1987, the Secretary may assess upon any person a civil penalty not to exceed the amount of coins and currency involved in the transaction with respect to which such penalty is imposed. The amount of any civil penalty assessed under this paragraph shall be reduced by the amount of any forfeiture to the United States in connection with the transaction for which the penalty was imposed.

(f) For any willful violation committed after October 27, 1986, of any reporting requirement for financial institutions under this chapter (except § 1010.350, § 1010.360 or § 1010.420), the Secretary may assess upon any domestic financial institution, and upon any partner, director, officer, or employee thereof who willfully participates in the violation, a civil penalty not to exceed the greater of the amount (not to exceed $100,000) involved in the transaction or $25,000.

(g) For each negligent violation of any requirement of this chapter, committed after October 27, 1986, the Secretary may assess upon any financial institution a civil penalty not to exceed $500.

(h) For penalties that are assessed after August 1, 2016, see § 1010.821 for rules relating to the maximum amount of the penalty.

Section 1010.820 does not expressly cover penalties of 1010.350. Section 1010.821, and Table 1 to that section provides for “adjusted civil monetary penalty amounts [to] replace the amounts published in the statutes authorizing the assessment of penalties”. Table 1 is on the next page.

1010.821 Penalty adjustment and table.

(a) Inflation adjustments. In accordance with the Federal Civil Penalties Inflation Adjustment Act of 1990, 28 U.S.C. 2461 note, (“FCPIA Act”), as further amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, FinCEN has set forth in paragraph (b) of this section adjusted maximum penalty amounts for each civil monetary penalty provided by law within its jurisdiction that is subject to the FCPIA Act. The adjusted civil monetary penalty amounts replace the amounts published in the statutes authorizing the assessment of penalties.

(b) Maximum civil monetary penalties. The statutory penalty provisions and their adjusted maximum amounts or range of minimum and maximum amounts are set out in Table 1. The last column in the table provides the newly effective maximum penalty amounts or range of minimum and maximum amounts. These maximum penalty amounts do not, however, limit the total amount of a penalty in the case of a penalty that may be imposed for each day a violation continues.

Current Regulations – 31 CFR s. 1010.821 Table 1 applies to violations of 31 USC s. 5314. It makes no reference to the regulations. The original $10,000 penalty is now $14,489 and the original $100,000 penalty is now $144,886.

Closing Thoughts

Do bad facts make bad law? The facts of the two Appeals Court decisions were as materially different as the outcomes: the 9th Circuit’s “per form” approach came from Jane Boyd inheriting some money from her UK-based father and fessing up to the 13 accounts with about $100,000 in one FBAR, filed late but otherwise accurately. A “per account” approach could have resulted in a heavy fine of $130,000. The 5th Circuit’s “per account” approach can from Alexandru Bittner’s dozens of accounts (including numbered and nominee accounts) accumulated over 20 years in three European countries contains tens of millions of dollars. His FBARs were untimely, incomplete, and inaccurate. He didn’t cooperate with the IRS, and by the time he re-filed, only five years of FBARs had survived the statute of limitations. Even with that, he failed to report 50+ accounts each year totaling more than $50 million. A “per form” approach could have resulted in a paltry fine of $50,000. Did these “bad facts” influence the 5th Circuit to reach a “per account” approach?

An argument against a “per form” approach to non-willful violations is that it could result in the same maximum penalty for two very different violations: failing to report one account with a $10,001 balance on one annual FBAR, and failing to report 200 accounts with $500 million in balances on one annual FBAR would have the same maximum penalty of $10,000.

An argument against a “per account” approach to non-willful violations is that, taken to its extreme (as argued in one of the amicus briefs), it could result in 24 violations per account (there are 24 pieces of information required for each account, and the penalty language includes a “failure to report the existence of an account or any identifying information required to be provided with respect to such account”). With Jane Boyd’s 13 accounts, that could have been a maximum penalty of $3,120,000.

31 USC 5314 is poorly worded, but includes some detail on what information must be reported. The civil penalties for failing to report were first imposed in 1986: 31 USC s. 5321(a)(5)(A) created a civil money penalty for willful violations of section 5314, and 31 USC s. 5321(a)(5)(B)(ii) capped that penalty at $100,000 for a “failure to report the existence of an account or any identifying information required to be provided with respect to such account.” So the civil money penalty for willful violations was imposed for a failure to report the existence of an account, or the failure to report any required information with respect to such account, and not on the failure to file an FBAR.

In 2004 Congress increased the civil penalties for willful violations of section 5314 and added civil penalties for non-willful violations, capped at $10,000. Non-willful violations included a “reasonable cause” exception. The  “reasonable cause exception” was based, in part, on “the amount of the transaction or the balance in the account at the time of the transaction was properly recorded”. This is a poorly worded clause, but it appears Congress was focused on the accounts being reported, not the reports.

Conclusion and Recommendation

As I began, none of the parties in all courts in Boyd and Bittner went back to the original 1972 regulation that required taxpayers to report their foreign bank accounts on their annual individual tax returns. Nor did any of them refer to the 1977 regulation – that required those accounts to be reported on an annual foreign bank account report, or FBAR – as a change in the requirement from an annual report on a tax form to an annual report on an FBAR. This could be an important consideration for the Supreme Court. In other words, everybody missed what I believe is a key fact that could, in fact, push the Supreme Court to adopt a “per account” basis.

Regardless of which approach the Supreme Court adopts, Congress could (should) resolve the issue. I recommend that Congress take a “per account” approach for willful violations, and a “per form” approach for non-willful violations.