Bittner v. U.S:
Will the US Supreme Court Uphold a Regressive Penalty
on US Citizens & Taxpayers
with Foreign Financial Accounts?
In this Taxpayer Rights Digest, Gwen Moore and Zhanna Ziering of the Moore Tax Law Group LLC write about Bittner v. United States, a case before the United States Supreme Court that has significant repercussions for US taxpayers with foreign financial accounts. Gwen and Zhanna represented the Center for Taxpayer Rights in submitting an amicus curiae brief to the Court. Oral arguments were held this past fall and we expect a ruling in the new year. The Center is enormously grateful to the Moore Tax Law Group LLC for its excellent pro bono representation on the brief and to the Center’s two board members, Professor Alice Abreu and Liz Atkinson of Whiteford, Taylor & Preston LLP, who worked with Gwen and Zhanna on the brief. (Because of my prior involvement in the case at the administrative level in my capacity as National Taxpayer Advocate, I am recused from participation in the matter.)
And before we launch into Gwen’s and Zhanna’s discussion, please take a moment to support the important work of the Center for Taxpayer Rights in taxpayer rights are protected in the US and around the world. — Nina
What Constitutes a “Violation”?
By Guinevere Moore and Zhanna Ziering
Congress began requiring certain United States taxpayers to tell the government about their connections to foreign financial accounts in the 1970’s when the Bank Secrecy Act was enacted. Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1114 (“BSA”). The BSA established certain requirements establishing which United States taxpayers needed to tell the United States about foreign financial accounts, what constitutes a foreign financial account, and provided authority for the Secretary of the Treasury to establish a method for United States taxpayers to report that information. Id. The BSA provided for a penalty of $1,000 “for each willful violation of this title.” Id at section 207. The Secretary of the Treasury then published Treasury Department Form 90-22.1, Report of Foreign Bank and Financial Accounts, or “FBAR”. (This information is now required to be filed on FinCen Form 114.)
By 1986, Congress created a penalty specific to FBAR violations, codified in Section 5321 of Title 31 of the United States Code. Rather than imposing a $1,000 penalty per violation of the statute, the statute expressly created a maximum penalty for a willful violation tied to “the account.” 31 U.S.C. section 5321. That statute was further amended in 2004 to authorize a penalty for non-willful violations of Section 5314. While certain United States taxpayers with connections to foreign financial institutions were required to file FBARs since the 1970 enactment of the BSA, it was not until 2008, when the Department of Justice began aggressively pursuing United States taxpayers with unreported foreign financial accounts, that the requirement to report foreign financial accounts became widely known and – just as inevitable – the subject of litigation.
Today, the penalties under Section 5321(a)(5) of the Bank Secrecy Act can be financially devastating. The penalty for a willful violation of the filing requirement is equal to 50% of the value of the account on the date of the violation and if the violation spans multiple years, can be as high as 300% of the value of the unreported account. This reporting violation is not tied to any underpayment of tax; the penalty can be imposed even if the account does not bear any taxable interest.
The penalty provision also recognizes that some violations can be non-willful and caps the penalty for non-willful violation at $10,000. The interpretation of this provision has been the subject of an escalating dispute between practitioners and the IRS. The statute and the regulations require filers to file a single FBAR form per year reporting all reportable accounts. Accordingly, the IRS may impose a civil penalty of $10,000 against “any person who violates, or causes any violation of,” the FBAR reporting requirements unless that violation is willful (and the penalty will increase) or due to reasonable cause (in which the penalty will not be imposed).
What constitutes a “violation”? Tax practitioners maintain that a “violation” of the FBAR reporting requirements occurs either when the FBAR form is not filed, is incomplete or incorrect. On the other hand, the government maintains that a “violation” occurs for each and every item that should have been, but was not, correctly reported on an FBAR. What’s the difference? To taxpayers like Alexandru Bittner, whose dispute is currently pending before the Supreme Court of the United States, over two million dollars.
The question of whether a “violation” means “every mistake or omitted item” on the one hand, or “every form that was required to be filed,” on the other, has been working its way through courts. The two different points of view ultimately created a split between the U.S. Court of Appeals for the Ninth Circuit and U.S. Court of Appeals for the Fifth Circuit. In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the Ninth Circuit held that only one non-willful penalty can be assessed for failure to file the FBAR form. The Fifth Circuit, in United States v. Bittner, 19 F.4th 734 (5th Cir. 2021), parted company with the Ninth Circuit, holding that the statute mandates that the FBAR non-willful penalty be applied on a per-account basis.
Not surprisingly, the circuit split has resulted in grossly disproportionate penalties being asserted and assessed for the same violations based on where in the world a taxpayer lives. And even more unsurprisingly, Bittner appealed the Fifth Circuit ruling to the U.S. Supreme Court, arguing that his FBAR penalties should have been assessed on a “per-form,” and not on a “per-account” basis. Where a taxpayer lives should not form the basis of a difference of over two million dollars in penalties for the exact same conduct.
The Supreme Court of the United States agreed to hear the case, so after this term taxpayers will face the same penalty regardless of where they live for the same conduct. What remains to be seen, however, is whether that penalty will be based on a per-account or per-form basis.
The Center for Taxpayer Rights was one of the several amicus curiae to file briefs in support of the petition and subsequently in support of Bittner. You can read the Center’s amicus curiae brief here. Bittner’s case illustrates just how absurd the per-account application can be. Mr. Bittner, a U.S. taxpayer who resided abroad and owned foreign companies, was not aware of the FBAR filing requirements. The government acknowledged that Bittner’s violations for the 2007-2011 (which was a failure to file five FBARs) was not willful and assessed non-willful penalties for 272 separate FBAR reporting violations, imposing an aggregate $2.72 million non-willful FBAR penalty.
The Center’s amicus brief focused on the absurdity of per-account penalty application, highlighting, through examples, how the failure to report the same amount of funds held in foreign accounts can result in disparate penalties because the non-willful penalty is arbitrarily being pegged to the number of accounts, which the statute does not require. Using examples, the brief also demonstrated how, in some circumstances, the aggregate non-willful penalties applied per-account for failure to file one form can easily exceed a willful penalty for failure to file the same form. And this is so even though the willful conduct is considered to be far more egregious than non-willful conduct and thus should be penalized more severely. Thus, the per-account approach results in a regressive penalty structure. The government attempted to rebut the Center’s comparison of the aggregate non-willful to willful penalties in its response brief, by shifting the focus to comparing “apples-to-apples” –- one willful violation to one non-willful violation on per account basis. But it failed to address the disproportionality of the aggregate willful vs. non-willful penalties imposed for failure to report accounts on one form.
The Center’s brief also posited that the individuals that are most affected by this absurd non-willful penalty application are the least culpable—foreigners or immigrants residing in the United States and U.S. taxpayers residing abroad. These groups of people are the most likely to be assessed non-willful penalties for the FBAR violations and are also more likely to have more than one foreign account. And yet, they are the most likely to end up being subject to economically devastating penalties for an inadvertent filing violation. This disproportionate impact on the least-culpable taxpayers is not justifiable and is certainly not supported by the legislative history of the penalty provision.
Finally, the Center argued that the rule of lenity mandates that the penalty provision be interpreted to apply per-form. The objective advanced by the rule of lenity is consistent with both congressional intent and the IRS’s obligation to administer and enforce tax laws justly and fairly. Congress has been making strides in taxpayer rights protection, including codifying specific taxpayer rights in the Taxpayer Bill of Rights. And interpreting this penalty provision by applying the rule of lenity would achieve the same protectionist goal. In its response brief, the government dismissed any arguments relating to the rule of lenity or any other canons of statutory construction, stating that the statute is not ambiguous and therefore there is no need to look beyond the language of the statute.
The Supreme Court heard oral arguments in Bittner on November 2 at 10:00 am, ET. During oral argument, the Center’s brief was cited on two occasions. You can listen to the oral argument at https://www.supremecourt.gov/oral_arguments/audio/2022/21-1195.