Foreign Bank Account Penalty Issue: Fifth Circuit Court of Appeals Taking a Per-Account View
By: Coleman Jackson, Attorney & Counselor at Law and Certified Public Accountant
December 21. 2021
The Fifth Circuit:
The United States Court of Appeals for the Fifth Circuit is the federal court that hears appeals from federal court decisions issued by the federal district courts in Texas, Louisiana and Mississippi. That means that the court decisions of the 5th Circuit is binding on the federal courts located in these three states. Fifth Circuit court decisions are binding on residents of Texas, Louisiana and Mississippi.
The Court Decision Discussed in this Blog:
Recently in an appeal from the United States District Court for the Eastern District of Texas, The Fifth Circuit ruled that the penalty on a taxpayer who fails to report interests in foreign bank accounts applies on a per-account basis, not a per-form basis. See U.S. v Bittner (5th Cir. 2021).
Brief of the Law:
The United States Congress enacted the Bank Secrecy Act in 1970. The Bank Secrecy Act (BSA) is codified as amended at 31 U.S.C. § 5311. The BSA as implemented requires specified persons, which includes United States Citizens and Green Card Holders, with a financial interest in a financial account in a foreign country to report such relationship to the Commissioner of Internal Revenue for each year in which such relationship exists. The specified person (U.S. Citizen or Green Card Holder) is considered as having a financial interest in a foreign account in which the person owns or have signatory authority; or any foreign account of any corporation in which the person has an ownership interest greater than fifty percent. The BSA also applies to beneficiary ownership and other interest in foreign trusts.
The prescribed reporting form is currently Form 114 which is required to be filed on or before April 15th of each calendar year with respect to foreign financial accounts with balances exceeding $10,000 at anytime during the preceding calendar year. The $10,000 balance can be in a single foreign account or a combination of multiplesmaller foreign accounts.Form 114 is commonly referred to as the FBAR. The FBAR is filed with the Financial Crimes Network. The Financial Crimes Network is an agency of the U.S. Department of Treasury. FINCen is not the Internal Revenue Service. The FBAR is not filed with the IRS.
The Bank Secrecy Act empowers the Secretary of the Treasury to “impose a civil money penalty on any specified person (U.S. Citizen and Green Card Holder) who violates, or causes any violation of, any provision of 31 U.S.C. § 5314.” The penalty regime and authority are set forth in 31 U.S.C. §5321. Different penalties apply depending upon whether the violation of the BSA is determined to be non-willful or willful. The maximum penalty for a non-willful violation is $10,000. See 31 U.S.C. §5321(a)(B)(i). The maximum penalty increases to the greater of $100,000 or fifty percent of the amount of the transaction when the violation involves a transaction; or the balance in the account at the time of the violation when the violation involves failure to report the existence of the foreign account. See 31 U.S.C. §5321(a)(5)(C)(i) and §5321(a)(5)(D). In the event the taxpayer properly reported the foreign account a reasonable cause defense is sometimes available for non-willful violations of the BSA.
Brief of the Facts in the case—U.S. v Bittner (5th Cir. 2021):
Bittner the defendant in the case before the 5th Circuit. He was born in Romania in 1957 and became a naturalized citizen of the United States in 1987. In summary, he returned to his native Romania in 1990, became a very successful businessman and investor. He maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein using numbered accounts “[t]o hide [his] name” according to the court record. Further, the court’s record shows that Bittner used accountants to maintain financial records and ensure compliance with Romanian tax laws. According to the Court’s findings of facts, Bittner was unaware that as a United States citizen he had to report his interests in certain foreign bank accounts to the United States government. Bittner never filed FBARs while living in Romania.
Bittner returned to the United States in 2011 and learned that he was suppose to file FBARs while residing in Romania. He hired a Certified Public Accountant who prepared and filed his delinquent FBARs in May 2012. The court record shows that Bittner hired a second Certified Public Accountant who amended his original filings and disclosed each unreported account from 2007 through 2011 indicating that he had 61 accounts in 2007, 51 in 2008, 53 in 2009, 53 in 2010 and 54 in 2011. It’s not clear from the court’s decision how the Internal Revenue Service learned of these late FBAR filings and the related amendments, but let it be clear; however, that the privacy enjoyed by federal tax returns under U.S. Federal Tax Law are not bestowed on FBARs. FBARs filed with the Financial Crimes Network are routinely available to federal law enforcement agencies. Congress enacted the Bank Secrecy Act with the primary purpose of curbing “serious and widespread use” of foreign financial accounts to evade U.S. taxes. These laws are also designed to combat money laundering, nefarious financial activity and other unlawful financial activity across international borders. So, it is not surprising that the IRS would learn of these delinquent FBAR filings. Regardless of how the IRS learned of the violations, “the IRS assessed $2.72 million in penalties against Bittner for non-willful violations of section 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.” A lawsuit ensued where the U.S. government sought a judgment on the assessed FBAR penalties. Bittner argued at the trial court level that no penalty was due because his violations were due to a reasonable cause and therefore, he could not be penalized for a non-willful violation. He also argued in the U.S. District Court for the Eastern District of Texas that the non-willful penalty should be assessed per-form and not per-account as the IRS assessed. In summary, the district court ruled in Bittner’s favor stating that the $10,000 maximum penalty for a non-willful violation applies on a per-form basis,butthe court rejected several other arguments that Bittner made to the Court. The parties appealed to the Fifth Circuit Court of Appeals.
What the 5th Circuit Said:
This is in brief how the Fifth Circuit Court of Appeals ruled as to whether the FBAR penalty for a non-willful violation of the BSA is assessed on a per-form basis or per-account basis:
The BSA’s “penalties attach only upon violation of regulations promulgated by the Secretary; if the Secretary were to do nothing, the Act itself would impose no penalties on anyone. “It is the failure to file an annual FBAR that is the violation contemplated” by section 5321(a)(5)(A).
Analysis and Decision of the 5th Circuit: Neither the BSA ‘s “text nor structure separates the excuse from the violation. On the contrary, if the exception of non-willful breaches applies on a per-account basis, then logically, the violations the exception forgives must arise on a per-account basis too. Framed in terms of “the transaction” and “the account,” the reasonable-cause exception most naturally reads as excusing the failure to report a transaction or account, not the failure to file an FBAR. This reading supports our view that the underlying “violation” in section 5321(a)(5)(A), cannot be read on a per-form basis. The 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 accountnot the failure to file an FBAR. Therefore, the $10,000 penalty cap applies on a per-account, not a per-form, basis.”
What Are Some Lessons and Take Aways from the Bittner Case?
As I stated in the beginning of this blog, the United States Court of Appeals for the Fifth Circuit hear appeals from federal courts with jurisdiction over U.S. Citizens, Green Card Holders and others residing in Texas, Louisiana and Mississippi. Therefore, the court’s ruling that the IRS is permitted under the regulations of the BSA to assess FBAR penalties on a per-account basis is binding on all of the federal courts within the 5th Circuit. The failure to report a qualifying foreign bank account is subject to the $10,000 penalty cap on a per-account basis for non-willful violations of the BSA by residents of Texas, Louisiana and Mississippi.
FBAR matters carry potentially criminal exposures that are not discussed in this particular blog because this case was a civil law matter. Perhaps foreign bank account and assets reporting is more of a legal matter than accounting matter that Certified Public Accountants are used to handling since the Financial Crimes Network is more of a law enforcement agency of the U.S. Department of Treasury than the Internal Revenue Service. Both agencies work together on foreign account matters; but, remember—Form 114 is filed with the Financial Crimes Network.
This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.
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