The U.S. Supreme Court has ruled that the $10,000 maximum penalty under the Bank Secrecy Act (BSA) for the nonwillful failure to file a compliant Report of Foreign Bank and Financial Accounts (FBAR) accrues on a per-report, not a per-account, basis. This ruling settles a split in authority between the Ninth Circuit (J. Boyd, CA-9, 2021-1 ustc ¶50,112) and the Fifth Circuit (A. Bittner, CA-5, 2021-2 ustc ¶50,242).
Background
U.S. citizens and residents must keep records and/or file reports when the person makes a transaction or maintains a relation for any person with a foreign financial agency (31 USC 5314). Each person with a financial interest in a financial account in a foreign country must report the relationship to the IRS for each year the relationship exists by providing specified information on and filing the FBAR. The FBAR generally must be filed by June 30 of each calendar year for foreign financial accounts over $10,000 maintained during the previous calendar year (31 C.F.R. 1010.350, 1010.306). If the person fails to file the FBAR, the IRS can impose a penalty of up to $10,000 for nonwillful violations, unless the violation was due to reasonable cause (31 USC 5321).
Here, the taxpayer nonwillfully failed to report his interests in multiple foreign bank accounts on annual FBAR forms for several years. The government assessed $2.72 million in civil penalties against the taxpayer: $10,000 for each unreported account each year for five years. The district court found the taxpayer liable and denied his reasonable cause defense, but reduced the assessment to $50,000 because it determined that the $10,000 maximum penalty attached to each failure to file an annual FBAR, not to each failure to report an account.
The Fifth Circuit ruled that the text, structure, history, and purpose of the relevant statutory and regulatory provisions showed that the “violation” of 31 USC 5314 contemplated by the 31 USC 5321 penalty was the failure to report a qualifying account, not the failure to file an FBAR. Therefore, the $10,000 penalty cap applied on a per-account basis, not a per-report basis.
FBAR Penalty Per Report
In the majority opinion by Justice Gorsuch, the Court determined that 31 USC 5314, which delineates an individual’s legal duties under the BSA, does not mention accounts or their number, but instead addresses the legal duty to file reports which must include various kinds of information about an individual’s foreign transactions or relationships. Further, 31 USC 5321 authorizes the Treasury Secretary to impose a civil penalty of up to $10,000 for “any violation” of section 5314. The nonwillful penalty provision in section 5321 does not speak in terms of accounts or their number, but instead pegs the quantity of nonwillful penalties to the quantity of violations. While multiple deficient reports may yield multiple $10,000 penalties, and even a simple deficiency in a single report may expose an individual to a $10,000 penalty, the Court ruled that the penalties for nonwillful violations accrue on a per-report basis, not a per-account basis. Also, while section 5321 does tailor penalties to accounts for certain cases that involve willful violations, Congress did not say in section 5321 that the government may impose nonwillful penalties on a per-account basis.
The Court found other contextual clues that cut against the government’s arguments. First, the government’s guidance to the public in various warnings, fact sheets, and instructions seemed to tell the public that the failure to file a report represented a single violation exposing a nonwillful violator to one $10,000 penalty. Also, when Congress amended the law in 2004 to authorize penalties for nonwillful violations, it did not apply language from previous amendments to willful penalties to authorize per-account penalties for nonwillful violations.
The Court also observed that other features of the BSA and its regulatory scheme suggested that the law aimed to provide the government with a report sufficient to tip it to the need for further investigation, not to ensure the presentation of every detail or maximize revenue for each mistake. Finally, the Court stated that the government’s per-account penalty reading of the statute invited anomalies, such as subjecting willful violators to lower penalties than nonwillful violators, that are avoided by reading the nonwillful penalty to apply on a per-report basis.
The Court concluded that, best read, the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.
Dissenting Opinion
Justice Barrett’s dissent (joined by Justices Thomas, Sotomayor, and Kagan) stated that the most natural reading of the statute establishes that each failure to report a qualifying foreign account constitutes a separate reporting violation, so the government can levy penalties on a per-account basis.
