The penalty for nonwillful failure to file a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), is assessed per FBAR not timely or properly filed rather than on the number of foreign accounts not reported, a district court held, granting an account holder's motion for partial summary judgment. The court also granted partial summary judgment to the government on the issue of whether the account holder had reasonable cause for failing to file FBARs.
Facts: Alexandru Bittner emigrated from Romania to the United States in 1982 and became a naturalized U.S. citizen in 1987 or 1988. He moved back to Romania in 1990 and lived there until 2011. He did not renounce his U.S. citizenship but maintained dual U.S.-Romanian citizenship. In Romania, he operated a variety of lucrative businesses and invested in real estate and other assets. He filed a number of U.S. income tax returns during that period as well but did not file FBARs for 1996—2011 until 2012, despite maintaining an aggregate balance of more than $10,000 in foreign financial accounts.
The IRS assessed FBAR penalties for 2007 through 2011 totaling $2.72 million on 272 accounts. The government filed suit and moved for partial summary judgment, seeking penalties of $1.77 million, based on a revised number of accounts for 2007—2010. Bittner also moved for partial summary judgment.
Issues: 31 U.S.C. Section 5321(a)(5) (part of the Bank Secrecy Act of 1970, P.L. 91-508, as amended) prescribes a civil penalty of up to $10,000 for a nonwillful violation of any provision of 31 U.S.C. Section 5314 unless the violation was due to reasonable cause and the amount of the transaction or balance in the account at the time of the transaction was properly reported. 31 U.S.C. Section 5314 and associated Treasury regulations require U.S. persons with a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country to file an FBAR with FinCEN for each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.
Bittner argued in part that the penalties should be calculated on the basis of the number of FBARs not timely filed. The government argued that they should be calculated on the basis of the number of accounts. The court stated the dispute was an issue of first impression for the Fifth Circuit.
Holding: Examining the statutory language concerning a violation within the meaning of 31 U.S.C. Section 5321(a)(5), the court concluded that the failure to file an annual FBAR is the relevant nonwillful violation. It noted that 31 U.S.C. Section 5321(a)(5)(D) does define a willful violation in terms of an account and a willfulness penalty by reference to the balance in that account at the time of the violation. Thus, the court reasoned, "Congress clearly knew how to make FBAR penalties account specific." Noting also that the willfulness provision predated Congress's addition of the nonwillfulness regime in 2004, the court reasoned by negative inference that because Congress did not similarly prescribe nonwillfulness penalties by reference to an account, "it intended for the non-willful penalties not to relate to specific accounts."
The court also noted that, according to the FBAR instructions, no form is required if "the aggregate value of the accounts did not exceed $10,000," on which the number of accounts to be reported would have no direct bearing.
The court rejected the government's argument that because the reasonable-cause exception for nonwillful violations refers to the "balance in the account," the violation itself is per account, stating that the penalty and its exception are not inherently connected. Similarly, the court disagreed with the government's argument that the nonwillful provision should be interpreted the same way as that of willful violations, because the former was added to modify the latter. The court reasoned that Congress may have "had perfectly good reasons" for choosing to compute willful and nonwillful penalties differently and that the difference in the language of the willful and nonwillful provisions might reflect those differences.
Consequently, the court granted Bittner's motion, holding he could be required to pay no more than the maximum $10,000 penalty for each year he nonwillfully failed to timely or properly file an FBAR. In so holding, the court acknowledged it was disagreeing with the holding in Boyd, No. CV 18-803-MWF (C.D. Cal. 4/23/19). In that case, a district court upheld the IRS's assessment of 13 nonwillful FBAR penalties for 14 accounts the account holder held in 2010 (the case is currently on appeal to the Ninth Circuit).
The court, however, rejected Bittner's claim that an issue of material fact existed concerning whether he had reasonable cause for the violations because he was educated outside the United States; was not trained in accounting, tax law, or finances; had no close contact with the United States during the period in question; and promptly undertook to correct the violations once he learned of them; or because he relied upon a CPA's advice. The record showed Bittner was a sophisticated businessman and investor and was aware of at least some of his U.S. tax obligations, the court stated. Furthermore, although he claimed he learned about the FBAR requirements in 2012 after consulting an accountant when he returned to the United States and attempted to remedy them at that time, this was long after his first violation.
Thus, the court also partially granted the government's motion, finding that Bittner's violations were without reasonable cause.
- Bittner, No. 4:19-cv-415 (E.D. Tex. 6/29/20)
— By Paul Bonner, a JofA senior editor.