Case: Bittner v. United States, No. 21-1195., 2023 BL 63500 (U.S. Feb. 28, 2023), Court Opinion
Analysis: Alexandru Bittner, the petitioner, immigrated to the United States in 1982, working first as a dishwasher, then as a plumber. Bittner became a U.S. citizen, though he returned to Romania in 1990. During this period outside of the United States, Bittner failed to file foreign bank account report (FBAR) forms. Upon his return to the United States in 2011, Bittner became aware of his filing obligations and attempted to rectify the matter by preparing and filing the required reports for tax years 2007 through 2011.
The stated purpose of the Bank Secrecy Act (BSA) is “to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.”1 Section 5314 of the Bank Secrecy Act directs U.S. residents or citizens to file reports when they maintain foreign and/or offshore bank accounts.
After Bittner’s FBAR reports were filed, the government identified that there were errors in the reports — namely that 25-plus accounts in which Bittner either had a financial interest or signature authority were not disclosed. After being notified of this error, Bittner hired a new accountant to assist in amending these FBARs.
Despite the regulations that allow filers with either a financial interest in or signature authority over more than 25 accounts to simply disclose the number of accounts, Bittner and his new accountant reported details of every account — 61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011. The IRS accepted these updated filings and, though not questioning the accuracy of the filings, assessed a $2.72 million nonwillful penalty under Section 5321 of the BSA.
Section 5321 of the BSA directs the secretary of the treasury to penalize those U.S. residents or citizens who violate the regulations and, through § 5318(a), has given the secretary of the treasury authority to administer these penalties.
Bittner challenged the penalty, arguing that the BSA authorizes a maximum penalty for nonwillful violations of $10,000 per report, not $10,000 per account. The District Court agreed with Bittner, but upon appeal, the Fifth Circuit upheld the IRS’ $2.72 million assessment. In the decision, the Fifth Circuit noted that a penalty may be imposed for “any violation” of the provisions of section 5314. The court went on to further note that the term “violation” “most naturally reads as referring to the statutory requirement to report each account — not the regulatory requirement to file FBARs in a particular manner” (emphasis added). The Fifth Circuit’s interpretation, though seemingly harsh and punitive, appeared to be consistent with the text of the BSA and regulations.
The Supreme Court’s decision, which was delivered by Justice Neil Gorsuch, reversed the Fifth Circuit decision, and held that, under the BSA, a taxpayer’s failure to file a compliant FBAR should be treated as one violation — not as a separate violation for each foreign account not timely reported. “Best read, the BSA treats the failure to file a legally compliant report as one violation … not a cascade of such penalties calculated on a per-account basis.”
The court further noted that it was “no surprise [that] the government seeks to turn this feature of the law to its advantage. Because Congress explicitly authorized per-account penalties for some willful violations, the government asks us to infer that Congress meant to do so for analogous non-willful violations as well.” The court was unpersuaded by the IRS’ argument, noting, “when Congress includes particular language in one section of a statute but omits it from a neighbor, we normally understand that difference in language to convey a difference in meaning (expressio unius est exclusio alterius).”
In addition to the court’s analysis of statute construction, stated purpose of the statute, and legislative intent, it was interesting to see that the human side of the law’s application was also considered. Justice Gorsuch noted that “the answer makes a difference, especially for immigrants who hold accounts abroad and Americans who make their lives outside the country,” thereby acknowledging (to a certain extent) the compliance burdens for those with international pixels in their tax picture.
Practitioners in this international space should be bolstered by this decision, as it allows for a much more reasonable and measurable penalty structure for those nonwillful taxpayers looking to come into compliance. There are questions, however, that practitioners must now consider:
- What is to be done in situations where cases are now closed and penalties have been paid since Bittner was filed?
- And the question at the forefront of my mind, can taxpayers file FBAR penalty refund claims to reclaim penalties paid in excess of the standard now decided on, and how far back can those claims go?
It remains to be seen how the IRS will clarify these points of contention, as no comment has yet been made. Analysts in the international tax space have noted that while the IRS allows for the claiming of refunds via the filing of Form 843, the FBAR penalty is authorized under the BSA, which falls outside the parameters of the Internal Revenue Code — so the question remains, would that be the route to go to recover seemingly overpaid penalties? The court’s decision at least offers some optimism for a more generous interpretation of FBAR penalties moving forward.
Rita Ryan leads Wolf’s International Tax Services Practice, where she focuses on tax planning and compliance for international holdings. Ryan has extensive experience advising clients on the tax aspects of cross-border business activities, structuring international investments, and the United States compliance obligations relating to these activities and investments for both entities and individuals. Ryan also works with other tax professionals as a trusted advisor to identify necessary reporting, advise on filings, or review work papers and prepared forms to ensure accuracy in this evolving international compliance landscape. Prior to joining Wolf, Ryan was an associate attorney at the law firm of Vacovec, Mayotte & Singer LLP, where she focused in the areas of international and domestic taxation, estate planning and tax controversy. Ryan is an adjunct professor at the Graduate Tax Program at Boston University School of Law, where she co-founded and co-teaches “Foreign Information Reporting and Withholding.” Ryan also teaches various other international tax topics for Strafford Publications, Tax Practice Pros and Wolters Kluwer.
1. 31 U.S.C. § 5311.