The circuit court ruled that the law imposes a penalty on the failure to report a qualifying account, not the failure to file an FBAR.
As a result, the court of appeals stated the $10,000 penalty cap applies on a per-account, not a per-form basis. The U.S. Supreme Court ruled that the $10,000 maximum penalty for the non-willful failure to file an FBAR report accrues on a per-report, not a per-account basis.
Each person with a financial interest in a financial account in a foreign country is required to file with the Secretary of the Treasury a Report of Foreign Bank and Financial Accounts (FBAR) on or before June 30 of each year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year. The FBAR report discloses information about each qualifying foreign account. A person who fails to report when required may be subject to a penalty of up to $10,000 for a non-willful violation. For a willful violation, the maximum penalty increases to the greater of $100,000 or 50% of the amount of the transaction, when the violation involves a transaction, or the balance in the account at the time of the violation.
The taxpayer in this case was born in Romania, but immigrated to the United States and was naturalized in 1987.
In 1990, he returned to Romania where he became a successful businessman and investor. He maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein. He was unaware that as a U.S. citizen, he was required to report his interests in certain foreign accounts. Consequently, he never filed FBARs while living in Romania.
He returned to the U.S. in 2011. Upon learning of his reporting obligations, he hired a CPA who filed FBARs for the years 2007 to 2011. Penalties for years prior to 2007 had expired due to the statute of limitations. His FBARs disclosed all foreign bank account information and balances.
In June 2017, the IRS assessed $2.72 million in penalties for non-willful violations, $10,000 for each unreported account from 2007 to 2011 (61 accounts in 2007, 51 in 2008, 53 in 2009, 53 in 2010, and 54 in 2011).
The taxpayer sued the government arguing that his violations were due to reasonable cause and therefore could not be penalized under 31 U.S.C. section 5321, that the maximum penalty allowed for a non-willful reporting violation is $10,000 per annual FBAR form, and that the penalties as assessed violated the excessive fines clause of the 8th Amendment to the U.S. Constitution.
The District Court held that the $10,000 maximum penalty for a non-willful violation applies on a per-form basis.
Having thus interpreted the statute, it deemed the 8th Amendment defense moot. The court also rejected the reasonable-clause defense and ordered the taxpayer to pay $50,000 ($10,000 for each year from 2007 to 2011). Both the government and the taxpayer appealed the decision to the 5th Circuit Court of Appeals.The 5th Circuit ruled in favor of the government. The taxpayer appealed the decision to the U.S. Supreme Court.
The Supreme Court noted that 31 U.S.C. section 5314 does not speak of accounts or their number but rather the legal duty to file reports which must include various kinds of information about an individual’s foreign transactions or relationships.Violation of section 5314’s reporting obligation is binary. One files a report in the way and to the extent the Secretary of the Treasury prescribes, or one does not. Multiple willful errors may establish a violation of section 5314 but even a single mistake, willful or not, constitutes a section 5314 violation. The only distinction the law draws between a report containing a single mistake and one containing multiple mistakes concerns the appropriate penalty.
Section 5321 (of 31 U.S.C.) authorizes the Secretary of the Treasury to impose a civil penalty of up to $10,000 for any violation of section 5314. The non-willful penalty provision does not speak in terms of accounts but rather pegs the quantity of non-willful penalties to the quantity of violations. Section 5314 provides that a violation occurs when an individual fails to file a report consistent with the statute’s commands. Multiple deficient reports may yield multiple $10,000 penalties, and even a seemingly simple deficiency in a single report may expose an individual to a $10,000 penalty. But penalties for non-willful violations accrue on a per-report, not a per-account basis.
Willful violations do tailor penalties to accounts.
Section 5321 specifically addresses a subclass of willful violations that involve a failure to report the existence of an account or any identifying information required to be provided with respect to an account. In such cases, the Secretary of the Treasury may impose a maximum penalty of either $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater.
The government argued that because Congress explicitly authorized per-account penalties for willful violations, the Court should infer that Congress meant to also do so for non-willful violations. The Court stated the government’s interpretation defies a traditional rule of statutory construction. When Congress includes particular language in one section of a statute and omits it from a neighbor, the Court normally understands that difference in language to convey a difference in meaning.
Here the statute twice provides evidence that when Congress wished to tie sanctions to account-level information, it knew exactly how to do so. Section 5321(a)(5) (C) and (D)(ii) provides penalties for certain willful violations on a per-account basis. Section 5321(a)(5)(B)(ii) states a person may invoke the reasonable cause exception only on a showing of per-account accuracy. In contrast, the statute does not state that the Secretary of the Treasury may impose non-willful penalties on a per-account basis.
The Court ruled that the non-willful failure to file a legally compliant report is one violation carrying a maximum penalty of $10,000.
