Supreme Court Rules Against IRS on Foreign Account Reporting Penalties

Legal Sidebari

Supreme Court Rules Against IRS on Foreign
Account Reporting Penalties
March 20, 2023
Federal law requires U.S. persons with a financial interest in or signature or other authority over foreign
financial accounts totaling more than $10,000 to report these accounts by filing a Report of Foreign Bank
and Financial Accounts, commonly known as an FBAR, each year. The IRS may levy civil penalties of up
to $10,000 for each non-willful violation of the reporting requirement. On February 28, 2023, the U.S.
Supreme Court held that this maximum penalty applies to each untimely or inaccurate annual FBAR
form, rather than to each foreign account not properly reported. In the case before the Court, the IRS had
assessed $2.72 million in per-account penalties based on five years of untimely FBAR forms. The Court’s
holding limits the maximum total penalty that may be assessed for those five untimely filings to $50,000,
or $10,000 for each untimely annual report. This Legal Sidebar discusses the relevant penalty provisions
and analyzes the Court’s decision.
Reporting Requirements
Congress enacted the Bank Secrecy Act (BSA) in part to address the serious and widespread use of
foreign financial institutions to evade domestic criminal, tax, and regulatory requirements. The BSA
requires U.S. citizens, residents, and entities to report—independent of any tax obligations—certain
foreign financial transactions, relationships, and accounts. One provision of the BSA, 31 U.S.C. § 5314,
establishes the reporting requirements, empowering the Secretary of the Treasury to adopt implementing
regulations. One of the regulations adopted by the Secretary, 31 C.F.R. § 1010.350, requires U.S. persons
with a financial interest in or signature or other authority over foreign financial accounts totaling more
than $10,000 to file an FBAR each year listing details regarding all foreign accounts. For individuals with
more than 25 foreign accounts, Section 1010.350 requires them to provide more limited information on
the FBAR and have the detailed information concerning each account available on request.
Congress amended the BSA in 1986, giving the Secretary of the Treasury authority to impose civil
penalties for willful violations of Section 5314, including foreign account reporting requirements. In the
American Jobs Creation Act of 2004, Congress expanded the available penalties to reach non-willful
violations.
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The civil penalties section as amended (31 U.S.C. § 5321(a)(5)) provides that the Secretary may impose a
penalty “on any person who violates, or causes any violation of, any provision of section 5314.” For non-
willful violations, “the amount of any civil penalty imposed . . . shall not exceed $10,000.” If any
violation is due to reasonable cause and “the amount of the transaction or balance in the account at the
time of the transaction was properly reported,” no penalty shall be imposed. For willful violations, the
maximum penalty is “the greater of $100,000 or 50 percent of the amount determined under subparagraph
(D).” Subparagraph (D) provides that, “in the case of a violation involving a failure to report the existence
of an account” or related identifying information, the relevant amount is the balance in the account at the
time of violation. The maximum penalty for a willful violation is thus the greater of $100,000 or 50% of
the balance of the account at the time of violation. The reasonable cause exception does not apply to
willful violations. The IRS must assess any civil penalty, willful or non-willful, within six years of the
violation. For violations occurring after November 2, 2015, the maximum penalty values are adjusted for
inflation.
Prior to the Supreme Court’s decision, the IRS interpreted both the $10,000 maximum penalty for non-
willful violations and the $100,000 element of the maximum penalty for willful violations as applying on
a per-account basis, that is, to each unreported or improperly reported foreign account. Several foreign
account holders accused of non-willful violations challenged the IRS’s position, arguing that the
maximum penalty for non-willful violations applies on a per-report (or per-form) basis, so that the
maximum penalty for non-willfully failing to file an accurate FBAR in any particular year is $10,000,
regardless of the number of foreign accounts the regulations required the defendant to report.
The U.S. Court of Appeals for the Ninth Circuit agreed with a defendant in one such case and adopted the
per-report interpretation. In United States v. Bittner, the U.S. Court of Appeals for the Fifth Circuit
endorsed the per-account interpretation urged by the IRS. Bittner successfully petitioned for a writ of
certiorari to the U.S. Supreme Court. These developments were discussed in a prior Legal Sidebar.
United States v. Bittner
Alexandru Bittner was born in Romania and became a naturalized citizen of the United States in 1987. He
returned to Romania in 1990 and became a successful businessman with numerous financial accounts in
several European countries. Bittner learned of his FBAR obligations on returning to the United States in
2011, at which time he filed the required FBAR forms. The IRS assessed $2.72 million in penalties for
272 non-willful violations based on Bittner’s failure to report between 51 and 61 accounts that were open
in each of the five years—2007 through 2011—for which penalties could still be levied. In other words,
the IRS assessed the maximum $10,000 penalty for each of the 272 accounts that Bittner should have
reported on five untimely filed FBAR forms. Bittner challenged the IRS’s penalty assessment, and a
federal district court ruled in his favor, adopting the per-report interpretation of the penalty provisions.
The Fifth Circuit reversed, upholding the IRS’s assessment.
The Supreme Court, in a 5-4 decision, held that non-willfully failing to file a timely or accurate FBAR
form is a single violation of the BSA subject to a maximum penalty of $10,000. Justice Gorsuch wrote the
opinion for the Court adopting the per-report interpretation, joined by Chief Justice Roberts and Justices
Alito, Kavanaugh, and Jackson. As discussed further below, Justice Gorsuch’s opinion included a section
discussing the rule of lenity joined only by Justice Jackson. Justice Barrett dissented, joined by Justices
Thomas, Sotomayor, and Kagan.
Majority Opinion
The majority concluded that the per-report approach is the best reading of the BSA. Justice Gorsuch
began with the text of Section 5314. He explained that the text “does not speak of accounts or their

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number,” and that the word “account” does not appear. In his view, the section creates a binary obligation
where one “either files a report ‘in the way and to the extent the Secretary prescribes,’ or one does not.”
Turning to the non-willful penalty provision of Section 5321, Justice Gorsuch again emphasized the lack
of any use of the term “account.” Instead, the statutory maximum penalty is tied to a violation, which
Justice Gorsuch identified as the binary, per-report obligation.
Justice Gorsuch next rejected the government’s arguments that the account-based elements of the willful
penalty provisions and the reasonable cause exception supported the IRS’s interpretation. He invoked the
expresio unius canon of construction, which he framed as providing that “[w]hen 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.” He thus understood the contrast between the
absence of account-specific language in the non-willful penalty provision and the presence of such
language elsewhere in Section 5321 to indicate that Congress did not intend the non-willful penalty to
apply on a per-account basis. He found additional support in the drafting history of the section, because
the non-willful penalty provision was added to Section 5321 after the willful penalties.
Justice Gorsuch then addressed Department of the Treasury and IRS documents describing FBAR
penalties, collecting several such documents that use language consistent with the per-report
interpretation of the non-willful maximum penalty. He explained that while these guidance documents
could not control the Court’s analysis, the Court could weigh them in assessing the persuasiveness of the
government’s contrary interpretation, citing Skidmore v. Swift & Co. Justice Gorsuch also looked to
Congress’s statement of purpose in the BSA. The emphasis on “reports” or “records,” Justice Gorsuch
concluded, shows that the relevant legal duty is the filing of required reports. Similarly, he contended that
the fact the regulations permit those with more than 25 accounts to provide fewer initial details suggests
that the filing of reports is the focus of the regulatory scheme, rather than “to ensure the presentation of
every detail or to maximize revenue for each mistake.”
Justice Gorsuch also reasoned that the per-account interpretation could lead to anomalies in application.
Individuals with low foreign account balances across several accounts would face greater potential
penalties for non-willful violations than those with an extremely high balance in a single account. The
less-stringent initial reporting requirement for those with more than 25 accounts could place those with
fewer accounts in more jeopardy than those with a very high number of accounts. Willful violators with
certain balances might face lower potential penalties than some non-willful violators.
Rule of Lenity
In the final portion of his opinion, joined only by Justice Jackson, Justice Gorsuch argued that if any
doubt remained about the best reading of the BSA, the rule of lenity would favor the per-report approach.
“Under the rule of lenity,” he explained, the Supreme Court has held that “statutes imposing penalties are
to be ‘construed strictly’ against the government and in favor of individuals.” The IRS argued that
precedent applying the rule of lenity in the Internal Revenue Code should not apply in the BSA, but
Justice Gorsuch disagreed and noted applications of the rule to a variety of civil penalty provisions.
Justice Gorsuch reasoned that application of the rule of lenity was particularly appropriate in Bittner
because of fair-notice concerns and potential criminal ramifications. First, confusion among experienced
tax professionals and the government’s guidance documents suggested a fair-notice problem, raising due
process concerns. Second, 18 U.S.C. § 5322 provides criminal sanctions for willfully violating the BSA,
so a broad construction of “violations” in Section 5321 could produce large criminal penalties under
Section 5322.

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Dissent
The dissenting Justices would have adopted the per-account interpretation as the most natural reading of
the BSA. Justice Barrett argued that Section 5314 conditions reporting requirements on the maintenance
of “a relation” with a foreign financial agency, such as an account. Furthermore, she contended, Section
5314’s requirements for detailed reporting of any relationship and the maintenance of records are best
understood in terms of specific accounts.
Justice Barrett understands Section 5321 to show that Congress treated a “violation” as account-specific
throughout the section, establishing a pattern that extends to the non-willful penalty provision because
identical words used in different parts of the same statute are generally presumed to have the same
meaning. She argued that the expressio unius canon is inapplicable where, as here, context suggests
otherwise. In the dissenters’ view, Congress explicitly referenced “accounts” in the reasonable cause
exception and the willful penalty provision only because it was conditioning something on the balance of
an account. Congress did not use “account” in the non-willful penalty provision because there was no
such condition, not because it was varying the understanding of a violation.
According to the dissent, the majority wrongly conflated the “reports” required by Section 5314 with the
FBAR form. Justice Barrett argued that the implementing regulations make this distinction between
account-based reports and the procedural mechanism of the FBAR form. She also critiqued the majority’s
citation of guidance documents, reading of the BSA’s purpose, and understanding of the regulatory
treatment of persons with more than 25 accounts. Justice Barrett characterized the majority’s discussion
of potentially absurd results that might flow from a per-account interpretation as ranging “from the
overstated to the incorrect,” and “in any event of limited relevance to the statutory interpretation
question” before the Court.
Finally, Justice Barrett noted that while Bittner faced a substantial penalty under the per-account
interpretation, the BSA offers the reasonable cause exception as a safe haven. Bittner argued for the
application of that exception before the lower courts, but those courts concluded that Bittner did not
exercise ordinary business care and prudence in ascertaining the reporting obligations for his complex
business interests. Bittner did not seek review of those conclusions in the Supreme Court.
Considerations for Congress
The Bittner opinions reflect the close resolution of a difficult question of statutory interpretation. The
result, while divided, resolves the circuit split and establishes the per-report approach as the governing
interpretation of the penalty for non-willful violations of the BSA’s foreign account reporting
requirements.
Other questions concerning FBAR-related penalties may be raised. In a footnote, Justice Gorsuch noted
that the question of “[w]hat, if any, mens rea the government must prove to impose a ‘non-willful’
penalty” was not before the Supreme Court. In another case, a petitioner has asked the Court to address
how “willfullness” should be determined for alleged willful violations. In Bittner, the government argued
that the annual FBAR form is a creature of regulation and that the broad language of Section 5314 would
permit it to adopt alternative reporting requirements with greater frequency or account specificity
requirements. Any such efforts may raise new legal questions.
If Congress prefers that non-willful penalties be subject to a per-account maximum, it could amend the
BSA to specify that approach. It could also consider broader amendments to the civil penalty provisions
for foreign account reporting violations or revisions to the reporting requirements themselves to resolve
some of the other interpretive disputes outlined above. Considerations in any such effort would include
the criminal, tax, and national security goals of the BSA along with the regulatory burdens imposed on

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those required to file reports. Congress could also do nothing, accepting the prevailing interpretation of its
statutory language.

Author Information

Alexander H. Pepper

Legislative Attorney




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