In United States v. Bittner, the IRS had sought to reduce to judgment about $3M of non-willful FBAR penalties, which had been assessed per account.
The taxpayer countered that non-willful FBAR penalties should have been assessed per form, not per account.
Recently, in a matter of first impression in the 5th Circuit, the district court of the Eastern District of Texas ruled in favor of the taxpayer on this issue.
The court found that non-willful FBAR penalties can only be assed by form, and not by account.
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Court’s Analysis
Here is some of the reasoning behind the Bittner court’s decision:
The ambiguity of the non-willful penalty statute
31 U.S.C. § 5321(a)(5)(A) & 31 U.S.C. § 5321(a)(5)(B)(i)
These sub-paragraphs of § 5321 authorize the Secretary of the Treasury (delegated to the IRS) to impose a civil penalty on any person who violates section 5314 (the FBAR filing requirement). That penalty “shall not exceed $10,000” per violation.
The ambiguity is: what is considered a violation? Is it the failure to report an account, or is it the failure to timely file the form? In the former interpretation, there could be multiple violations in the same year, while in the later there can only be one violation per year.
Looking for clues elsewhere
A familiar principle of statutory construction . . . is that a negative inference may be drawn from the exclusion of language from one statutory provision that is included in other provisions of the same statute.
In other words, if Congress includes certain language in one section of a statute but not in another, it shouldn’t be inferred that they forgot to include it, but rather that they intended not to include it.
31 U.S.C. § 5321(a)(5)(D)(i)–(ii) — Willful FBAR penalties
The willfulness provision provides a penalty for willful FBAR violations in an amount equal to the greater of $100,000 or 50 percent of either “the amount of the transaction” or “the balance in the account at the time of the violation.”
Congress therefore had a template for how to relate an FBAR reporting penalty to specific financial accounts, and the fact that it did not do so for non-willful violations is persuasive evidence that it intended for the nonwillful penalties not to relate to specific accounts.
The argument here is that in other sections, such as the willful FBAR penalties, Congress specifically referenced “account” when it intended to do so.
31 U.S.C. § 5321(a)(5)(B)(ii)(I)–(II) — Reasonable cause
This was particularly important, as the language in the reasonable cause section of § 5321 has been previously used in other decisions to essentially insert language into the non-willful penalty section.
Under the reasonable cause exception—§ 5321(a)(5)(B)(ii)—an individual who commits a non-willful FBAR violation is not assessed a civil penalty if that violation was due to reasonable cause and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.”
The argument that previously carried the day for the Government is that since the reasonable cause exception to non-willful penalties references “the balance in the account”, a violation of the non-willful penalty section should also be read as per account. The Bittner court turns that argument on its head.
Congress therefore related the reasonable cause exception to “balance in the account” and could have done the same when defining the non-willful FBAR violation and penalty. But it did not. Tellingly, Congress passed the non-willful civil penalty provision—§ 5321(a)(5)(B)(i)—and the reasonable cause exception together. They are part of the exact same statutory scheme, passed by the exact same Congress at the exact same time. Congress knew what it was doing when it drafted the non-willful civil penalty without any reference to “account” or “balance in the account,” and the Court will presume that Congress acted intentionally in doing so.
The Government has not provided any good reason for why the exception to a rule should somehow inform the calculation of the penalty for a violation of that rule…Congress can forgive non-willful FBAR violations any way it likes—even in ways that have nothing to do with the underlying violation. And why Congress elected to forgive non-willful FBAR violations in the particular way it did is not the issue before this Court; any attempt by this Court to comment on why the reasonable cause exception mentions “balance in the account” while the penalty provision does not would be pure conjecture.
To conclude, Congress used the word “account” or “accounts” over one hundred (100) times throughout the BSA. But remarkably, it omitted any mention of “account” or “accounts” in § 5321(a)(5)(A) and (B)(i).
Conclusion
It is good to see that the court resolved this legal ambiguity in favor of the taxpayer. The decision was good one also for policy reasons:
- It protects taxpayers from arbitrary and capricious decisions such as, for example, whether to assess a $60,000 penalty or a life-changing $3M penalty for the same type of violation;
- It prevents the IRS from being able to assess huge willful-like penalties with no burden of proof other than to show that the taxpayer had a FBAR filing obligation and didn’t file; and
- It will not reduce the incentive for taxpayers to comply with FBAR filing requirements. If a taxpayer is non-willful, then they did not know they had an FBAR filing requirement in the first place. No amount of penalties can change that.