Civil Penalties and FBARs (2023)

Statute known colloquially as bank secrecypretendprovides for the assessment of civil monetary penalties ("CPM") in various contexts. One of them is foreign financial accounts. Any United Stateslicewith a financial interest or signing authority in a foreign financial account (including a bank account, brokerage account, mutual fund, foundation, or other type of foreign financial account) containing more than $10,000 is required underBSAannually report the account to the Ministry of Finance by electronic submission aReport of foreign banks and financial accounts(FBAR) for the Financial Crimes Enforcement Network (FinCEN).114.

A recent decision by the US Supreme Court,Bittner v. United States, eliminated some insecurities in himterritory.

Record

The FBAR is a calendar year report and must be filed no later than June 30 of the year following the calendar year being reported. The applicant must keep records of the account(s) in question for five years and be prepared to make them availableinspection.

The necessary contents for the deposit are:

1. the account number (or other name) of the foreign account and the name to which it is registered;
2. the name and address of the foreign bank or other person with whom the account is kept; and
3. type of account and its highest value at the time of the annual reportperiod.

The FBAR filing requirement applies to all United States persons with a direct and specific indirect interest or signature in a foreign financial account where the aggregate value of such accounts exceeds $10,000 per year.

Certain deposit exclusions are available, including the following United States persons or foreign financial accounts:

• Certain foreign financial accounts jointly owned by spouses
• United States persons included in the consolidated FBAR
• Correspondent/Ouraccounts
• Foreign financial accounts owned by a government body
• Foreign financial accounts owned by an international financial institution
• Owners and Beneficiaries of American Individual Retirement Accounts ("IRAs")
• Participants and beneficiaries of tax-deferred pension plans
• Certain persons with signature authority but no financial interest in foreign financialaccount
• Trustees (but only if a US person reports the account on an FBAR filed on behalf of the trust)
• United States Military Bank Foreign Financial Accounts

A complete overview of available exemptions is available on FBARinstructions.

The Ministry of Finance can evaluate aDEAfrom to10,000 dollarsfor everyonenot on purposeviolation of any provision of the FBAR;law.An issue on which IRS practice has been inconsistent—and on which lower federal courtsdivision—whether separate penalties or only one penalty should apply to a taxpayer who has multiple foreign accounts, which should be described in the annual FBAR filing. In other words, is the maximum CMP $10,000 per FBAR report or per foreign bank account?

The issue was recently resolved by the US Supreme CourtSud.The case involved a Romanian immigrant who became a naturalized American citizen.citizenand returned to Romania after the fall of the communist regime to take advantage of business opportunities. He had 272 foreign bank accounts in Romania. He operated his business for several years without knowing that he was subject to FBAR reporting requirements for all of these accounts, even though he was not a resident of the United States at the time. After learning of this request, he hired an accountant to prepare and file FBARs for tax years 2007 through 2011. The IRS assessed a $2.72 million penalty based on the theory that each unknown foreign account constituted a separate violation.

The Supreme Court has ruled that a person who willfully fails to file an FBAR is subject to a maximum CMP of $10,000 for each FBAR filing—tj.by reference, not by account. For a decision on such a relatively minor — and certainly technical — legal issueinterpretation,The court surprisingly split 5-4. The case has so far attracted little attention. The few media reports that have emerged have mostly focused on two unimportant details. One was a brief interruption of oral argument (in November 2022) by three abortion rights protesters in the courtroom (who may have been disappointed that the justices were not disturbed by the interruption). Another was the aspect of the "strange friends" vote, in which Justice Alito dissented with Justice Thomas and Justice Jackson who dissented with Justices Kagan and Sotomayor.

Writing for the majority, Justice Gorsuch relied on the plain language of the BSA. Section 5314 focuses on the legal obligation to file reports, which must include various types of information about a person's "transactions or relationships" abroad. Justice Gorsuch's opinion categorically noted: “Section 5314 does not address accounts or their number. The word "account" does not even appear, but the associated legal obligation is the obligation to depositReference."A § 5314 reporting violation is binary, the majority concluded: one either files a report "in the manner and to the extent prescribed by the Secretary" or not. Multiple intentional mistakes can give rise to a violation of §5314, but even one mistake, whether intentional or not, constitutes a violation of §5314.

The position of the Ministry of Finance was such because Congress had expressly approved sanctions on the accountdeliberate violations,A court should find that Congress intended to do the same for analogous inadvertent violations. However, that point of view was rejected as incompatible with the well-known rule of legal constructionthe expression of one is the exclusion of the other.In the willful violation provision, § 5321(a)(5)(D) and the "good cause" exception in § 5321(a)(5)(B)(ii), Congress specifically provided for penalties based on the bill, thereby proves that Congress knew how to do this but deliberately chose different language in §5321(a)(5)(B)(i).

Legislative history supports this conclusion. As originally enacted (1970), the BSA included penalties only for willful violations. In 1986, Congress authorized penalties under the bill for certain willful violations. When the BSA was amended again in 2004 to allow penalties for inadvertent violations, Congress could have—but did not—simply use language from the 1986 amendment to expand the bill's penalties for inadvertent violations.violations.

Finally, the majority held that the bill-for-bill interpretation, as applied to unintentional violations, was inconsistent with the intent of the FBAR provisions,tj.require certain reports and records to assist the government in various criminal and tax intelligence initiatives; This purpose of seeking information is fully accomplished by interpretation by exposure. To hold otherwise and allow non-intentional violations to be added to the bill could lead to an absurd result: an intentional infringer would face a lesser penalty than an inadvertent infringer.

A dissent composed by JusticeBarrett,highlighted the language in § 5314 that requires FBAR reporting when an individual has a relationship with a foreign financial institution or foreign bank account. This statutory focus on the relationship, the dissent argued, led to the conclusion that it is each relationship that triggers a separate penalty for an unintentional violation.

This interpretation, although overlooked by the dissenting judges, would still leave an ambiguity: is the "relationship" for this purpose with the institution maintaining the account or the account itself? In other words, one could plausibly argue that 272 accounts in one bank constitute nothing more than one "relationship".

Judge Gorsuch's majority opinion concluded with a brief briefDepartment(joined only by Justice Jackson) relying on the rule of leniency that, as the prior case has repeatedly explained, "statutes imposing sanctions must be `strictly construed' against the government and in favor of private individuals." The main purpose of the leniency rule, Justice Gorsuch wrote, is to ensure that taxpayers receive "fair warning ... in language that ordinary people will understand, of what the law intends to do," an ideal that runs counter to the absence of any "discussion of per-account penalties for inadvertent violations" in the statute, along with "its own public guidance documents [that] appeared to warn of per-report, rather than per-account, penalties." Judge Gorsuch noted the punitive consequences of the government's interpretation, which would change the criminal exposure in this case from a $250,000 fine and five years in prison to a $68 million fine and 1,360 years in prison—all for inadvertent violations of the BSA.