Recently, the U.S. Supreme Court, held 5 to 4 that the Bank Secrecy Act (BSA)’s $10,000 maximum penalty for the nonwillful failure to report foreign bank accounts applies per report filed, instead of per foreign account. The decision resolved a split between the Fifth and Ninth Circuits regarding the application of damages for a nonwillful failure to file a Report of Foreign Bank & Financial Accounts (FBAR).
The plaintiff filed federal tax returns, but did not file FBARs for several years. The IRS imposed a penalty of $2.72 million, consisting of a $10,000 fine for each of the plaintiff’s 272 accounts that were the subjects of the late-filed FBARs. In assessing the penalty, the IRS asserted that the term “violation” in the BSA statute and corresponding regulations governing foreign bank account reports signified each undisclosed account on the FBAR, rather than each failure to file a FBAR. The plaintiff challenged this interpretation in the U.S. District Court for the Eastern District of Texas, asserting that for nonwillful violations, the BSA only authorizes a maximum penalty of $10,000 per FBAR report, making the maximum penalty $50,000 for five years of missed FBAR filings, instead of the $2.72 million total penalty that had been imposed. The plaintiff prevailed in the district court, but the U. S. Court of Appeals for the Fifth Circuit found in favor of the IRS, and reversed.
The Supreme Court agreed with the plaintiff, holding that “the BSA treats the failure to file a legally compliant report as one violation carrying a maximum penalty of $10,000, not a cascade of such penalties calculated on a per-account basis.” The Court reasoned that the IRS’s interpretation was not entitled to Skidmore deference, a form of deference that applies when an agency demonstrates that its interpretation of a statute that it administers has the “power to persuade.” The Court was not persuaded by the IRS’s interpretation because 1) the statute’s only “account-specific” language was in the FBAR’s reasonable cause exception and willful penalty provisions; 2) its interpretation conflicted with previous agency FBAR guidance; and 3) the drafting history of the nonwillful penalty provision suggested that Congress intended to treat nonwillful violations different from willful violations.
Accordingly, the Court remanded the case to the Fifth Circuit for reconsideration.
In the realm of financial regulations and legal interpretations, this recent U.S. Supreme Court decision regarding the Bank Secrecy Act (BSA) and the Report of Foreign Bank & Financial Accounts (FBAR) is a significant clarification. This ruling underscores the intricate nature of interpreting statutes and their applications, especially when dealing with penalties for nonwillful failure to report foreign accounts.
Let's break down the concepts involved in this article:
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Bank Secrecy Act (BSA): This is a federal law enacted to combat money laundering and other financial crimes. It mandates financial institutions to keep records and report certain transactions to the U.S. Department of the Treasury.
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Report of Foreign Bank & Financial Accounts (FBAR): Required by the BSA, this report mandates individuals to disclose their foreign financial accounts to the IRS if they hold financial interest or signature authority over these accounts. It's separate from tax returns and serves as a measure to prevent tax evasion.
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$10,000 Maximum Penalty: The BSA imposes penalties for nonwillful failure to report foreign accounts. The recent Supreme Court decision clarified that this penalty applies per report filed, not per foreign account.
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IRS Penalty Imposition: In this specific case, the IRS imposed a penalty of $2.72 million on the plaintiff, asserting a $10,000 fine for each of the 272 accounts not reported timely through FBAR filings.
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Interpretation Dispute: The crux of the issue revolved around whether the penalty should be applied per undisclosed account on the FBAR or per failure to file a FBAR. The plaintiff argued that for nonwillful violations, the BSA only allows a maximum penalty of $10,000 per FBAR report.
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Supreme Court Ruling: The Court sided with the plaintiff, emphasizing that the failure to file a compliant report should be seen as one violation, not a series of penalties calculated based on individual undisclosed accounts. This decision was backed by reasons including the lack of account-specific language in the statute, conflicting interpretations by the IRS, and the legislative history indicating Congress's intent to treat nonwillful violations differently.
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Skidmore Deference: This is a legal principle where an agency's interpretation of a statute it administers receives deference based on the persuasiveness and expertise shown by the agency. In this case, the Court did not find the IRS's interpretation compelling enough to merit such deference.
This decision carries implications for how penalties for nonwillful violations of FBAR reporting will be calculated, setting a precedent for future cases and clarifying the application of penalties under the Bank Secrecy Act.
