The Supreme Court ruled 5–4 in a fractured opinion on Feb. 28 that the IRS imposed an excessive fine on a businessman for failing to report foreign bank accounts, reducing the financial penalty to $50,000 from $2.72 million.
The decision came after the House of Representatives, now controlled by Republicans, voted in January to repeal a congressional provision allotting almost $80 billion to the IRS over the coming 10 years for increased enforcement.
The petitioner, Alexandru Bittner, was born in communist Romania. He moved to the United States in his youth, working as a dishwasher and later as a plumber. Eventually, he was naturalized in the United States and has been a dual Romanian–U.S. citizen ever since.
Bittner returned to Romania after the collapse of Soviet bloc communism in 1990 and lived there until 2011.
He was a successful businessman and had several non-U.S. personal bank accounts and owned stock in a number of Romanian corporations that also had foreign bank accounts. While living abroad, Bittner had limited contact with the United States.
He said later he was unaware that he was required to file U.S. income tax returns reporting his foreign income. He was also unaware of the existence of the Report of Foreign Bank and Financial Accounts (FBAR) form or Financial Crimes Enforcement Network Form 114, or his duty to file such forms.
When Bittner returned to the United States in 2011, he came to learn that he should have filed U.S. tax returns while living in Romania. He hired a professional accountant, who advised him on the requirement to file FBARs and to prepare the needed documents.
The IRS found that Bittner had failed to timely file FBARs for five years: 2007 through 2011. In that period, because he had more than 25 foreign accounts, he wasn’t required to detail those accounts but was permitted merely to state the total number of foreign accounts in which he had a financial interest, or so he thought at the time. He then filed corrected forms that volunteered the full information. The financial penalty was initially set at $50,000 for the nonwillful violations.
But the IRS decided to impose the maximum penalty under the Bank Secrecy Act (BSA), even though Bittner’s delinquency was unintentional. Despite the fact that Bittner only failed to file five annual forms on time, the IRS took the position that he had violated the law a full 272 times—once for each account that wasn’t reported in each of those five years and fined him $10,000 for each unreported account.
The BSA’s penalty should be calculated per report, not per bank account, Gorsuch wrote.
“Best read, 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,” he wrote.
Section 5314 of the BSA “does not speak of accounts or their number. The word ‘account’ does not even appear. Instead, the relevant legal duty is the duty to file reports.”
Nor does Section 5321, which authorizes a civil penalty of $10,000 for “any violation” of Section 5314, refer to accounts or their number, he wrote.
Section 5314 “provides that a violation occurs when an individual fails to file a report consistent with the statute’s commands,” Gorsuch wrote.
“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 in all cases, penalties for non-willful violations accrue on a per-report, not a per-account, basis.”
The contrary decision of the U.S. Court of Appeals for the 5th Circuit should be reversed and the case remanded to that court “for further proceedings consistent with this opinion,” Gorsuch wrote.
Chief Justice John Roberts and Justices Samuel Alito and Brett Kavanaugh joined the majority opinion except for Part II–C, which suggests the three jurists disagreed with the reasoning in that specific part.
The part discusses the rule of “lenity” that provides that when there are ambiguities in a criminal statute related to prohibitions and penalties, the matter should be resolved in the defendant’s favor when doing so would not go against legislative intent.
Gorsuch said the rule should apply in this case and explained why, but the three justices didn’t attach a statement indicating why they disagreed.
Justice Amy Coney Barrett filed a dissenting opinion, which was joined by Justices Clarence Thomas, Sonia Sotomayor, and Elena Kagan.
Bittner held as much as $16 million across more than 50 bank accounts in Romania, Switzerland, and Liechtenstein, Barrett noted.
“The most natural reading of the statute establishes that each failure to report a qualifying foreign account constitutes a separate reporting violation, so the Government can levy penalties on a per-account basis,” she wrote.
Section 5314 “indicates that its reporting requirement attaches to each individual account” with “a foreign financial agency.” Each account “triggers the requirement to file reports” and “each failure to report an account violates the reporting requirement,” Barrett wrote.
Bittner’s attorney, Daniel Geyser of Haynes and Boone, welcomed the court’s ruling.
“The Court’s decision correctly cabins the IRS’s discretion and curbs agency overreach, protecting countless innocent taxpayers from devastating penalties that did nothing to advance the Act’s goals,” he told The Epoch Times by email.
“We’re delighted for our client and grateful that the Court accepted our position.”
The Department of Justice didn’t respond by press time to a request by The Epoch Times for comment.
