Supreme Court Holds Nonwillful FBAR Penalties Are Per-Report, Not Per-Account

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.