As all my readers know, the Bank Secrecy Act (BSA) has been requiring US taxpayers to report certain foreign financial accounts and retain detailed records about them. Failing to file or to properly report all foreign accounts on the notorious “FBAR” (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) can result in very high penalties. Just how high the penalties can soar depends on various factors that leave taxpayers with much uncertainty. Included in the myriad of factors are the inclination of the Internal Revenue Service (IRS) agent to apply certain agency-issued mitigation guidelines permitting reduced penalties, the amount in the account(s), and the individual’s prior violations. In addition, two main factors will impact the ultimate penalty: 1) Whether the violation of the statute was “willful” or “non-willful” and 2) which court is deciding the case!
My prior blog detailed the thorny issues involved in penalties for “willful” FBAR violations and how the courts have disagreed as to the permissible penalty cap for such violations. Today’s post will update readers on the FBAR penalty landscape for “nonwillful” violations and discuss the latest taxpayer win in United States v. Zvi Kaufman (DC, Connecticut, January 11, 2021).
The penalty for non-willful FBAR violations is generally US$10,000 per violation. It may come as an unwelcome surprise to learn that the IRS has assessed this penalty for each unreported account for each year. Thus, if the taxpayer had 6 unreported accounts for the year at issue, the penalty could be US$60,000 for that tax year. The IRS is viewing the violation as the failure to report each account on the FBAR, rather than a failure to file the FBAR form itself for the particular year.
The IRS has a lot of discretion in assessing penalties for “nonwillful” FBAR violations, but as we will see today, another court is clipping the agency’s wings in this regard! The Internal Revenue Manual (IRM) sets out what the IRS “thinks” it can do in the FBAR penalty playground. The examining agent, for example, is given discretion to assess lesser penalties – the agent can assess only one FBAR penalty per year, even when there are several undisclosed foreign accounts. The examiner also has the option to assert only one FBAR penalty when there are multiple years of violations. Per the IRM, the particular facts of the case, however, may indicate that assertion of a separate penalty is warranted for each account and for each year. (Ka’Ching for the IRS).
The Courts Have Had Some Say
But, what have the courts said about penalty assessments in “nonwillful” violation cases? Let’s look back at some recent “nonwillful” FBAR penalty cases, leading up to the taxpayer’s wonderful win in Kaufman.
- In United States v. Boyd, 2019 WL 1976472 (C.D. Cal. 2019), the taxpayer had fourteen financial accounts in the United Kingdom, but failed to file an FBAR for 2010, the year in issue. Since the IRS concluded her violations were not “willful”, the agency mitigated the penalties and assessed a nonwillful penalty for 2010 on each of 13 accounts with a total FBAR penalty of US$47,279. The taxpayer argued that the penalty was in excess of that permitted by the BSA, claiming that the maximum US$10,000 penalty is based on the failure to file the FBAR itelf rather than per account that should have appeared on the FBAR. The court rejected the taxpayer’s argument. In agreeing with the IRS, the court accepted the agency’s position that “the better interpretation of the relevant statutory and regulatory language is that each non-willful FBAR violation relates to a foreign financial account, and that the IRS may penalize each such violation with a penalty not to exceed US$10,000.”
The Boyd case is on appeal to the Ninth Circuit. Oral arguments were heard in the summer of 2020; counsel for the taxpayer has already sent a copy of the Kaufman decision (discussed below) to the Ninth Circuit. Hopefully the Ninth Circuit agrees with the reasoning of the district court in Kaufman.
- United States v. Bittner (E.D. Texas 6/29/2020) was the first case to side with the taxpayer and was decided just last summer. In that case, several years of unfiled FBARs were at issue, covering 3 tax years and involving numerous overseas accounts. The IRS sought nonwillful FBAR penalties for 177 accounts in total. The district court held that the nonwillful FBAR penalty was to be assessed per form and not per account. The happy taxpayer saw the number of violations reduced from 177 as asserted by the IRS (for a whopping nonwillful penalty of US$1,770,000) to a mere 4 (for a total penalty amount of US$40,000).
The newest case –
- In United States v. Zvi Kaufman three tax years were involved during which the taxpayer had a financial interest in or signatory authority over various financial accounts in Israel (thirteen foreign financial accounts in 2008, twelve in 2009, and seventeen in 2010). The IRS asserted nonwillful FBAR penalties on a per account basis, per year. The IRS obviously used its discretion to lower the possible penalties (e.g., for 2008 the penalty that could have assessed was US$10,000 x 13 accounts = US$130,000, but IRS assessed only US$42,249 penalty for that year). Mr. Kaufman argued that the maximum amount of civil monetary penalties that could be imposed for his nonwillful violations was $10,000 for each year that the FBAR was not filed, resulting in a total penalty amount of $30,000. The district court (D.C. Conn.) agreed with Mr. Kaufman reaching its conclusion by analyzing the statute. This was no simple task since the Bank Secrecy Act had been amended and the matter was not clear. I refer readers to the full opinion to follow the analysis, but provide a relevant excerpt below:
For the first three decades of the Bank Secrecy Act, Congress decided that no penalty should be imposed for non-willful violations. [citation omitted] Then, when Congress amended the Bank Secrecy Act to impose penalties for non-willful violations, it wrote a penalty provision that at first glance imposes a strict $10,000 cap. See United States v. Horowitz, 978 F.3d 80, 81 (4th Cir. 2020) (observing but not holding that “[a]ny person who fails to file an FBAR is subject to a maximum civil penalty of not more than $10,000”). And it did so with full awareness of the penalty provision for willful violations, which expressly uses the balance of the account as a benchmark for assessing the statutory cap. Absent more persuasive evidence to the contrary, the Court concludes that Congress did not intend for the statutory cap for non-willful violations to be determined on a per account basis.(emphasis added).
If you have FBAR issues, IRS has procedures in place and there may be a penalty-free way to get back on track. The IRS clearly has taken a very aggressive FBAR penalty position that if left unchallenged can wipe out your overseas accounts. Worrying about it is simply not productive. Contact me if you have FBAR matters that need resolution.
Posted: February 11, 2021
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