A Big Win for Taxpayers in a Non-Willful FBAR Penalty Case (but Two Losses in Willful FBAR Penalty Cases) by ROBERT S. HORWITZ
It has been a while since I blogged on FBAR cases, but three cases over the past few months deserve mention. Two were willful cases where the courts held that the taxpayers were liable for the FBAR willful penalty: the Fourth Circuit’s affirmance of the district court’s grant of the Government’s summary judgement motion in United States v. Horowitz (no relation) and the district court’s decision on remand in Bedrosian v. United States. The third was a case dealing with whether the non-willful FBAR penalty is assessed on an account-by-account basis, United States v. Bittner.
The taxpayers in Horowitz had worked for a number of years in Saudi Arabia. The deposited a large part of their income into a local bank. Since that bank did not pay interest on deposits, they eventually transferred the funds to a Swiss bank account. The amount in the Swiss account eventually reached over $1.6 million and was their main financial asset. Eventually, they had the funds placed in UBS account. When they returned to the U.S., they did not give UBS their mailing address.
Dr. and Mrs. Horowitz reported on their U.S. income tax returns the income they earned in Saudi Arabia and the interest earned on their U.S. bank accounts, so they knew that foreign income and interest income were both reported. They never told their CPA about the Swiss account or asked if interest on a foreign account was subject to U.S. income tax. They did, however, tell friends about the Swiss account.
In 2008 they were told by UBS that they had to close their account because UBS no longer was accepting U.S. citizens as customers. They moved the funds to another Swiss bank. The account opening forms directed the bank to hold mail and Dr. Horowitz initialed each page.
The taxpayers entered the Offshore Voluntary Compliance Initiative and paid the tax due on previously unreported foreign income, but in 2012 they opted out. In June 2014, the IRS assessed willful penalties against them. In 2016, the Government sued to collect the willful penalty. The district court entered summary judgment in favor of the Government and the Horowitzes appealed.
The Horowitzes raised four arguments on appeal. First, they argued that under United States v. Ratzlaf, 510 U.S. 135 (1994), willful for purposes of criminal penalties under the Bank Secrecy Act requires actual knowledge that one is violating the law. They argued that “willful” for purposes of civil penalties under the Bank Secrecy Act should have the same meaning. The Court noted that the Supreme Court had remarked that “willful” is a term with many meanings and, in Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007), the Supreme Court in the civil context “willful” includes “reckless disregard.” The Court concluded that for purposes of the civil FBAR willful penalty, willful includes both actual knowledge and reckless disregard, which is determined under an objective standard: a person acts with reckless disregard if he acts or fails to act “in the face of an unjustifiably high risk of harm that is either known or so obvious that I should be known.” This differs from criminal recklessness and willful blindness, both of which include an objective element. Nor is reckless disregard negligence, sine it requires “a high risk of harm, objectively assessed.” It agreed with the Third Circuit in Bedrosian that recklessness is established if the taxpayer “(1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.”
You probably know the background in Bedrosian. As you may recall, Bedrosian claimed his former accountant, now deceased, told him about the FBAR requirements but told him since he failed to file in prior years, he didn’t have to file (I guess because he was “grandfathered” ?) Bedrosian subsequently filed an FBAR that reported only one of two accounts he had overseas. The district court held that Bedrosian was not liable for the willful FBAR penalty, the Third Circuit held that a) the FBAR penalty is a penalty under the internal revenue laws, so that the district court did not have jurisdiction over the taxpayer’s suit for refund of a partial payment towards the penalty, b) the district court had jurisdiction over the Government’s counterclaim for the unpaid balance of the FBAR penalty, and c) the district court would have to consider whether the plaintiff acted willfully under the “reckless standard” based on other Third Circuit cases in the “taxation realm.”
The second argument raised by the Horowitzes was that evidence did not support the district court’s determination. The Fourth Circuit held this argument was hogwash. The Horowitzes knew a significant part of their savings were in the foreign accounts; that income they earned in Saudi Arabia was taxable by the U.S. and that interest on U.S. accounts was taxable by the U.S. and gave their CPA information about the interest on their U.S. accounts each year. Nevertheless, they never asked their CPA if foreign interest was taxable by the U.S. and never informed the CPA about their foreign account. They did not give their U.S. mailing address to UBS and had their second Swiss bank hold the mail. Additionally, they failed to closely review their returns which reported they had no foreign accounts and signed the returns under penalties of perjury. The Fourth Circuit held that the evidence clearly established that the Horowitzes “ought to have known” that they were failing to fulfill their obligation to disclose their Swiss accounts and could easily have found out that duty.
The Horowitzes also argued that if they willfully failed to file FBAR returns, under the applicable regulations, the maximum penalty per year was limited to $100,000. Joining the Federal Circuit, the Fourth Circuit rejected this argument, finding that the 2004 amendments to the civil FBAR penalty voided the regulation and Treasury’s failure to amend the regulation did not abrogate the statute.
Finally, the Horowitzes argued that the assessment was not timely. The statute of limitations was June 30, 2014 and the IRS had made the assessment on June 13, 2014. Subsequently, when the Horowitzes filed a protest with appeals, an IRS employee removed the assessment date without abating the assessment. The Court held that the June 13, 2014 assessment was never abated or reversed and removing the assessment date did not change the date of the assessment. Thus, the Court held that the assessment was. Timely.
Now to Bedrosian on remand: Surprise, surprise. Applying the following description of the reckless standard for willfulness, the district court held that Bedrosian acted willfully (quoting from the Third Circuit’s opinion):
A person commits a reckless violation of the FBAR statute by engaging in conduct that violates an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.
After considering several Third Circuit cases involving the trust fund recovery penalty, the district court held that based on the evidence, including the following, “Bedrosian’s conduct was reckless and therefore willful”:
- Bedrosian cooperated with the Government “only after he was exposed as having hidden foreign accounts.”
- Bedrosian’s FBAR only disclosed one of two Swiss accounts and he moved the funds in the undisclosed account to a different bank rather than repatriate them.
- Bedrosian admitted he saw a Wall Street Journal article about the federal government tracking mail coming to the United States from overseas and thus was aware of the possibility it would learn of his offshore accounts if mail was sent to him by the Swiss bank.
- Bedrosian’s Swiss accounts were on “mail hold,” as he was undoubtedly aware of.
- His FBAR checked the box for having less than $1 million in the account when he knew the total in his accounts was over $1 million.
According to the district court, many of the circumstances cited by the Fourth Circuit in Horowitz were present in Bedrosian’s case:
- Bedrosian knew of the FBAR reporting requirements and the Horowitz’s knew they their world-wide income was taxed
- Both used mail holds for correspondence from their Swiss bank
- Both had significant amounts in their offshore accounts
- Both signed returns under penalties of perjury and representing that the answers were true.
The district court interpreted non-FBAR tax cases to “generally support that when a taxpayer is responsible for reviewing tax forms and signing checks, the taxpayer is responsible for errors that would have been apparent had they reviewed such forms and checks closely.” Bedrosian knew there was more than $1 million his Swiss accounts but the FBAR form he signed checked the box for under $1 million. He thus knew or should have known the form he signed was inaccurate and therefore acted willfully.
Based on this standard of willfulness, anyone who signs a return that contains an error that he or she would have caught had the return been read over carefully, has willfully signed an inaccurate return. I don’t know if that is what Congress had in mind when it used the word “willfully” in the FBAR statute but that is where it appears we have ended up.
The Government has been pushing the line that the FBAR penalty is assessed on an account-by-account basis. Thus, a person whose failure to report several accounts is non-willful can be assessed a penalty of $10,000 for each unreported account. Similarly, where a person willfully fails to report multiple accounts can be assessed a penalty equal to the greater of $100,000 or 50% of the value of the account. The Government won the first reported decision on multiple non-willful penalties, United States v. Boyd, (CD CA), appeal pending (9th Circuit). On June 29, 2020, a district court judge in Texas held, in a thoughtful opinion, that the non-willful FBAR penalty is applied per FBAR form and not per account, so that a non-willful penalty cannot exceed $10,000 per year. United States v. Bittner, 126 AFTR 2d 2020-5051 (E.D. Tex. 6/29/2020).
The defendant in Bittner was born in Romania, moved to the U.S. in 1982, became a naturalized U.S. citizen, and returned to Romania in 1990. In Romania, he became a very successful businessman, operating several businesses and opening a number of foreign accounts. He returned to the U.S. in 2011. During the years he lived in Romania he had earned over $70 million. Between 2007 and 2011 he had, at any one time, between 51 and 61 foreign financial accounts. He did not file timely FBARs for these years, so the IRS assessed non-willful FBAR penalties against him totaling $2.72 million. The Government sued to collect the penalties. Because Bittner admitted to having a financial interest in some, but not all, of the accounts, the Government moved for partial summary judgment as to those accounts. The penalties on the admitted accounts totaled $1.77 million. Bittner filed a cross-motion for partial summary judgment.
The Court framed the issue as:
Does the civil penalty provided by 31 U.S.C. 31 U.S.C. 5321(a)(5)(A) and (B)(i) for non-willful violation(s) of the regulations implementing 31 U.S.C. 5314 apply per foreign financial account maintained per year but not properly or timely reported on an annual FBAR, or per annual FBAR report not properly or timely filed?
The Court stated it was conducting analysis of the text of the statute in light of the statutory and regulatory framework in which it appears. Since section 5321(a)(5)(A) provides for a penalty “on any person who violates, or causes any violation of, any provision of section 5314,” the question became what is a “violation” of the statute. Under the regulations then in effect, “the form prescribe under section 5314 is the [FBAR] or any successor form which is to be filed on or before June 30 of the calendar year for foreign accounts maintained during the immediately preceding calendar year. According to the Court, the parties agreed that, based on this language, the failure to file the annual FBAR is the violation that triggers the penalty. The dispute was whether, where there are multiple accounts, does the failure to file the FBAR form constitute a separate violation for each account or one violation.
The Court looked to the language of the willful penalty , which bases the amount of the penalty “in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.” From this language, the Court concluded that Congress intended the willful penalty to be applied on an account by account basis.
The Court then looked at the language of the non-willful penalty and the reasonable cause exception. While the reasonable cause exception to the non-willful penalty was related to the “balance in the account,” the non-willful penalty itself did not contain any reference to “account” or “balance in the account.” The Court presumed that Congress acted intentionally when it drafted the non-willful penalty language without these references. Further, because the BSA aimed “to avoid burdening unreasonably a person making a transaction with a foreign financial agency,” an individual required to file an FBAR form was only required to file one report for each year. As a result, “it stands to reason that a ‘violation’ of the statute would attach directly to the obligation that the statute creates – the filing of a single report – rather than attaching to each individual foreign financial account maintained.” Additionally, no matter how many foreign accounts a person has the requirement to file an FBAR is only triggered if the aggregate balance in the accounts is over $10,000. It thus made no sense “to impose per-account penalties for non-willful FBAR violations when the number of foreign financial accounts an individual maintains has no bearing whatsoever on that individual’s obligation to file an FBAR in the first place.”
The Court rejected the government’s arguments that since the reasonable cause exception relates to the “balance in the account” the penalty must apply per account and that since the willful penalty applies on a per-account basis, so must the non willful penalty. While Congress may have had good reason to assess the willful penalty on a per-account basis and look to the balance in the account to determine the applicability of the reasonable cause exception was no reason to conclude that it meant for the non-willful penalty to apply for a per-account basis given the statutory language.
According to the Court, adopting its “per form” reading avoids the “absurd outcome that Congress could not have intended in drafting the statute.” The Court used as an example of this absurd result two individuals with multiple offshore accounts with $1 million. One had two accounts and the other had 20. Even though both failures to file were non-willful, based on the government’s reading, the individual with 2 accounts would face a maximum penalty of $20,000 while the individual with 20 accounts would face a maximum penalty of $200,000. As to the government’s argument that investigation costs increase with the number of accounts, the Court found this insufficient to overcome the statutory language, especially since an individual with 25 or more accounts would not have to list any of the accounts on the FBAR.
The Court also rejected the government’s reliance on United States v. Boyd (CD CA) appeal pending (9th Circuit) since the Boyd court did not explain why it found the government’s interpretation more reasonable, the case was not binding precedent and the Court disagreed with it. The Court ended its discussion of the issue as follows:
To conclude, Congress used the word “account” or “accounts” over one hundred (100) times throughout the BSA. But remarkably, it omitted any mention of “account” or “accounts” in § 5321(a)(5)(A) and (B)(i). At the end of the day, the Court will not insert words into statutes that are not there. E.E.O.C. v. Abercrombie & Fitch Stores, Inc. , 135 S. Ct. 2028, 2033 (2015) (“The problem with this approach is the one that inheres in most incorrect interpretations of statutes: It asks us to add words to the law to produce what is thought to be a desirable result. That is Congress’s province. We construe [a statute’s] silence as exactly that: silence.”); 62 Cases, More or Less, Each Containing Six Jars of Jam v. United States, 340 U.S. 593, 596 (1951) (“After all, Congress expresses its purpose by words. It is for us to ascertain-neither to add nor to subtract, neither to delete nor to distort.”); see also King v. Burwell, 135 S. Ct. 2480, 2505 [115 AFTR 2d 2015-2203] (2015) (Scalia, J., dissenting) (quoting Pavelic & LeFlore v. Marvel Entertainment Group, Div. of Cadence Indus. Corp., 493 U.S. 120, 126 (1989)) (“They made Congress, not this Court, responsible for both making laws and mending them. This Court holds only the judicial power-the power to pronounce the law as Congress has enacted it…. We must always remember, therefore, that ‘[o]ur task is to apply the text, not to improve upon it.'”). Congress knew how to make the non-willful FBAR penalty vary with the number of foreign financial accounts maintained, but it did not do so. That is the end of the road.
Finally, the Court determined that since Bittner did not file FBAR forms for the years in issue, the reasonable cause exception did not apply.
Contact Robert S. Horwitz at email@example.com or 310.281.3200 Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division. He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.