DOJ’s New FBAR Song: Another One Bites the Dust by ROBERT S. HORWITZ
I recently blogged about Kimble v. United States, where the Court of Federal Claims granted summary judgment in favor of the Government in an FBAR willful case, holding that the taxpayer’s signing a return that incorrectly checked the “no” box to the question whether she had foreign accounts was sufficient to establish willfulness. The Kimble court has now been joined by the district court in Maryland in United States v. Horowitz, Case No. PWG-16-1997 (Md., 1/18/19).
Peter Horowitz is an anesthesiologist. He and his wife Susan lived in Saudi Arabia from 1984-2001, where Peter worked. In 1988, they set up a joint account at UBS in Switzerland with money earned in Saudi Arabia. At one point, the account balance reached almost $2 million. When the couple returned to the U.S., they closed accounts they had in Saudi Arabia but kept open the UBS account.
In late 2008, Peter closed the UBS account and opened an account at Finter Bank in Switzerland. He planned to open a joint account, but since Susan was not with him, the bank only allowed him to open an account in his name. After 2008, Susan was added to the account.
Peter provided their CPAs with information to prepare their tax returns. He did not inform the CPAs about the foreign accounts or ask about whether he was required to report the accounts to the IRS. The Horowitz’s did not file FBARs for either 2007 or 2008. Their returns for both years checked “no” to the question on Schedule B whether they had foreign financial accounts. In 2010 they disclosed their foreign accounts. They entered the Offshore Voluntary Disclosure program, but in December 2012, opted out. In June 2014, the IRS assessed FBAR penalties against both Peter and Susan for 2007 and 2008. Each penalty was equal to 25% of the amount in the account ($247,030) on the date the FBAR was due. The assessment form was prepared by the FBAR Penalty Coordinator and signed by her manager. The penalties for 2007 ere based on the UBS account and for 2008 were based on the Finter account.
The taxpayers protested to IRS Appeals. Appeals requested that the penalty be removed as premature. The penalty coordinator removed the penalty input date. After Appeals upheld the penalty, in 2016, the penalty coordinator reentered the penalty input date.
The Government sued to collect the penalties and moved for summary judgment. The taxpayers filed cross-motions for summary judgment.
The first issue before the Court was whether the maximum penalty was limited to $100,000 based on Treas. Reg. 31 CFR 1010.820(g)(2), which caps the willful penalty at $100,000. District courts in Texas (U.S. v. Colliot) and Colorado (U.S. v. Wadhan) have held that the regulation controls and, therefore, the penalty may not exceed $100,000. The Court of Federal Claims in Norman v. U.S. and Kimble held that the regulation conflicts with the statute and is invalid. The Court found the Kimble case “persuasive” and, relying in part on the Internal Revenue Manual, held that the regulation conflicted with the statute and, therefore, the IRS could assess willful penalties equal to up to 50% of the amount in the account on the date of the violation.
The Court next rejected the claim that the penalty had been reversed in 2014 and was thus time barred. According to the Court, the Horowitz’s failed to meet their burden of proving the claim was barred. Assuming removal of the penalty input date was a reversal of the penalty, there was no evidence that the penalty coordinator was authorized to reverse a penalty assessment, no managerial approval of a reversal was shown and since DOJ alone can compromise assessed FBAR penalties of over $100,000, the penalty coordinator could not have validly reversed the assessment.
The Court granted Susan partial summary judgment. Only a U.S. person with a beneficial interest in or signatory authority over a foreign account is required to file an FBAR. The 2008 penalty against Susan was based on the Finter account. She did not have an interest in or signatory authority over that account in 2008. Thus she was not liable for an FBAR penalty for that year. That the IRS could have assessed a penalty against her based on the UBS account, which she had an interest in, or could have assessed a 50% penalty against Peter was irrelevant to the question of whether she was liable for a penalty for not reporting the Finter account.
The Court upheld the willful penalties against Peter for both years and against Susan for 2007. Although there was no evidence that either actually knew about the requirement to file an FBAR and their CPAs did not ask about foreign accounts or explain the FBAR requirements or the Schedule B questions to them, this was irrelevant. By virtue of signing the return under penalties of perjury and failing to discuss their foreign accounts with their CPAs, they showed a conscious effort to avoid learning about the reporting requirements and thus acted willfully.
For reasons previously discussed in my January 2 blog on Kimble, https://taxlitigator.me/ , I find the willingness of courts to base liability for the FBAR willful penalty on what is constructive knowledge and the cavalier manner in which the Court of Federal Claims dismissed the Colliot decision disturbing. If the Kimble and Horowitz decisions gain wide acceptance, taxpayers will have virtually no chance of prevailing in a willful penalty case. And we will see another one and another one and another one bite the dust.
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 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.