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FBAR Willful Cases Are Similar to Groundhog Day by ROBERT S. HORWITZ

Whenever I read a new FBAR willful penalty I get a distinct feeling of déjà vu all over again, to quote the great Yogi Berra.  Elements:

  • Did the taxpayer have a foreign bank account – check.
  • Did the taxpayer know of the foreign bank account – check
  • Did the taxpayer fail to tell the return preparer about the foreign bank account – check
  • Did the taxpayer fail to report income from the foreign bank account – check
  • Did the tax return check the box on Schedule B “NO” to the question of whether there were offshore accounts – check
  • Did the taxpayer sign the return under penalty of perjury – check

Conclusion: the taxpayer willfully failed to file an FBAR report.  Case in point: the Eleventh Circuit’s recent opinion in United States v. Rum, Docket No. 19-14464 (April 23, 2021).   The defendant, Said Rum, was a naturalized U.S. citizen who owned and operated several businesses.   In 1998 he opened a numbered account at UBS with $1.1 million transferred from his accounts in the U.S.  He claimed he did so to conceal the funds from potential judgment creditors.  He directed UBS to hold mail.  Despite no judgment being entered against him, he did not repatriate the funds to the U.S.

Between 2002 and 2008, UBS sent Rum account statements containing a statement that the information was being provided to help in preparing his U.S. income tax returns.  In 2002, UBS advised him that it was required to report his earnings from U.S. securities to the IRS.  Rather than fill out a W-9, Rum directed UBS to not invest in any U.S. securities and signed a form that he was liable for tax in the U.S. as a U.S. person.  In October 2008, UBS notified Rum that it was closing accounts of U.S. citizens.  Rum transferred the funds in his UBS account to a numbered account at Arab Bank in Switzerland. 

Rum admitted he never told his return preparer about the Swiss accounts.  He listed the Swiss accounts on a mortgage application to show his financial position, but did not list his foreign account or report income from his foreign account on his tax returns and did not disclose it on applications for federal aid for his children’s college tuition.  He signed his returns under penalties of perjury.  The “No” box was checked in response to the question on Schedule B whether he had any foreign financial accounts.

In 2008, Rum’s 2006 tax return was audited.  He told the revenue agent that he had closed the UBS account but did not tell her about the Arab Bank account.  The agent determined a tax deficiency but did not propose a fraud penalty or any FBAR penalty.  Rum filed an FBAR for 2008 in October 2009, after the June 30 filing deadline, and only after he was notified by UBS that his account was within the scope of a Treaty Request from the IRS.  In November 2009, after being notified by Arab Bank that it was closing his account, Rum transferred his offshore funds to an account in the U.S. 

During 2009, Rum had approximately $300,000 investment income from his foreign accounts.  He only reported $40,000 of that income.  The IRS audited his 2005 and 2007-2010 income tax returns.  The IRS determined deficiencies in tax and fraud penalties.  Given the amount in his offshore account, the assertion of deficiencies and fraud penalties, he was not eligible for the willful penalty to be mitigated under the Internal Revenue Manual (IRM) guidelines.  The IRS asserted a 50% FBAR willful penalty for 2007, which was sustained on appeal.

Since Rum failed to pay the FBAR assessment, the Government filed a suit to reduce the assessment, plus interest and late fees, to judgment.  The district court granted summary judgment for the Government and Rum appealed.  He raised the following claims on appeal: (a) that the district court used the wrong standard for determining willfulness; (b) that genuine issues of material fact were in dispute, precluding summary judgment; (c) that Reg. §1010.820(g)(2) limits the maximum FBAR penalty to $100,000; (e) the IRS’s factfinding procedures were arbitrary and capricious; and (f) that the district court erroneously rejected his challenge to interest and late fees.  The Eleventh Circuit rejected all of Rum’s arguments and affirmed the district court.

The first issue addressed by the Eleventh Circuit was the standard of review.  Since both parties urged a de novo standard of review for the willfulness determination, whether there were genuine issues of material fact and for legal issues, and this was the standard of review adopted by the Fourth Circuit in the Horowitz and Williams cases, the Eleventh Circuit adopted the de novo standard for these issues.  For questions regarding the IRS’s decision to impose the willful penalty and amount of the penalty, the arbitrary and capricious standard was adopted. 

The Court then turned to the issue of what is the proper standard for determining willfulness for the civil FBAR willful penalty.  In Safeco. Ins. Co. v. Burr, 551 U.S. 47 (2007), the Supreme Court held that willfulness includes recklessness for purposes of determining willfulness for alleged violations of the Fair Credit Reporting Act.  The Third Circuit in Bedrosian, the Fourth Circuit in Horowitz and the Federal Circuit in Norman had all held that willfulness for purposes of the FBAR civil penalty includes reckless disregard.  In Malloy v. United States, 17 F.3d 329, the Eleventh Circuit held that willfulness for purposes of the trust fund recovery penalty includes reckless disregard of a “known and obvious risk that trust funds may not be remitted to the Government, such as failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted.”  The Eleventh Circuit concluded that willfulness for purposes of the civil FBAR penalty includes reckless disregard. 

Under the Safeco standard as articulated by the courts of appeal in Bedrosian, Horowitz and Norman, recklessness exists if the defendant “(1) clearly ought to have known that (2) there was a grave risk an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.”  Applying this standard to the undisputed facts, the Eleventh Circuit held that Rum acted with reckless disregard and thus willfully failed to file an FBAR for 2007.  Thus there was no genuine issue of material fact and the district court correctly granted summary judgment on the issue of willfulness.

After determining that the district court correctly held that Rum acted willfully, the remaining dominos fell in quick succession.  First, the regulation setting the maximum FBAR willful penalty at $100,000 was promulgated prior to the amendment making the maximum FBAR willful penalty 50% of the amount in the account.  In amending the penalty provision, Congress did not intend for the maximum penalty to be $100,000.  As a result, the Eleventh Circuit joined the Fourth and Federal Circuits in rejecting the argument that the maximum penalty is $100,000.

Next to fall was the claim that the IRS’s factfinding procedure for determining the amount of the penalty was arbitrary and capricious.  The IRM had guidelines for determining the amount of the penalty, the revenue agent’s recommendation required managerial approval and was reviewed by IRS area counsel, Form 886-A explained the facts and law upon which the determination was based and Rum had an opportunity to appeal the determination.  Thus, the IRS’s factfinding procedures were not arbitrary and capricious.  His argument about interest and late fees was similar to that concerning the IRS’s factfinding and was rejected as being without merit.

So there you have it.  Another FBAR willful appeal, another Court of Appeals upholding the Government’s positions.  The appeal in United States v. Schwarzbaum (SD Fla 2020) is pending before the Eleventh Circuit.  Luckily for Mr. Schwarzbaum, the United States voluntarily dismissed its cross-appeal.

Robert S. 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.

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