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Federal Circuit Upholds Liability for FBAR Willful Penalty, Determines the Regulation Limiting Penalty to $100,000 Is Invalid by ROBERT S. HORWITZ

Last August, I blogged on the Court of Federal Claims (CFC) decision in the Mindy Norman FBAR willful penalty case.  Rejecting the decisions in Colliot and Waldham, the CFC held that 31 CFR § 1010.820 (which limited the willful FBAR penalty to $100,000) was invalid due to the 2004 amendment to 31 U.S.C. §5321(a)(5).  Disagreeing with the CFC’s decision, Ms. Norman appealed to the Court of Appeal for the Federal Circuit.  The Federal Circuit issued its decision on November 8, 2019, in which it determined that the CFC’s analysis was spot on.

Ms. Norman raised three issues in her appeal:  first, that the CFC erred in finding her FBAR violation was willful; second, that the regulation limited the maximum penalty to $100,000; and third that the penalty imposed against her violated the Eight Amendment prohibition on excessive fines.

Initially, the Federal Circuit addressed Ms. Norman’s argument that willfulness requires evidence of “actual knowledge of the obligation to file an FBAR.”  Noting that the Supreme Court in Safeco Ins. Co. v. Burr, 551 U.S. 47 (2007), held that “where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well,” the Federal Circuit held that for purposes of the willful FBAR penalty, recklessness suffices to show willfulness.

Based on the evidence that Ms. Norman signed a return that checked the box “no” to the question whether she had an offshore financial account, that her account was a numbered account, that she signed a document directing UBS not to invest in U.S. securities, that when funds were withdrawn from the account UBS had it delivered to her in cash and that she lied to IRS agents when initially interviewed, the court had no problem holding that the CFC’s willful determination was supported by the evidence.  Troubling, however, is the penultimate paragraph of the Federal Circuit’s analysis of the evidence on willfulness:

Ms. Norman also argues that she could not have will-fully violated the FBAR requirement because she did not read her 2007 tax return. But whether Ms. Norman ever read her 2007 tax return is of no import because “[a] tax-payer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.” Greer v. Comm’r of Internal Revenue, 595 F.3d 338, 347 n.4 (6th Cir. 2010); see also United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000) (finding that taxpayer “signed the fraudulent tax form and may be charged with knowledge of its contents”). The fact that Ms. Norman did not read her 2007 tax return supports that she acted recklessly toward the existence of reporting requirements.

Slip op. at 8-9.  The court noted that there was more evidence than just the return to support the finding.  Pending on appeal to the Federal Circuit is the Kimble case, where the CFC granted summary judgment holding the plaintiff was willful based on two stipulations: that she did not read her return before signing it and that the return checked “no” to whether she had an offshore account.  If the Federal Circuit affirms Kimble, it will lessen considerably the government’s burden of proving willfulness.

Addressing the regulation limiting the penalty to $100,000, the Federal Circuit noted that the statutory language reads that for willful violations “the maximum penalty … shall be increased to the greater of” $100,000 or 50%.  Because the regulation predated the statute, the statute rendered it invalid.  The Court rejected Ms. Norman’s argument that the statute gives the Secretary discretion to determine the amount of the willful penalty and the regulation was an exercise of that discretion.  According to the Court, while the Secretary can exercise his discretion to impose a penalty below the maximum, it is done on a case by case basis.  The Secretary was not authorized to set a cap on all cases that was inconsistent with the statute.  It also rejected Ms. Norman’s arguments that regardless of whether the regulation is inconsistent with the statute, it is binding on the IRS until repealed and that the regulation is entitled to Chevron deference.

As to the Eighth Amendment claim, the Federal Circuit did not address it because it was not properly preserved in the CFC.  Finding Ms. Norman’s arguments lacking, the Federal Circuit affirmed the CFC’s decision.

Whether this is the end of the line for the argument that the regulation validly limits the maximum willful penalty to $100,000 is unclear.  All the trial level courts that have considered the matter, other than Colliot and Waldham, have sided with the Government.  The Government settled both cases after losing on the issue of the regulation’s validity and I assume it will do so in any future cases where the taxpayer prevails on this argument at trial.

I personally believe that the Federal Circuit’s analysis is incorrect.  The language governing the amount of the penalty is contained in §5321(a)(5)(B) and (C), as amended in 2004:

(B) Amount of penalty. —
(i)In general. —
Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.


(C) Willful violations. — In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—
(I) $100,000, or
(II) 50 percent of the amount determined under subparagraph (D)….

The verb phrase “shall be increased” refers to being increased from the maximum amount of the non-willful penalty under (B)(i).  Unlike the Federal Circuit, in my view it does not prohibit the Secretary from exercising his discretion by capping the maximum amount that can be assessed cases to an amount that is less than 50% of the account balance at the time of the violation.  But I am probably in the minority on this issue.

Contact Robert S. Horwitz at horwitz@taxlitigator.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.

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