IRS Loses Another Non-Willful FBAR Case by ROBERT S. HORWITZ
In December I had an FBAR roundup, where I wrote about three recent FBAR cases, two willful cases the IRS won (the Fourth Circuit’s decision in US v. Horwitz and the district court’s decision on remand in Bedrosian v. US) and the IRS loss in a non-willful case (US v. Bittner). This week a district court in Connecticut handed the IRS a loss in another non-willful FBAR case, U.S. v. Kaufman, 18-cv-00787 (Jan. 11, 2021). As in Bittner, the parties filed cross motions for summary judgment and presented the court with two issues: a) whether the maximum $10,000 non-willful penalty was per account or per annual filing and b) whether the defendant had “reasonable cause” for not filing an FBAR form. The result was the same as in Bittner: the defendant did not have reasonable cause, but the non-willful penalty was per annual form not per account.
A little background: Mr. Kaufman is a U.S. citizen who has resided in Israel since 1979. He had multiple financial accounts in Israel. In 2008 he had a beneficial interest in or signatory authority over 13 Israeli accounts, in 2009 there were 12 accounts and in 2010 there were 17 accounts. Mr. Kaufman’s U.S. tax returns were prepared by an American accounting firm. Each year, the accountants would ask if he had any foreign accounts and would advise him that if he did, he may need to file FBAR forms. Each year he told his accountants he did not have any foreign accounts. When asked how he paid his bills, he claimed it was out of a U.S. brokerage account, so they checked the “no” box to the question on the return whether he had foreign accounts. Notwithstanding this evidence, Mr. Kaufman claimed he did not learn of the FBAR filing requirement until September 2011. He also claimed that he suffered a heart attack in late 2010 and was involved in an auto accident in 2011 and that these affected his cognitive abilities.
The first issue the Court addressed was the reasonable cause defense. To escape liability for the non-willful penalty a person must show “reasonable cause” and that the amount in the account was accurately reported. The Court focused on the “reasonable cause” prong. Since “reasonable cause” is not defined in the FBAR statute, the Court looked to the reasonable cause defense to penalties in Internal Revenue Code sections 6651 and 6664, noting that under US v. Boyle, 469 U.S. 241 (1985), failure to timely file a return is not excused by reliance on an agent. Given the facts, including the taxpayer being told by his CPAs that he did not have foreign accounts and used a U.S. brokerage account to pay his bills, the Court found there was no reasonable cause. Thus, he was liable for the non-willful penalty.
Now the Court had to decide whether the maximum penalty was $10,000 per year, or whether the IRS could assess the non-willful penalty on an account by account basis, with the maximum penalty per account being $10,000. This was a question of interpreting the statute, the starting point for which is the “plain meaning” rule, i.e., the language in a statute is given its plain meaning. The problem was that the language in the statute was not clear on whether the maximum non-willful penalty was to be applied on an annual basis or an account-by-account basis. The Government pointed to the language in the willful penalty provisions of the statute, which refer to “balance in the account” and “existence of an account” as requiring the non-willful penalty to apply on an account by account basis. Mr. Kaufman argued that this language “reveals exactly the opposite. The Court agrees with Kaufman.” The Court followed the logic of the Bittner court.
The Court, relying on Bittner, reasoned that the language in the willful penalty provision shows that Congress knew how to make penalties account specific. It drew a negative inference from the exclusion of language in the non-willful provision of language that was in the willful provision of the statute that Congress did not intend for the non-willful penalty to apply per account. To buttress its determination, the Court found it significant that the regulations provide as the threshold for filing the FBAR form an aggregate balance in all accounts of over $10,000 since it makes no sense to assess a non-willful penalty per account when the reporting obligation is based on the aggregate balance and not on the number of accounts.
Under both willful and non-willful penalties “the violation flows from the failure to file a timely and accurate FBAR. The only difference is that the manner for calculating the statutory cap for penalties for willful violations involves an analysis that includes consideration of the balance in the accounts, while no such analysis is required for non-willful violations.” (Slip. Op. at 18-10.)
The Government’s interpretation “could readily result in disparate outcomes among similarly situated people” based solely on the number of accounts and a person who had several accounts who was non-willful “could be exposed to a significantly higher penalty than a willful violator.” The Court found as conjecture the Government’s argument that limiting the penalty for non-willful violations to $10,000 per year would decrease the penalties deterrence value. The Court noted that for the first three decades of the statutes existence there was only a willful penalty and when Congress added the non-willful penalty it was aware that the willful penalty used the account balance as a cap, something the Court found persuasive evidence that Congress did not want the non-willful penalty to be applied on a per account basis. The Court found unpersuasive the district court’s decision in US v. Boyd.
Boyd is currently on appeal to the Ninth Circuit, which heard oral argument last summer. Counsel for Ms. Boyd has already sent a copy of the Kaufman decision to the Ninth Circuit. We can only wait to see whether the Ninth Circuit finds the reasoning in Kaufman and Bittner persuasive.
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.