The Good, the Bad and the Ugly FBAR Style by Robert Horwitz
What does the title of one of Sergio Leone’s great Clint Eastwood westerns have to do with Foreign Bank Account Reports (known in the trade as “FBARS”) and FBAR penalties. Two significant court of appeal opinions and a district court opinion involving the FBAR penalty were issued recently (United States v. Boyd, __ F.3d __, 2021 WL 1113531 (9th Cir. March 24, 2021), Kimble v. United States, __ F.3d __, 2021 WL 1081395 (Fed. Cir. March 22, 2021) and United States v. Gentges, No. 18-CV-7910(KMK) (SDNY March 31, 2021)). From the perspective of people who are assessed non-willful FBAR penalties Boyd is generally good, but raises some potentially bad points, while Kimble and Gentges are bad and ugly. This blog will discuss the two appeals court cases; my next blog will discuss the district court case. So let’s look at the Boyd and Kimble cases.
In Boyd the defendant had 14 accounts overseas. She did not originally file FBARs or report income from the accounts on her income tax returns. In 2012, she was admitted into the Offshore Voluntary Disclosure Program (OVDP) and filed amended returns and late FBARs, including an FBAR for 2010 on which she accurately reported her foreign accounts. In 2014, she opted out of OVDP. After the IRS determined that her failure to file a timely FBAR reporting her foreign accounts for 2010 was non-willful, the IRS assessed 14 non-willful penalties against her for 2010 totaling $47,279. The Government sued to reduce the FBAR assessments to judgment and the district court ruled in favor of the Government. Ms. Boyd appealed.
On appeal Ms. Boyd argued that where an accurate but late FBAR is filed, the Government can only assess one penalty in the maximum amount of $10,000. The Government argued that when there is a late FBAR, it can assess a non-willful penalty for each offshore account. The Ninth Circuit viewed the “salient question” as whether Ms. Boyd committed one non-willful violation for her failure to file a timely FBAR for 2010 or multiple violations for her single failure to file a timely FBAR. To answer the question, the Ninth Circuit looked to the language of the statute, 31 U.S.C. §5321(a)(5)(A), which allows the Government to “impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.” The court focused on the word “provision,” which is not defined in the statute. A general rule of statutory construction is that, barring an indication to the contrary, words in a statute are deemed to have their ordinary, common meaning. Turning to the dictionary, the court noted that “provision” is defined as “a condition, requirement, or item in a legal instrument.” The Court found two provisions in §5314: a) timely filing an FBAR and b) ensuring the report requires specified information.[i]
Noting that the Supreme Court has held that civil and criminal penalties under the Bank Secrecy Act, which contains the FBAR provisions, require a violation of regulations, the court then looked at the regulations. The first regulation requires citizens to report financial interests in offshore accounts on the FBAR form; the second sets a date for filing the FBAR if the aggregate value in the accounts exceeded $10,000 during the prior calendar year. Because Ms. Boyd’s late-filed FBARs were accurate, the Ninth Circuit concluded that “she could not have violated …the regulation that delineates the content of the report prescribed by §5314 — the FBAR”. This logically led to the inexorable conclusion that Ms. Boyd only committed one violation: filing a late FBAR for 2010.
The Ninth Circuit listed its reasons for rejecting the Government’s argument of multiple violations (one for each account):
- Since her late FBAR was accurate, she did not violate the regulation concerning the contents of the report;
- The statutory phrase “any violation” did not mean that more than one violation could occur with respect to a single report because it was “any violation …of any provision”; since Ms. Boyd did not violate the provision governing the contents of the FBAR report, she only could have committed one violation, failing to file on time.
In discussing the second reason for rejecting the Government’s argument, the court hinted that in a different factual situation (such as not filing an FBAR, or filing one but leaving off several accounts) the statutory language might support a claim that there were several non-willful violations. This is one reason why I characterize the Boyd opinion as good-bad (but not ugly).
The court next rejected the Government’s arguments that its interpretation was correct based on “the statutory scheme as a whole and legislative intent,” finding that (a) unlike the willful-violation provisions of §5321(a)(5)(D),[ii] the non-willful penalty provisions didn’t refer to “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” and (b) based on the per-account language in the reasonable cause exception to the non-willful penalty, the failure to include per account language in the non-willful penalty provision militates against this argument.[iii] The court reiterated that “nothing in the statute or regulations suggests that the penalty may be calculated on a per-account basis for a single failure to file a timely FBAR that is otherwise accurate.” This is the second indication that the Boyd court is leaving open the possibility that a person who fails to file an FBAR with multiple accounts could face multiple penalties.
Ms. Boyd argued that the rule of lenity mandates her interpretation of the statute. Noting that the rule of lenity ordinary applies to criminal statutes, the Ninth Circuit also noted that it “strictly construes tax penalty provisions independent of the rule of lenity.” Strictly construing the §5321(a)(5)(B) penalty, the court held that even if the Government’s interpretation was reasonable, “the precise issue here is not whether the statute authorizes a non-willful penalty; it is whether the statute plainly authorizes a non-willful penalty for each account under the facts here, and it does not.” This is the third time the court hints that, under different facts, a person could potentially be assessed multiple non-willful penalties with respect to one FBAR report.
Another “bad” part of the language is the characterization of the FBAR penalty as a “tax penalty,” even though it is found in Title 31 and not in Title 26 (the Internal Revenue Code). In Bedrosian v. United States, 912 F.3d 144 (3rd Cir. 2019), the court based its decision that the district court lacked jurisdiction over Mr. Bedrosian’s suit for a refund since he paid only a portion of the penalty on its determination that the FBAR penalty was a “internal revenue” penalty and thus full-payment of the amount assessed with any penalties and interest was required to maintain a suit for refund of an FBAR penalty. This may be an indication that the Ninth Circuit will not allow a person to sue for a refund of an FBAR penalty without full payment of the amount assessed with interest and penalties.
The majority opinion leaves a number of unanswered questions about the FBAR penalty: a) if a person non-willfully fails to file an FBAR, have they committed two non-willful violations, not filing on time and not reporting, allowing the IRS to assess two $10,000 penalties? b) if a person non-willfully fails to file an FBAR and has multiple accounts, will they have committed one violation, two violations, or one violation per account (or maybe a violation for not filing and a sperate non-reporting violation for each account); c) if a person is assessed a large FBAR penalty, will they need to full pay the amount of the assessment with any accrued penalties and interest, because it is a “tax penalty”? d) would the Ninth Circuit uphold multiple willful penalties of up to $100,000 each if a person files an accurate, albeit late FBAR? I’m sure there are many other potential issues lurking here, but the most consequential issue may be that the decision will spur the IRS to assess willful penalties against persons residing in the Ninth Circuit where otherwise it might assess non-willful penalties.
It also appears the Ninth Circuit majority opinion, remanding the case to the district court, leaves another issue hanging in the air. It says the maximum penalty that can be assessed against Ms. Boyd is $10,000. It does not state that is the amount of the judgment the district court should enter. Since the largest penalty assessed was $5,000 but there was only one violation according to the Ninth Circuit can the district court enter judgment for $10,000 based on two penalties or can it only enter judgment for $5,000 based on one penalty assessment? The Ninth Circuit doesn’t say.
Judge Ikuta made a spirited dissent, arguing that based on the statute and regulations, United States persons with multiple offshore accounts are required to file a report for each account (which the judge calls the “substantive element”), that the use of one form to report multiple accounts (which she calls the “procedural element”) doesn’t affect that duty and, therefore, the IRS can assess multiple penalties where a late FBAR is filed accurately listing multiple accounts. Judge Ikuta ended her dissent with the quip “the majority misinterprets the relevant statutes and regulations in a manner that unfairly favors the tax evader.” There is nothing to suggest that Ms. Boyd was a tax evader. She was not assessed either a willful FBAR penalty or a civil fraud penalty. Jack Townsend, in his Federal Tax Crimes blog, felt that the dissenting judge was out of bounds in making a “cute” sound bite. I think it may reflect how some members of the federal judiciary view people with undisclosed offshore accounts and may in part account for why the courts have readily upheld FBAR willful penalties even on summary judgment.
Which takes us to Kimble. Ms. Kimble inherited foreign bank accounts from her father, a Holocaust survivor who kept the accounts secret because he feared possible persecution in the U.S. and the need to flee the country. Ms. Kimble’s husband advised her father, and, after he died, he advised her on managing the offshore accounts. He prepared their income tax returns and did not report income from those accounts on their returns. He continued to manage the accounts after they divorced. Following the divorce, Ms. Kimble hired a CPA to prepare her returns. The CPA never asked her about foreign accounts and she did not tell him about them. He prepared returns that checked the box on Schedule B “No” to the question whether she had offshore accounts. Ms. Kimble signed the returns under penalties of perjury. It was through reading about the IRS investigation of UBS, that she learned of the need to disclose foreign bank accounts. She was accepted into the OVDP.
Because she balked at paying the proposed penalty under the OVDP ($377,309), she withdrew from OVDP. The IRS assessed a $697,299 willful FBAR penalty against her. She paid and sued in the Court of Federal Claims, which granted summary judgment in favor of the IRS, finding that in signing her return under penalty of perjury without reviewing it she acted with reckless disregard and, thus, had willfully violated the FBAR requirements. The Court of Federal Claims also rejected her argument that the IRS abused its discretion in assessing a penalty equal to 50% of the amount in her account. The Federal Circuit affirmed.
The court rejected Ms. Kimble’s argument that a willful violation requires “actual knowledge” of the duty to file an FBAR. In Norman v. United States, 942 F.3d 1111 (Fed. Cir. 2019), it had held that willful for purposes of the civil FBAR penalty includes recklessness. As a result, “Ms. Kimble had a secret foreign account, she had constructive knowledge of the requirement to disclose that account [because of Schedule B of the income tax return], and she falsely represented that she had no such accounts. It was thus not clear error for the Court of Federal Claims to hold that she committed a willful violation.”
While I could understand the Federal Circuit affirming a decision after a trial, as occurred in Norman, I find its decision in this case troubling because the court is laying down a rule that there is an irrebuttable presumption a taxpayer has constructive knowledge of the contents of her tax return and in filing a return that is erroneous the taxpayer has “willfully” violated the law. But as we will see in the discussion of Gentges, this is the rule most courts now follow.
In line with its decision in Norman, the court rejected Ms. Kimble’s argument that the regulation promulgated in 1987, which set the maximum willful penalty at $100,000, was rendered invalid by a subsequent amendment to the statute and, thus, the IRS did not err in assessing a penalty equal to 50% of the amount in the account. Because Ms. Kimble failed to plead that the penalty violated the Eight Amendment prohibition on excessive fines, the court held that she waived this argument.
Query: Assuming someone in Ms. Boyd’s situation signed an original return that checked “no” to the question whether she had foreign accounts, will the IRS, based on Kimble, in the future automatically assess willful FBAR penalties if a FBAR form was filed late even if it was accurate if the “no” box on the tax return was checked? Remember, like Ms. Kimble, Ms. Boyd was accepted into the OVDP program, filed late FBARs as required of OVDP participants, and then withdrew.
A major problem I have with the cases that automatically find failure to read carefully a tax return is willful under the “reckless disregard” standard is that it makes a mockery of what “reckless disregard” means. In holding that reckless disregard can be constitute willful conduct in the civil contest, the Supreme Court in Safeco Ins. Co. v. Barr, 551 U.S. 47 (2007) stated that reckless disregard is an objective standard that is:
action entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.”
It is this high risk of harm, objectively assessed, that is the essence of recklessness at common law. See Prosser and Keeton §34, at 213 (recklessness requires “a known or obvious risk that was so great as to make it highly probable that harm would follow”).
I do not see failing to read over every line of an income tax return as being an act that entails “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” While cases upholding willfulness under the reckless disregard standard often cite Safeco, I have not seen any decision that articulates how failing to read every line of a tax return meets this standard. But maybe I just don’t see the obvious.
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.
[i] The court didn’t say why each enumerated item of information required to be reported under §5314 wasn’t a separate provision, but then the Government didn’t argue that there could be multiple violations for each offshore account.
[ii] The distinction made by the court between the willful and the non-willful penalty is an indication that it may support the assessment of multiple $100,000 willful penalties where a person files a late FBAR accurately listing multiple accounts.
[iii] The reasonable cause exception, 31 U.S.C. §5321(a)(5)(B)(ii) states:
Reasonable cause exception.–No penalty shall be imposed under subparagraph (A) with respect to any violation if–
(I) such violation was due to reasonable cause, and
(II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported.