There have been a number of recent court cases involving foreign bank account or FBAR reporting penalties. This is likely due to the significant amount of the penalty and that many do not fully appreciate the amount of the liability they face if caught not complying with the FBAR rules. The recent Norman v. United States, No. 15-872T (Ct. Cl. 2018), is an example.
The Facts & Procedural History
Ms. Norman is a retired school teacher. She was assessed a $803,530.00 FBAR penalty in 2013. The penalty was for a Swiss account she had control over in 2007.
Ms. Norman hired an accountant in 2009 to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP). The accountant did not file ODVP paperwork; he submitted a quiet disclosure. This means that he filed amended income tax returns to report and pay the taxes on income from the foreign account.
The IRS audited the income tax return, which led to the FBAR penalties and litigation.
FBAR Penalties, Generally
The FBAR penalties can apply if U.S. citizens or residents fail to report ownership or control over certain foreign accounts that have a value in excess of $10,000. The rules require these accounts to be disclosed by filing a FinCEN Form 114, Report of Foreign Bank and Financial Accounts, or “FBAR.”
For willful violations, the amount of the maximum penalty is the greater of $100,000 or 50 percent of the highest value of the account.
Are FBAR Penalties Limited to $100,00?
While this case was pending, the United States v. Colliot, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018) decision was handed down. The court in Colliot concluded that the regulations capped the penalty at $100,000. This court rejected this reasoning, concluding that the regulation was invalid as it was not consistent with the amended statute:
Crucially, the amended statute dictates that the usual maximum penalty “shall be increased” to the greater of $100,000 or 50 percent of the account. § 5321(a)(5)(C)(i) (emphasis added). Congress used the imperative, “shall,” rather than the permissive, “may.” Therefore, the amendment did not merely allow for a higher “ceiling” on penalties while allowing the Treasury Secretary to regulate under that ceiling at his discretion. Rather, Congress raised the new ceiling itself, and in so doing, removed the Treasury Secretary’s discretion to regulate any other maximum.
The result is that the court did not cap the FBAR penalty at $100,000.
It is not clear how other courts would decide this issue. Can taxpayers rely on the existing regulation or is the regulation invalid?
Evidence of Willfulness
We have previously written about the difficulty in determining what conduct is willful (you can read that FBAR post here). In this case, the court focused on the credibility of the taxpayer as a witness:
The Court cannot believe that this long string of “inaccurate” statements — to the IRS and to the Court, in tax documents, oral statements, letters, pleadings, and testimony at trial — is due entirely to happenstance, and is the fault of everyone involved but Ms. Norman. Because of her false statements and because her memory of every other issue is so uncertain, the Court does not find Ms. Norman’s testimony credible, and the Court therefore cannot rely on her testimony, when she claims that she did not know of her duty to report her foreign income until 2009 and she tried to apply to the OVDP when she learned of it.
It then turned to the evidence:
Ms. Norman signed documents to open a numbered bank account — which, by definition, concealed her income and financial information — with Union Bank Switzerland (“UBS”) in 1999, as the only accountholder. Trial Tr. 43:12-50:2; see also Def. Exs. 1-4. Ms. Norman further concealed her financial information from U.S. authorities by signing to waive her right to invest in U.S. securities in 2000. Trial Tr. 50:14 (acknowledging her signature); Def. Ex. 5-1 (“I am aware of the new tax regulations.7”). Dieter Lutolf, a UBS representative, executed a similar agreement on Ms. Norman’s behalf in 2003, Def. Ex. 6-1, five days after Ms. Norman had a phone call with the bank, Def. Ex. 28-1, and again in 2005, Def. Ex. 6-2, two weeks after Ms. Norman had an in-person visit with a bank representative. Def. Ex. 28-1.
Based on this, the court concluded that Ms. Norman failed to file FBARs willfully.
Those litigating FBAR cases that have a question about willfulness will no doubt be very interested in this case. This case makes it clear that the taxpayers credibility is critical when it comes to questions of willfulness. The strategy of only recalling helpful facts to the exclusion of any and all harmful facts may not be an effective strategy. This is particularly true when there is some evidence that establishes the harmful facts.