After a district court in Texas recently held that penalties for the non-willful failure to file an FBAR is be assessed by form (and not by the number accounts), the District Court of Connecticut came to a similar decision in United States v. Zvi Kaufman No. 3:18-cv-00787. This will be welcome news by taxpayers who may be appealing or litigating non-willful FBAR penalties.
Taxpayer resided in Israel for 40 years and opened bank accounts in Israel. He late filed his FBARs for tax periods 2008, 2009, and 2010.
The Internal Revenue Service then assessed penalties against the taxpayer for his non-willful failure to file timely FBARs — $42,249 for the 2008 FBAR, $42,287 for the 2009 FBAR, and $59,708 for the 2010 FBAR. The penalties were calculated based on the number of accounts. The IRS sent a letter to Kaufman demanding payment.
The Government then brought suit to reduce the penalties to judgment. The amount consisted of $144,244.00 on the principal for the outstanding FBAR penalties, $36,373.20 in late-payment penalties, and $6,062.20 in interest.
The taxpayer filed for summary judgment. He argued in part that the maximum amount of civil monetary penalties that can be imposed for his non-willful violations is $10,000 for each year that a FBAR was not timely filed, for a total of $30,000. The taxpayer also argued that he had reasonable cause; but there was nothing noteworthy in that argument and is not discussed in this post.
31 U.S.C. § 5321(a)(5)(A) & 31 U.S.C. § 5321(a)(5)(B)(i)
§ 5321 authorizes the Secretary of the Treasury (delegated to the IRS) to impose a civil penalty on any person who violates section 5314 (the FBAR filing requirement). That penalty shall not exceed $10,000 per violation.
The question is — what is meant by violation? Is it failure to report each account a separate violation, or is it the failure to file the form ? In the former interpretation, there could be multiple violations in the same year, while in the later there can only be one violation per year.
Court’s analysis regarding the statutory cap on non-willful FBAR penalties
The taxpayer argued that the maximum penalty that may be imposed under the statute for non-willful FBAR violations is $10,000 per form that is untimely or inaccurately filed.
The Government argued that the statutory cap of $10,000 applies to each account untimely or inaccurately reported.
“[The] starting point in statutory interpretation is the statute’s plain meaning, if it has one” writes the court, quoting United States v. Jones, 965 F.3d 190, 194 (2d Cir. 2020) (quoting United States v. Dauray, 215 F.3d 257, 260 (2d Cir. 2000)).
The court finds that the issue cannot be resolved by a plain meaning analysis because the text in Section 5321(a)(5)(A) does not explicitly define ‘violation’ for purposes of determining the non-willfulness penalty.
Looking elsewhere in the statute & negative inference
§ 5321(a)(5). This subsection, which authorizes penalties for willful FBAR violations, specifically references “account” — “in the case of 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, the balance in the account at the time of the violation.”
The taxpayer argues that, therefore, Congress clearly intended the willful FBAR penalty to apply per account. But because they did not do so for the non-willful FBAR penalty section, it should be inferred that Congress did not intend for it to apply by account. In other words, it wasn’t an “oops we forgot” to include the word account, but rather an intentional omission.
Where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion,” writes the court citing Russello v. United States, 464 U.S. 16, 23 (1983).
A presentation of this reasoning into its logical components:
- A violation of an FBAR filing requirement can either mean the failure to file the form, or the failure to report an account.
- Other sections of the FBAR statute either don’t define ‘violation’, or they specifically reference ‘account’ when intended to describe the type of violation.
- The “per form” interpretation would be the default and the insertion of ‘account’ as a modification of the default.
- Therefore, the term ‘violation’ in 31 U.S.C. § 5321(a)(5)(A), which does not mention ‘account’, should be interpreted as the failure to file a form.
The court granted summary judgment to the taxpayer as to the penalty cap issue.
It was probably difficult to find in favor of the taxpayer because of the facts, although this was a purely legal issue. There are a number of facts in the opinion (that were omitted here) that could have likely shown willfulness or willful blindness. But that is not what the Government sought.
The IRS has ‘mitigation guidelines‘ in the IRM as to when penalties are applied per form as opposed to per account. Per account penalties are assessed when the facts are egregious – although the IRM does not tell us what facts are considered egregious. It seems that the IRS created their own separate category of “really bad non-willful” which is just not in the statute.
This provided the IRS with an incredible amount of unfettered discretion.
When per account non-willful penalties are allowed, the IRS has the discretion whether to assess, for example, a $60,000 penalty or a $3M penalty, such as in Bittner.
Sure, we can say let the taxpayer have their day in court. But therein lies the problem. There is almost no burden of proof for the Government – all the Government needs to show on a non-willful penalty is that the taxpayer had an FBAR filing requirement and did not timely file one. A per account non-willful penalty assessment doesn’t increase the burden of proof.
Surely Congress did not intend to give this level of discretion (i.e. in whether to assess non-willful penalties by account or by form) to the IRS, much less to a single IRS examiner, group manager, or FBAR coordinator on a penalty that carries virtually no burden of proof for the Government.
Kaufman was a good decision.