Government Seeks Judgment for FBAR Penalties Against Oregon Woman

In U.S. v. Tonisson, No. 3:19-cv-01497, the government filed a complaint to reduce to judgment almost $100,000 in FBAR penalties for Taxpayer’s non-willful failure to report foreign bank accounts from 2011 through 2013.

FBAR filing requirement & penalty statute

31 U.S.C. § 5314(a) – FBAR filing requirement

Federal law requires every resident or citizen of the United States who has a financial interest in, or signatory or other authority over, a bank, securities, or other financial account in a foreign country to report that relationship to the Department of Treasury for each year in which the relationship exists. That report is Form FinCEN 114 “FBAR”.

31 U.S.C. § 5321(a)(5) – FBAR penalties for non-willful failures

Any United States resident or citizen who fails to comply with the FBAR reporting requirements may be subject to a civil penalty. For violations involving the non-willful failure to report an interest in a foreign account, the maximum civil penalty that the Department of Treasury may impose for each violation is $10,000.

The FBAR statute of limitations is 6 years from the due date of the FBAR report. The IRS may not assess FBAR penalties beyond the 6 years unless the Taxpayer has agreed to extend the statute, such as through the now unavailable OVDI or OVDP process.

Until more recently, it was unclear whether a ‘violation’ meant the failure to file the form or a failure to report the account. If the former, then the FBAR penalty would be limited to $10,000 per year, or potentially a maximum of $60,000 for a six year period.

However, the government has taken the position in a string of recent cases that a ‘violation’ is the failure to report the account, and therefore multiple FBAR penalties can be assessed each year.

U.S. v. Tonisson – background

Taxpayer resides in Multnomah County, Oregon, and was a resident of the United States during the calendar years at issue.

Taxpayer immigrated to the U.S. in 2003. Since 2003 failed to file FBARs, despite having interests in foreign bank accounts with annual aggregate balances exceeding $10,000.

On December 8, 2010, Taxpayer, jointly with her husband, submitted an application to enter the IRS’s OVDI program with respect to years going back to 2003.

Taxpayer acknowledged that (1) she had bank accounts at six different foreign banks; (2) the highest aggregate annual balance for these accounts was between $100,000 and $1 million; (3) these foreign accounts generated interest income that Taxpayer did not report on tax returns; and (4) the source of the funds in these foreign accounts was an inheritance from her husband’s mother.

As required for the OVDI, the IRS sent Taxpayer a letter requesting her provide documentation for the tax years covered by the voluntary disclosure. The letter requested delinquent or amended returns reporting income from any foreign bank accounts, copies of bank statements for any foreign accounts, and other relevant documents.

The IRS then sent 3 additional letters, until Taxpayer finally responded to the 4th letter. Taxpayer, through her representative, provided copies of tax returns for 2003, 2008, and 2010 and a copy of an FBAR form for 2010. In addition, Taxpayer claimed that she did not have to file tax returns for the 2004 through 2007 years.

Based on its examination of Taxpayer’s foreign accounts, the IRS reached a different conclusion. The IRS determined that income earned from Taxpayer’s foreign accounts alone was sufficient to require that she file tax returns for the 2004 through 2007 years.

Taxpayer did not provide reasons for failing to file FBAR forms for 2003 through 2008. In addition, Taxpayer did not provide reasons for failing to file FBAR forms for 2009, 2012, and 2013; for failing to file a timely FBAR form for 2010; and for filing an incomplete FBAR form for 2011.

The IRS prepared a closing report, with which Taxpayer disagreed. Taxpayer then opted out of the OVDI program.

During calendar years 2011 through 2013 — the years at issue in this case — Taxpayer had at least seven bank accounts at various banks in France, Sweden, and Denmark. The aggregate balance of these foreign accounts exceeded $10,000 during each of these years.

The IRS then assessed $90,000 in FBAR penalties for 2011 through 2013. The balance now includes interest, failure to pay penalties, and costs of collection, totaling about $98,000

Conclusion

Although the ‘per account’ FBAR non-willful penalty interpretation still seems dubious, the facts are much more damning here than in previous such cases.

Unfortunately for the Taxpayer, the streamlined filing compliance procedures were not yet available, and her only option was to submit her delinquent returns and FBARs under the much harsher OVDI program.

Non-willful taxpayers can now eliminate FBAR penalties by submitting their FBARs and amended tax returns under the streamlined domestic offshore procedures and the streamlined foreign offshore procedures.