Breaking from Wadhan and Colliot, the court in Norman v. United States, No. 15-872T (Ct. Cl. 2018) recently held that FBAR willful penalties are not limited to $100,000 despite the regulation which sets a $100,000 maximum cap.
Facts and procedural history
Plaintiff, Ms. Norman, a retired school teacher, signed documents to open a secret numbered bank account with UBS in Switzerland. After UBS informed Ms. Norman that UBS would be working with the US government to identify the names of US clients who may have engaged in tax fraud, she then closed her account and transferred her funds to Weglein & Co.
Rather than applying to the OVDP in 2009, Ms. Norman filed a “quiet disclosure” through her Swiss accountant, Mr. Kraft. A taxpayer makes a quiet disclosure by filing amended tax returns and FBARs and paying related tax and interest for previously unreported offshore income, without otherwise notifying the IRS or admitting any culpability for violating § 5314.
The IRS assessed a civil penalty under 31 U.S.C. § 5321(a)(5)(C), in the amount of $803,530, for the willful failure to report an interest in a bank account at UBS in Switzerland for 2007. The penalty amount was 50% of the account balance.
Plaintiff contested the penalty assessment before the IRS Office of Appeals, but the assessment was sustained. She then paid the penalty in full.
Subsequently, plaintiff filed a Form 843, Claim for Refund and Request for Abatement, seeking a refund or abatement of the penalty from the IRS. In the complaint, plaintiff argues that the assessment of the penalty was arbitrary and capricious.
While the case was in litigation, the Colliot decision was handed down that limited willful FBAR penalties to $100,000 per the Treasury Regulation (which had not been updated to reflect the high penalty cap in the Internal Revenue Code).
FBARs filing requirement and penalties
In 1970, Congress enacted the Bank Secrecy Act and authorized the Treasury Secretary to prescribe regulations which would implement the Bank Secrecy Act. The Treasury Secretary then required citizens with an interest in or control over one or more foreign financial accounts with value above $10,000 at any time during that calendar year, to file an FBAR before June 30 of the following year (now April 15). To enforce this regulation, the IRS may assess a “civil money penalty on any person who violates, or causes any violation of, any provision of § 5314,” not to exceed $10,000.
§ 5321(a)(5)(C) mandates that the maximum penalty “shall be increased to the greater of $100,000, or 50 percent of the
The later higher penalty amount is applied for willful violations of failure to file an FBAR.
The standard for willfulness under the Bank Secrecy Act
The term “willful” is not defined under the statute. See generally, 31 U.S.C. § 5321. However, the Bank Secrecy Act specifically defines penalties under § 5321 as “civil money penalties.” § 5321(a)(5)(A). Where, as here, “willfulness is a condition for civil liability,” it is “generally taken  to cover not only knowing violations of a standard, but reckless ones as well.”
“While the term recklessness is not self-defining, the common law has generally understood it in the sphere of civil liability as conduct violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.”
Specific to FBAR cases, willfulness in the context of violations of § 5321 “may be proven ‘through inference from conduct meant to conceal or mislead sources of income or other financial information,’ and it ‘can be inferred from a conscious effort to avoid learning about reporting requirements.” Williams, 489 Fed. App’x at 658 (quoting United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991). A person willfully violates section 5314 when she “either knowingly or recklessly fails to file an FBAR.”
In this case, some of the facts that probably led to a determination of willfulness are:
- Large transfers of money from the U.S. to the offshore account
- The account was a numbered account (to conceal her ownership)
- The location of the account in a known tax haven (Switzerland)
- Lack of business or other purpose for the account and no apparent ties to Switzerland
- Active management of the investment portfolio
- UBS notifying Ms. Norman that they were providing customer information to the US government, after which she opened another account, also in Switzerland
- Subsequently making a quite disclosure
- Numerous inaccuracies and misstatements made during her audit interview and at trial
Are FBAR willful penalties limited to $100,000?
The court finds that the penalty is not limited to $100,000. The maximum penalty that can be assessed under § 5321(a)(5)(C) is the greater of $100,000 or 50 percent of the account.
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.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR Submission Procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.