Can FBAR penalties be assessed on a per account basis? In the recent United States v. Boyd, the court answered that question when it found that non-willful FBAR penalties can be assessed on a per account basis.
FBAR Non-Willful Penalty Statute
31 U.S.C. 5314(a) and its corresponding regulation under 31 C.F.R. § 1010.350 requires all U.S. persons (i.e., citizens, green card holders, and tax residents) to report foreign financial accounts on Form FinCEN 114 (“FBAR”) annually if the aggregate value of their foreign financial accounts exceeds $10,000.
31 U.S. Code § 5321(a)(5)(B)(i) authorizes the Treasury Secretary to assess a civil penalty on any person who violates section 5314 (FBAR filing requirement), and that penalty for non-willful violations may not exceed $10,000. The Treasury Secretary delegated the authority to the IRS to assess and collect FBAR penalties under 31 C.F.R. § 1010.810(g).
U.S. v. Boyd – Taxpayer’s Position
Boyd is a U.S. Citizen. During 2010, Boyd had a financial interest in accounts in the United Kingdom. The U.K. accounts had collective balances in excess of $10,000. In 2010, Boyd received interest and dividends from the U.K. accounts. Boyd, however, did not report the interest and dividends on her 2010 federal income tax return, nor did she otherwise disclose the existence of her U.K. accounts on the return.
In 2012, Boyd submitted an application to participate in the Internal Revenue Service’s (“IRS”) Offshore Voluntary Disclosure Program (“OVDP”), an IRS initiative for taxpayers who wished to voluntarily report previously undisclosed offshore financial accounts.
Boyd was accepted into the OVDP and submitted, in October of 2012, a delinquent FBAR for the 2010 calendar year. Around the same time, Boyd amended her 2010 federal income tax return to reflect the interest and dividends she received from the U.K. accounts.
In March of 2014, Boyd requested to opt out of the OVDP. Opting out of the OVDP meant that the IRS would examine Boyd’s income tax returns for the years for which no FBAR was submitted. In addition, the IRS would determine whether to assert FBAR penalties against Boyd. The IRS eventually concluded that Boyd had committed thirteen FBAR violations but that she had not violated her reporting requirements willfully.
In assessing the thirteen separate FBAR penalties against Boyd, the IRS treated each account that was not listed on a timely filed FBAR as a separate non-willful violation.
The amount of each FBAR penalty was computed based on the highest balance contained in the relevant account during 2010. For accounts containing $50,000 or more, the IRS asserted a $5,000 penalty. For accounts containing less than $50,000, the IRS asserted a penalty equal to 10% of the high balance in the account. On June 10, 2016, the IRS sent Boyd a letter demanding payment of the FBAR penalties.
On January 31, 2018, the Government commenced this action seeking to reduce the penalty assessment to judgment, as well as late-payment penalties and interest assessed against Boyd.
Taxpayer contends that, if there is a non-willful failure to file an FBAR, the penalty cannot exceed $10,000, regardless of the number of bank accounts required to have been listed on the FBAR.
Taxpayer argues further that, had Congress intended to impose a penalty based on each bank account required to be shown on the FBAR, Congress could have easily included such explicit language.
U.S. v. Boyd – Government’s Position
The Government argues that the better interpretation of the relevant statutory and regulatory language is that each non-willful FBAR violation relates to a foreign financial account, and that the IRS may penalize each such violation with a penalty not to exceed $10,000.
In support of its argument, the Government points to the reasonable cause exception found in 31 U.S.C. § 5321(a)(B)(ii), which provides: “No penalty shall be imposed . . . 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.”
The Government contends that Congress made clear that each violation relates to each “account,” since Congress used the singular form of the word.
The Court views section 5321 as somewhat unclear as to whether the $10,000 negligence penalty applies per year or per account.
However, in light of the prominence of “transactions” and “accounts” in the language of section 5321, the Court determines that the statute contemplates that the relationship with each foreign financial account constitutes the non-willful FBAR violation.
The Court ultimately determines that more than one FBAR penalty may be assessed per year. Taxpayer motion for summary judgment was denied and the Government’s motion for the same was granted.
FBAR penalty – remedial or penal?
Eight Amendment wasn’t raised here, but it might be applicable. It’s not a novel argument in FBAR suits, but it typically hasn’t been raised in the non-willful context. It’s precisely here where it could apply – where a taxpayer who is clearly not willful is subject to substantial civil penalties. In some cases, non-willful FBAR and international information return penalties can be as significant as willful FBAR violations.
“The touchstone of the constitutional inquiry under the Excessive Fines Clause is the principle of proportionality: The amount of the forfeiture must bear some relationship to the gravity of the offense that it is designed to punish”, writes the Court in U.S. v. Bajakajian 524 U.S. 321 (1998).
Although Bajakajian applies to civil asset forfeiture, there’s no logical reason why it shouldn’t also apply to certain civil penalties. At least in the FBAR penalty context, the money is usually still sitting in a foreign account and available for the Government to eventually collect, and the penalty can’t be discharged in Chapter 7 bankruptcy. By the time of assessment, the Government is already fully aware of the contents in the foreign accounts; moreover, the accounts may have been frozen due to FATCA non-compliance. The only difference between a civil forfeiture and an FBAR penalty is that the Government has to wait a little longer to collect an FBAR penalty.
The Court in Bajakajian found that the forfeiture of currency at issue was grossly disproportionate to the respondent’s offense. Among the facts it noted:
- The nature of the crime was solely a reporting offense
- The violation was unrelated to any other legal activities
- The “respondent [did] not fit into the class of persons for whom the statute was principally designed” and was “not a money launderer, a drug trafficker, or a tax evader”
If Bajakajian could be applied here, it would be hard to argue that the 13 FBAR penalty assessments are not fines intended to punish. The money is legal sourced and not used for any unlawful purposes. Is the penalty proportional to the harm caused? Consider the purposes of FBAR filing:
- To provide information. FBARs allegedly provide “information to fight fraud, money laundering, terrorist financing, tax evasion and other financial crime.” None of these crimes were committed here, and the government was not deprived of any meaningful information. It could be argued that fines encourage taxpayers to file their FBARs. However, fines would not encourage compliance in non-willful situations if the Taxpayer was not aware of the filing requirement in the first place.
- Related Title 26 violations. If the government seeks to assess FBAR penalties for related Title 26 violations, there’s already a laundry list that covers that, including civil fraud, 40% accuracy-related, failure-to-pay, and 6038D penalties. Most of these were probably assessed, or at least could have been assessed, along with the FBAR penalties.
In Helvering v. Mitchell, 303 US 391 (1938), the Supreme Court held that a 50% penalty imposed for committing income tax fraud is remedial. However, the civil fraud penalty is tied to the amount of additional tax owed to the government, and which bears a direct relationship to the offense.
FBAR willful penalties, on the other hand, are tied to the amount of funds in a foreign bank account. It doesn’t matter if the money was legal-sourced, previously taxed, or even if previously reported on an FBAR. And FBAR non-willful penalties are now tied to the number of bank accounts. In neither situation does the penalty bear a relationship to the gravity of the offense.
As it stands, Constitutional limits against excessive civil penalties are not well-defined. There’s bound to be an upper-limit for civil penalties and perhaps the Supreme Court will someday provide the framework for it. Until then, lower courts will probably continue to sweep constitutional challenges to civil penalties as remedial.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with their 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.