Under 31 USC 5314(a) and 31 C.F.R. 1010.350, every U.S. person that has a financial interest in, or signature or other authority over, a financial account in a foreign country must report the account to IRS annually on an FBAR. The penalty for violating the FBAR requirement is set forth in 31 USC 5321(a)(5). 31 USC 5321(a)(5)(A) provides that the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of 31 USC 5314(a).
The maximum amount of the penalty depends on whether the violation was non-willful or willful. The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. (31 USC 5321(a)(5)(B)(i)) The maximum penalty amount for a willful violation is the greater of $100,000 or 50% of the balance in the account at the time of the violation. (31 USC 5321(a)(5)(C), 31 USC 5321(a)(5)(D)).
The penalty amounts described above reflect a 2004 law change that increased the maximum civil penalties that can be assessed for willful failure to file an FBAR. Before that change, the maximum penalty was $100,000. Regs that were promulgated before the statutory increase continue to reflect the former $100,000 maximum (as opposed to the "greater of $100,000 or 50%" maximum). (31 C.F.R. 1010.820(g)). There is currently disagreement amongst courts as to whether the 2004 statutory amendment invalidated the $100,000 cap established by 31 C.F.R 1010.820.
Alice Green, the taxpayer, is a U.S. citizen. Sometime prior to '80, her parents opened an investment account at the Union Bank of Switzerland (UBS account) and designated Alice as a joint owner.Alice's father was Jewish, and members of his family had been killed in the Holocaust. According to Alice, her father's intent with respect to the UBS account was to provide Alice with funds in case she needed to escape America. The money in the UBS account was only to be used in an emergency, and its existence was to be kept a secret.
In 2008, Alice learned from a newspaper article that the U.S. was “putting pressure on UBS to reveal the names of people who had secret accounts in UBS" and retained counsel to comply with foreign reporting requirements. On June 30, 2008, the balance in the UBS account was $1,365,662, and the balance in the HSBC account was $134,130.
Alice didn't report any investment income from either account on her original income tax returns from 2004 through 2008 despite having income each year. She also answered a question on those tax returns regarding the existence of reportable foreign financial accounts in the negative for three of those returns, and left the question blank on the fourth. The instructions for that question indicated that a "yes" answer would mean that an FBAR should be filed. Alice didn't file FBARs during these years.
In 2009, Alice applied, and was accepted, to the Offshore Voluntary Disclosure Program (OVDP). As part of her participation in the OVDP, in 2011, she filed amended tax returns for 2003 through 2008 reflecting the unreported investment income. On her 2007 amended returns, she also changed her answer to "yes" regarding the existence of a foreign account, but left it unchanged on the others.
She negotiated a closing agreement with IRS in 2012 that required her to pay the tax liability due as well as a $377,309 penalty.
She Decided Later To Withdraw From The OVDP,
On Account Of The Penalty Amount and
The Court of Federal Claims concluded that Alice's 2007 failure to file an FBAR was willful, finding that her actions were voluntary and that she knew of the requirement vis-a-vis her affirmative answer to the question on her amended 2007 return regarding the existence of foreign reportable accounts. In so holding, the Court rejected Alice's construction of the term "willfulness" as meaning criminal behavior and requiring more than a simple failure to check a box and file an FBAR, and found that Supreme Court precedent supported treating reckless conduct as "willful" for various purposes.
Finally, the Claims Court found that the $100,000 maximum in the regs was no longer valid in light of the new statutory maximum. The Court noted that IRS has stated, in the Internal Revenue Manual (IRM), that while its regs hadn't been revised to reflect the change in the penalty ceiling, the statute raising the maximum was "self-executing and the new penalty ceilings apply." (IRM § 220.127.116.11.5.1)
The Court found that the reasoning of recent district court cases reaching a contrary conclusion (e.g., U.S. v. Colliot, (DC TX) 121 AFTR 2d 2018-1834) conflicted with the reasoning of the Federal Circuit in Barseback Kraft AB v. U.S., (CA Fed Cir 1997) 121 F.3d 1475, which held that certain pricing regs, while not formally withdrawn, had been rendered invalid by an intervening law change.
Now Alice Kimble has asked the appeals court in a brief filed on April 30, 2019, to reverse the U.S. Court of Federal Claims’ ruling that she had willfully failed to disclose her account at UBS AG. She asked the court to decide that the Internal Revenue Service by law cannot impose a penalty of greater than $100,000 for willful failure to file a Foreign Bank and Financial Accounts report.
Read more at: Tax Times blog