United States v. Jane Boyd and Kimble v. United States, decided within two days of each other, delivered very different messages to taxpayers who have foreign financial account reporting obligations. Boyd, decided in the Ninth Circuit, holds that the IRS may impose only one non-willful penalty when a taxpayer files an untimely, but accurate, Report of Foreign Bank and Financial Account (FBAR), no matter how many accounts the taxpayer should have originally reported. Kimble, decided in the Federal Circuit, held that taxpayers who sign their tax returns under penalty of perjury “cannot escape the requirements of the law by failing to review their tax returns,” and that the failure to review tax returns, which would have directed the taxpayer to file an FBAR, is enough to show willfulness.
United States taxpayers who have a direct or indirect interest in, or signature authority over, foreign financial accounts with an aggregate balance of $10,000 or higher must file an FBAR. The FBAR has no tax implications at all, it is merely an information reporting form. But the penalties for failing to file an FBAR, or for filing a false FBAR, are staggering: $100,000 or 50 percent of the balance of the account at the time of the violation for willful violations, and $10,000 for non willful violations.
What makes an FBAR Violation Willful?
In Kimble v. United States, the Court of Appeals for the Federal Circuit put the nail in the coffin for most defenses available for taxpayers who read and signed their tax returns, but did not file an FBAR when they knew they had an ownership interest in a foreign financial account. Caroline Rule, a long-time tax litigator and partner with Kostelanetz & Fink, LLP explained:
The Kimble decision holds that signing a tax return that does not disclose a foreign bank account means that a taxpayer is reckless in not filing an FBAR and hence is liable for a willful FBAR penalty. This essentially leaves no room for the non-willful penalty, since an individual who voluntarily files an untimely FBAR, like the taxpayer in Boyd, will very likely have previously signed and filed a tax return that did not disclose her foreign accounts. But the taxpayer in Kimble did more than merely sign the tax returns, carrying out her father’s wishes to preserve the secrecy of a foreign bank account and giving instructions to the foreign bank that would ensure that the account was not disclosed to the U.S. Her affirmative acts to ensure the account’s secrecy evidenced that the she knew there was a requirement to disclose a foreign account in the U.S. and she was avoiding that requirement. There was therefore evidence to support a willful penalty without a need for the court’s reductive holding based only on her signing a tax return.
Zhanna Ziering, a member with the law firm of Caplin & Drysdale, Chartered, agrees, noting that the way that courts are currently interpreting the willfulness requirement under the FBAR statute leaves very little room for courts to find non willfulness or reasonable cause, and has resulted in strict liability that was not intended by the statute.
Taxpayers who have an interest in a foreign financial account, who read and sign their tax returns, and who are aware of the interest in the foreign financial account face an uphill battle in FBAR cases, despite the plain language in the FBAR statute to provide for a non willful penalty and a reasonable cause exception to the penalty.
What penalties apply to Non-Willful Violations?
In Boyd, the IRS did not assert a willful penalty, and the only penalty at issue was a non willful penalty. The IRS contended that the statute provides for a $10,000 penalty per account that should have been reported, and the taxpayer argued, successfully on appeal, that the maximum applicable penalty for a late-filed FBAR is one $10,000 penalty when the late filing was non-willful. The Court of Appeals for the Ninth Circuit agreed with the taxpayer, holding that the plain language of the statute only provides for one penalty per late-filed FBAR forms. The taxpayer victory is bittersweet, however, because a dissent from Judge Ikuta argues that the majority “misinterprets the rules in a way that favors the tax evader.”
Lavar Taylor, counsel for the taxpayer in Boyd, is “thankful that the court reached the correct result,” but “disagrees with the dissent’s suggestion that this case involves, or applies to, tax evaders.” Likewise, Caroline Ciraolo, who together with Caroline Rule represented the American College of Tax Counsel as Amicus Curiae in Boyd, takes issue with the dissent’s characterization of those who fail to file FBARs as a “tax evader”. Ciraolo noted, “The Ninth Circuit reached the correct conclusion in limiting the failure to file a timely FBAR to a single violation and single non-willful FBAR penalty. What comes as a shock is the dissent’s mischaracterization of Appellant as a tax evader. The FBAR is not a tax form and the failure to file an FBAR does not result in a tax due and owing, an element of tax evasion. Moreover, even the government, which advocates for an extremely broad interpretation of willfulness as indicated in Federal Circuit’s recent decision in Kimble, determined that Appellant engaged in non-willful conduct. The suggestion that the Ninth Circuit’s interpretation of statutes and regulations applicable to non-willful FBAR penalties unfairly favors the tax evader is simply beyond reason.”
Putting it all together
Like many members of the Tax Court Bar, I am relieved to see the majority opinion from the Ninth Circuit in Boyd, but disheartened by the dissent in that case and the opinion in Kimble. Courts are creating a strict-liability test for FBAR violations – meaning that ignorance of the law is no excuse – that is not reflected in the statute. Congress knows very well how to create a strict liability law if it wants to, and the FBAR penalty statute provides for a three tiered penalty system: willful violations, non willful violations, and violations excused by reasonable cause. Having represented hundreds of taxpayers who have made both intentional omissions on tax returns and information reporting forms such as FBARs and made honest mistakes and omissions, I can attest that the three-tiered statutory penalty scheme is an accurate reflection of what I see in practice – those who have no excuse for the error or omission (willful violations), those who might have done more to discover their obligations, but certainly did not try to intentionally conceal or hide anything (non willful violations), and those who did try to determine their reporting obligations, but nonetheless got it wrong (reasonable cause). Courts should not eliminate three-tiered statutory penalty scheme Congress created.
The Department of Justice, Tax Division did not immediately respond to a request for comment.