Ninth Circuit: Late FBAR Penalty Applies Per Filing, Not Per Account

(Parker Tax Publishing April 2021)

In a case of first impression reversing a lower court's decision, the Ninth Circuit held that the penalty for a non-willful failure to file a timely Report of Foreign Bank and Financial Accounts (FBAR) applies on a per-filing basis rather than per account. The court examined the statutory and regulatory scheme under 31 U.S.C. Sec. 5314 and held that the statute authorizes the IRS to impose only one non-willful penalty when an untimely, but accurate, FBAR is filed, no matter the number of foreign bank accounts held by the taxpayer. U.S. v. Boyd, 2021 PTC 72 (9th Cir. 2021).

Background

Jane Boyd, an American citizen, had a financial interest in fourteen financial accounts in the United Kingdom with an aggregate balance in excess of $10,000. The amounts in these accounts significantly increased between 2009 and 2011 after her father died in 2009 and she deposited her inheritance from him. Boyd received interest and dividends from these accounts and did not report the interest and dividends on her 2010 federal income tax return or disclose the accounts to the IRS.

In 2012, Boyd asked to participate in the IRS's Offshore Voluntary Disclosure Program (OVDP), a program that allowed taxpayers to voluntarily report undisclosed offshore financial accounts in exchange for predictable and uniform penalties. After the IRS accepted Boyd into the program, she submitted, in October 2012, an FBAR listing her 14 foreign accounts for 2010 and amended her 2010 tax return to include the interest and dividends from these accounts. Boyd was granted permission by the IRS to opt out of the OVDP in 2014. The IRS then examined Boyd's return and concluded that she committed 13 FBAR violations - one violation for each account she failed to timely report for calendar year 2010 (one of the 14 accounts was used to fund several other accounts and the IRS therefore did not impose a separate penalty on that account). Boyd's late-submitted FBAR was complete and accurate.

The IRS concluded that Boyd's violations were non-willful, and it assessed a total penalty of $47,279. In 2018, the government sued Boyd seeking to obtain a judgment against her for that amount plus additional late-payment penalties and interest. Boyd argued before the district court that she had committed only one non-willful violation and that the maximum penalty allowed for that single non-willful violation was $10,000. The district court disagreed and held that Boyd was liable for the 13 FBAR violations determined by the IRS. Boyd appealed to the Ninth Circuit.

Under 31 U.S.C. Sec. 5321(a)(5)(A), the government is authorized to impose a civil penalty for violating any provision of 31 U.S.C. Sec. 5314. Section 5321 establishes two types of civil penalties depending on whether the violation was willful or non-willful. The maximum penalty for a non-willful violation cannot exceed $10,000. The maximum penalty for a willful violation is the greater of $100,000 or 50 percent of the balance of the account at the time of the violation. A reasonable cause exception applies for non-willful violations under Section 5321(a)(5)(B)(ii) if the violation was due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported. The statute is implemented by two relevant regulations. The first, 31 C.F.R. Sec. 1010.350(a), requires citizens to report financial interests in foreign accounts for each year in which such relationship exists and provide such information as shall be specified in the FBAR form. The second, 31 C.F.R. Sec. 1010.306(c), requires that the FBAR be filed on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year. Thus, Section 1010.350 and the FBAR form describe what information must be disclosed, while Section 1010.306 imposes a deadline for when the FBAR must be filed.

On appeal, Boyd argued that the statutory language does not support a separate penalty for each account she should have listed on the FBAR she failed to timely file. Rather, according to Boyd, the statute and regulations provide that a non-willful, untimely but accurate FBAR filing constitutes a single violation subject to a maximum penalty of $10,000. The IRS contended that the wording of 31 C.F.R. Sec. 1010.350(a) makes the obligation to report each account independent of the obligation to file an FBAR, and therefore a taxpayer who fails to report multiple foreign bank accounts commits multiple violations. The IRS further argued that the use of the word "any" before "violation" in 31 U.S.C. Sec. 5321(a)(5)(A) means that more than one violation may occur with respect to a particular FBAR. The IRS also argued that, because Congress amended Section 5321 in 2004 to add a willful violation penalty and explicitly based the penalty amount on the balance of any account willfully misreported or non-reported, Congress must have intended that the non-willful violation also based the penalty amount on the number of accounts misreported or non-reported. Further, the IRS said that the per-account language in the reasonable cause exception to non-willful violations supported its interpretation.

Analysis

The Ninth Circuit reversed the district court and held that Boyd committed only one violation by filing a late FBAR. The court found that because Boyd's late-filed FBAR was accurate, she could not have violated Section 1010.350 - the regulation that delineates the content of the FBAR. Rather, Boyd violated only Section 1010.306, since her FBAR for 2010 was due by June 30, 2011, and she did not file it until 2012. Thus, the court held that under the statutory and regulatory scheme, Boyd committed a single non-willful violation, i.e., the failure to timely file the FBAR. The court also disagreed that the word "any" in 31 U.S.C. Sec. 5321(a)(5)(A) meant that more than one violation could occur with respect to one FBAR. The court said that the statute simply refers to the relevant regulations that prescribe how the provisions in Section 5314 may be violated.

The court also rejected the IRS's argument that Congress intended to impose multiple non-willful violations for the filing of a single FBAR by basing the willful violation penalty provision on the balance of any account willfully misreported or non-reported. In the court's view, the fact that Congress amended Section 5321 in 2004 to extend the existing penalties to non-willful violations, but omitted the per-account language from the non-willful penalty provisions, suggested that Congress did not intend for the penalty to apply on a per-account basis. The court also thought that, contrary to the IRS's argument, the inclusion of per-account language in the reasonable cause exception supported the view the Congress intentionally omitted such language from the non-willful penalty provision. The court concluded that the non-willful penalty provision allows the IRS to assess one penalty not to exceed $10,000 per violation, and nothing in the statute or regulations suggested that the penalty may be calculated on a per-account basis for a single failure to file a timely FBAR that is otherwise accurate.

Observation: In a dissenting opinion, one judge said it was clear from the statute and regulations that any failure to report a foreign account is an independent violation, subject to independent penalties. The dissenting judge thought that the majority was conflating the "report" that a person must make, which means the timely reporting of the existence of each account, with the "reporting form" required by the regulations, i.e., the FBAR.

For a discussion of the requirement to report foreign bank accounts, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com