IRS Can Assess FBAR Penalty Based on Number of Accounts Rather Than Number of Filings

(Parker Tax Publishing May 2019)

A district court held that the IRS could assess a penalty on each account that a taxpayer failed to report on a Foreign Bank and Financial Accounts (FBAR) form, rather than on each FBAR filing she failed to make. The court rejected the taxpayer's argument 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. Boyd v. U.S., 2019 PTC 161 (C.D. Calif. 2019).

Background

Jane Boyd is a U.S. citizen. During 2010, Boyd had a financial interest in, signatory authority over, and/or otherwise controlled 14 financial 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.

Boyd was required by law to file a Foreign Bank and Financial Accounts (FBAR) form disclosing her financial interest in her 14 U.K. bank accounts for 2010, but failed to timely do so. In 2012, she submitted an application to participate in the IRS Offshore Voluntary Disclosure Program (OVDP), an IRS initiative intended to provide a predictable and uniform penalty structure 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 and the IRS agreed. 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 13 FBAR violations but that she had not violated her reporting requirements willfully. The IRS further determined that Boyd was eligible to mitigate the FBAR penalties. Specifically, it determined that she had satisfied four threshold conditions set forth in the Internal Revenue Manual (IRM) and that she was eligible for Level II non-willful mitigation with respect to each of the U.K. accounts, since each account contained less than $250,000.

On June 9, 2016, the IRS assessed 13 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 percent of the highest 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 filed suit in a district court seeking to reduce the penalty assessment to judgment, as well as late-payment penalties and interest assessed against Boyd.

FBAR Statute

Under 31 U.S.C. Sec. 5321(a)(5)(A), the Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of 31 U.S.C. Sec. 5314. Under 31 U.S.C. Sec. 5314(a) and corresponding regulations, U.S. citizens must report on an annual basis any "financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country" exceeding $10,000.

Compliance Tip: FinCEN Form 114, Report of Foreign Bank and Financial Accounts, is used to report a financial interest in, or signature authority over, a foreign financial account. This report is filed electronically. Previously, FBARs were reported on a printed form, TDF 90-22.1. FinCEN Form 114 is due on or before April 15 of the year immediately following the calendar year being reported.

A person who fails to timely file an FBAR form in accordance with the relevant regulations may be assessed a civil monetary penalty. Under 31 U.S.C. Sec. 5321(a)(5)(B)(i), a penalty for a non-willful violation cannot exceed $10,000. Under 31 U.S.C. Sec. 5321(a)(5)(C)-(D), the penalty for a willful violation can be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation.

Taxpayer's Argument

The taxpayer argued that the plain language of 31 U.S.C. Section 5321(a)(5)(B) supported her position that a non-willful penalty for a given year cannot exceed $10,000. She argued 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.

Government's Argument

The government argued 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 pointed to the reasonable cause exception found in 31 U.S.C. Sec. 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." According to the government, Congress made clear that each violation relates to each "account," since Congress used the singular form of the word. In a similar vein, the government pointed out that 31 U.S.C. Sec. 5321(a)(5)(C)-(D) provides, with respect to willful violations, that an FBAR penalty can be the greater of $100,000 or 50 percent of the "balance in the account at the time of the violation." According to the government, "[i]n each instance, Congress selected the singular forms of 'account' and 'balance,' indicating that a violation relates to one, and only one account."

District Court's Analysis and Holding

The court disagreed with the taxpayer that the relevant statutory language clearly supported her position. Rather, the court viewed 31 U.S.C. Sec. 5321 as somewhat unclear as to whether the $10,000 negligence penalty applies per year or per account. Nonetheless, the court concluded that, given the relevant language the government highlighted, the government had advanced the more reasonable interpretation and thus upheld the government's assessment of 13 separate FBAR penalties against the taxpayer.

Observation: The lead counsel in another case dealing with the same issue sent a letter (2019 PTC 162) to the judge overseeing the Boyd case. In the letter, the lawyer notes that the issue in Boyd is the same as the issue that his clients have and is one of first impression - whether the IRS is unlawfully applying penalties per account, rather than per violation of the filing requirements of 31 U.S.C. Sec. 5314. In the letter, the lawyer notes that the fines assessed in his case, Patels et al. v. U.S. (No: 8:18-cv-238), are the largest non-willful filing violation penalties ever assessed - $440,000 for one of his four clients alone, including multiple $10,000 penalties on accounts with balances less than $100.

For a discussion of FBAR penalties, 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.

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