Taxpayer "Willfully" Failed to File FBAR; Maximum Penalty Upheld

(Parker Tax Publishing January 2019)

The Court of Federal Claims held that a taxpayer's failure to file a Report of Foreign Bank and Financial Accounts was "willful" because, by failing to review her tax returns for the years at issue and falsely representing on her tax returns that she had no foreign bank accounts, she acted with reckless disregard of the duty to report the accounts. The court also found that the IRS did not abuse its discretion in imposing the maximum penalty based on its finding of willfulness. Kimble v. U.S., 2018 PTC 450 (Fed. Cl. 2018).

Background

Alice Green is a U.S. citizen, born in 1951. Her father, Harold Green, died in 1997; her mother, Frances Green, died in 2016. Around 1980, the Greens opened an investment account at the Union Bank of Switzerland (UBS) and designated Alice as a co-owner. Mr. Green, who was Jewish, established the account for use in case Alice ever needed to escape the United States in the event of a second Holocaust. Alice married Michael Kimble in 1984. Mr. Green told Mr. Kimble about the UBS account, specifying that it should be kept secret and used only in a dire emergency. Mr. Kimble promised to always respect Mr. Green's wishes. The Kimbles had one son, David, born in 1985. Mrs. Kimble told David about the UBS account when he was a teenager and instructed him to keep it secret.

In 1998, the Kimbles opened a bank account at HSBC in Paris, France, to pay expenses associated with a Paris apartment they owned. Mr. Kimble handled the couple's finances and prepared their joint tax returns, but never reported any investment income derived either from the HSBC or the UBS accounts. He also did not report the existence of their foreign bank accounts.

The Kimbles divorced in 2000. The UBS account was not mentioned in any divorce documents and, after the divorce, Mrs. Kimble became the sole owner of the HSBC account. Around 2000, Mrs. Kimble hired Steven Weinstein, a CPA, to prepare her tax returns. Weinstein never asked Mrs. Kimble if she had a foreign bank account, and she did not disclose the existence of either the UBS or HSBC accounts to Weinstein. Mrs. Kimble also never asked Weinstein whether foreign investment income needed to be reported on her income tax returns.

In 2005, Mrs. Kimble granted powers of attorney over the UBS account to her son and her mother. She also signed a bank verification form stating that she was the sole beneficial owner of the account. Her representation was inaccurate, as her mother was a co-owner of the UBS account at that time.

The UBS account earned investment income each year from 2003 through 2008. Around 2008, Mrs. Kimble added David as a co-owner on the UBS account. That year, Mrs. Kimble learned from a newspaper article that the United States was pressuring UBS to reveal the names of people who had secret accounts. Mrs. Kimble did not know she was required to disclose her foreign bank accounts until she read the article. As of June 2008, the UBS account balance was approximately $1.3 million and the HSBC account balance was $134,000.

In 2009, UBS entered an agreement with the United States requiring the bank to provide the names and account information of U.S. citizen clients. Mrs. Kimble authorized UBS to comply with the IRS's request. In 2010, Mrs. Kimble sold the Paris apartment, closed the HSBC account, and deposited the proceeds into the UBS account.

Mrs. Kimble did not report any investment income, either from the UBS or HSBC accounts, on her tax returns for 2004 through 2008. She also did not review the accuracy of any returns filed on her behalf for 2003 through 2008. On her 2004 through 2007 returns, Alice answered "no" to Question 7(a) on Schedule B of Form 1040, which asks whether the taxpayer has an interest in a foreign bank account. She left that line blank on her 2008 return. She also did not report her interest in the accounts by filing a timely Report of Foreign Bank and Financial Accounts (FBAR) for 2003 through 2008.

In 2009, Mrs. Kimble was accepted into the Offshore Voluntary Disclosure Program (OVDP). She filed amended returns for 2003 through 2008. For 2007, she changed her answer to Question 7(a) on Schedule B to "yes" but left her answer unchanged on the rest of the returns. Mrs. Kimble also filed FBARs for 2003 through 2008.

In 2012, Mrs. Kimble and the IRS negotiated a closing agreement requiring Mrs. Kimble to pay a miscellaneous penalty of approximately $377,000. In 2013, Mrs. Kimble withdrew from the OVDP. The IRS informed her that opting out of the OVDP was irrevocable and could result in a higher penalty.

The penalty for not filing an FBAR depends on whether the taxpayer's failure was "willful." In 2013, the IRS determined that Mrs. Kimble's failure to file an FBAR for 2007 was willful because she (1) had a direct interest in the accounts and was listed as the sole owner of each account; (2) answered "no" to Question 7(a) on all of her original Schedules B; (3) failed not only to disclose the accounts but omitted all income associated with them; (4) concealed the existence of her accounts; (5) actively managed both accounts; (6) had no business or family connections to either France or Switzerland; (7) remained noncompliant after entering and exiting the OVDP; and (8) had sizable offshore income in the accounts.

In 2016, the IRS assessed a penalty of approximately $697,000, consisting of 50 percent of the UBS account balance and 10 percent of the HSBC account balance. Mrs. Kimble paid the full amount and filed a refund claim. In 2017, she sued for a refund in the Court of Federal Claims.

Analysis

A U.S. resident with an interest in a foreign bank account exceeding $10,000 is required under 31 U.S.C. Sec. 5314 to disclose the interest on an FBAR. Under 31 U.S.C. Sec. 5321(a)(5), as amended by the American Jobs Creation Act of 2004 (2004 AJCA), a willful violation of the FBAR requirement results in a penalty equal to the greater of $100,000 or 50 percent of the account balance at the time of the violation. Prior to the amendment of the penalty by the 2004 AJCA, the maximum penalty was $100,000. The regulations under this statute, however, have yet to be updated for the increased penalty amounts.

Observation: There is a difference of opinion among some courts as to the maximum penalty that may be applied where a taxpayer has not filed a FBAR or has filed an inaccurate FBAR. In Wadhan v. U.S., 2018 PTC 245 (D. Colo. 2018) and U.S. v. Colliot, 2018 PTC 251 (W.D. Tex. 2018), two district courts held that the IRS could not assess penalties in excess of $100,000 per year, the limit specified in the regulations in 31 C.F.R. Sec. 1010.820, where a taxpayer failed to file or filed inaccurate FBAR, even though the related statute (31 U.S.C. Sec. 5321(a)(5)(C)) increased the penalty in 2004 to the greater of $100,000 or 50 percent of the balance in the relevant account. However, the Court of Federal Claims, in Norman v. U.S., 2018 PTC 250 (Fed. Cl. 2018), held that the IRS properly assessed against a taxpayer a penalty in the amount of 50 percent of the balance of her 2007 unreported foreign account after a finding that she willfully failed to file a FBAR in connection with her 2007 Swiss bank account.

Willfulness includes reckless violations, defined as actions that entail an unjustifiably high risk of harm that is either known or so obvious that it should be known.

The government moved for summary judgment as to Mrs. Kimble's willfulness in failing to file an FBAR. It contended that she knew she had funds in foreign bank accounts but did not report them and falsely represented on her tax return that she had no foreign accounts. The government claimed that Mrs. Kimble's failure to file an FBAR was part of a broader effort to conceal the UBS account's existence from the IRS.

Mrs. Kimble responded that under the government's broad interpretation of willfulness, every failure to file an FBAR would be willful. She argued she made no conscious effort not to comply, was not a bad actor, and did not use the UBS account for any illegal activity. She also contended that the IRS abused its discretion in assessing the penalty because it did not consider factors other than the size of the account. She also argued that the IRS abused its discretion when it found that she was the sole beneficiary of the UBS account, since she was a co-owner with her mother.

The Court of Federal Claims held that Mrs. Kimble's failure to file an FBAR for 2007 was willful. According to the court, Mrs. Kimble recklessly disregarded her duty to report the accounts because she failed to review her tax returns for accuracy and falsely represented on her 2007 return that she had no foreign bank accounts. The court also noted that Mrs. Kimble failed to disclose the UBS account to Weinstein and never asked him how to properly report foreign investment income.

The court also concluded that the IRS did not abuse its discretion in assessing the penalty. Mrs. Kimble failed to show why the IRS's erroneous determination that she was the sole owner of the account rendered the penalty assessment unlawful. The court also found that Mrs. Kimble was not entitled to a maximum penalty of $100,000 because the later-enacted 31 U.S.C. Sec. 5321(a)(5) nullified the inconsistent regulation.

For a discussion of FBAR reporting requirements and penalties for not filing an FBAR, 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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