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Willful FBAR penalties can quickly add up to hundreds of thousands of dollars. But are those penalties an unconstitutional fine under the Eighth Amendment? In a recent filing in the United States Court of Federal Claims, the government said the amount didn't matter, constitutionally speaking, because an FBAR penalty is not a fine at all.
When the Internal Revenue Service (IRS) imposed willful FBAR violation penalties on Alice Kimble, she filed a lawsuit in federal court. She said the fine was inappropriate because the failure to file FinCEN 115 forms was non-willful. Even if the court found her actions were willful, she and her tax attorney argued the penalty violated the Eighth Amendment of the U.S. Constitution — the ban on excessive fines and penalties.
Every year, U.S. taxpayers with over $10,000 in financial accounts overseas are required to file a Foreign Bank Account Report (FBAR) under the Bank Secrecy Act. FBAR penalties for accidental, inadvertent, or otherwise non-willful failure to file are limited. They can't exceed $10,000 per account, per year. But where the IRS decides the violation was willful, it can impose up to $100,000 or 50% of the highest aggregate balance of all unreported accounts.
The question of whether FBAR violations are willful or non-willful has been the basis for extensive tax litigation. Over the years, the courts have identified 3 ways a person can willfully fail to file FBARs:
If a person knew, or reasonably should have known, about the FBAR reporting requirement, the IRS is allowed to impose willful FBAR penalties, even if the taxpayer unintentionally missed the deadline or failed to file.
In Kimble v United States (No. 1:17-cv-00421), Alice Kimble owned two foreign bank accounts, one with HSBC and another with UBS. According to Kimble, the UBS account was funded by her father's income as a lawyer. Shortly before his death he made her a joint owner on the account so that she "inherited" the money when he died. She admitted to not filing an FBAR in 2007, but said the violation was not willful.
But the IRS said Kimble was intentionally keeping the UBS account a secret from everyone, including the U.S. government. She maintained the account as a numbered account, withheld all correspondence from the bank, and avoided investing in U.S. securities. From the IRS's perspective, that demonstrated her willfulness in not filing FBARs and not checking the box disclosing foreign assets on her tax returns.
In response to the IRS, Kimble raised a different defense. She said that even if her conduct was willful, the penalty the IRS imposed was an unconstitutional excessive fine. The Eighth Amendment says "excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted." The question Kimble and the IRS put in front of the court was whether willful FBAR penalties count as fines, and if they are excessive.
The IRS argued that the the Eighth Amendment did not prevent the IRS from imposing willful FBAR penalties. The government's attorneys argued the Eighth Amendment shouldn't apply at all, because the FBAR penalties weren't fines in the constitutional sense.
Federal courts have distinguished between criminal penalties and civil fines imposed for remedial purposes. Criminal fines and forfeitures have been regulated under the Eighth Amendment. But that constitutional provision doesn't apply to civil fines. However, even in its argument, the IRS cited cases where previous federal courts had "assumed" the penalties were a fine before weighing whether they were excessive under the circumstances. While the IRS drew connections between FBAR penalties and other civil remedial fines, it could not say another court had found FBAR penalties were not controlled by the Eighth Amendment.
It remains to be seen whether the federal court will rule on the IRS's position that an FBAR penalty is not a fine, or simply rule on the Eighth Amendment issue of excessive fines. Either way, the case demonstrates the importance of hiring a skilled tax attorney to defend you if you are facing willful FBAR penalties. Without a competent defense, you could face thousands of dollars of unnecessary fines and penalties.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are are facing willful FBAR penalties, contact Joe Viola to schedule a free consultation.