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What does it mean to willfully fail to file foreign financial account reports or make false statements on your tax returns? Can you willfully violate a rule you didn’t know existed? And if you do, how much should you be charged? These aren’t new questions for the federal tax courts, but a recent court decision has widened the gap between two sides of the maximum willful FBAR penalties debate, raising the stakes for a future appeal.
This blog post will review the U.S. Court of Federal Claims opinion, Kimble vs. U.S.A., case number 1:17-cv-00421. It will explain how the court’s positions on willfulness and the maximum willful FBAR penalties could affect future court of appeals decisions, and how much taxpayers have to pay when they fail to disclose foreign financial accounts.
Alice Kimble’s grandparents had known persecution. They were survivors of the Holocaust who fled to the U.S. and raised a family. They taught their son, Harold Green, the importance of having money set aside to escape if persecution came to the United States. Green passed that knowledge down to his daughter, Alice Kimble, who in turn taught her son, David.
The knowledge came with a bank account at the Union Bank of Switzerland. When Alice learned about this account from her father he made her promise never to tell anyone about it, and to only use it for life-and-death emergencies. Kimble and her family respected her father’s wishes, keeping the account secret until 2008, when a consent agreement at UBS threatened to expose Kimble to criminal consequences for failing to disclose the account on her federal tax returns and failing to file FBARs disclosing the foreign financial account. (Kimble also kept a second, smaller account at HSBC, a French account, which was used to maintain an apartment there. However, Kimble did not object to the fines and penalties related to the HSBC account.)
Kimble applied to the now-closed Offshore Voluntary Disclosure Program (OVDP). As part of the program, she filed amended tax returns disclosing the foreign investment income, resulting in a total underpayment of nearly $100,000 in taxes between 2003 and 2008. As part of a proposed Consent Agreement, the IRS planned to impose a miscellaneous penalty of $377,309 as well.
After completing most of the process, she chose to withdraw from the program and “take her chances” with the IRS. As a result, the IRS imposed maximum willful FBAR penalties on her: 50% of the UBS account balance or $682,832.
Kimble appealed the assessment to the U.S. Federal Court of Claims. She raised two issues that are currently up for consideration by federal courts of appeals:
When it imposed a willful FBAR penalty, the IRS said it was because Kimble:
Kimble’s tax attorney said that this made the “willful” part of the statute apply to every case where the IRS imposes FBAR penalties. If all that was needed to show willfulness was for a taxpayer to know he or she had a foreign financial account, there would be few to no cases where a person would non-willfully fail to file. Instead, her attorney asked the court to require the IRS to show that Kimble knew she needed to file a report, but willfully chose not to.
The court said that when it comes to civil tax penalties, “willfulness” means something broader than that. The opinion cited other cases which allowed for maximum willful FBAR penalties when a taxpayer turned a blind eye to reporting requirements or recklessly disregarded the need to file a report.
Kimble’s tax attorney also argued that, even if the IRS could impose willful FBAR penalties, those penalties should be capped at $100,000 due to an outdated regulation that was never amended to match the new higher penalty limits included in the American Jobs Creation Act passed by Congress in 2004. This issue has come up before, but judges across the country have different opinions on how the regulation and the statute interact.
In United States v Colliot and United States v Wadhan, two different federal district courts ruled that because the maximum willful FBAR penalties allowed under the regulation fell within the threshold set out in the new statute, the two did not conflict and the regulation stands, at least until the Secretary of Treasury changes it. However, in Norman v United States, the U.S. Federal Court of Claims -- the same court that handled the Kimble matter -- said the statute replaced the regulation. It cited language saying where willful conduct occurred “the maximum penalty … shall be increased to the greater of $100,000 or 50 percent” of the balance of the account.
In the Kimble case, the Court of Claims doubled down on its previous opinion. It reiterated that the “new statute  increased the statutory maximum penalty for a ‘willful’ violation.” It also found that Kimble’s attorney had failed to show why the assessment of the maximum willful FBAR penalties violated the 2004 statute.
Both willfulness and the maximum willful FBAR penalties are already up for consideration by federal courts of appeals. The IRS is prepared to maximize the revenue generated by non-disclosure of foreign financial accounts. But tax attorneys across the country are preparing their best arguments to ensure that everyday taxpayers aren’t thrown into dire financial straits, just because they didn’t know the law. With two opinions on each side, the question of how the maximum willful FBAR penalties is sure to have the attention of judges and legal pundits across the country. Depending on how the Court of Appeals rules on the issue, it may even be headed to the Supreme Court.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding maximum willful FBAR penalties, contact Joe Viola to schedule a free consultation.