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When you open a new financial account overseas, it often is technically more than one account. You may have both checking and savings accounts at a foreign bank. Or your investments may be divided into different accounts with different investment strategies. But a new California District Court case says when you inadvertently fail to file FBAR reports, all those separate accounts could add up to bigger non-willful FBAR penalties.
Jane Boyd was a U.S. citizen who owned or controlled 14 foreign financial accounts in the United Kingdom. Each of those accounts had a collective ballance over $10,000. Under the U.S. Bank Secrecy Act, that meant that Jane was legally required to report all 14 accounts in an annual Foreign Bank Account Report (FBAR). In 2010, she didn’t. Even though she had received interest and dividends from the U.K. accounts, they didn’t show up on either her tax returns or a separate FBAR form.
When Boyd and her tax attorney discovered the problem, she applied and was accepted into the now-closed Offshore Voluntary Disclosure Program (OVDP). That program allowed taxpayers to voluntarily come forward to correct errors in tax reporting in exchange for lower penalties. In Jane’s case, though, the penalties were far higher than even her lawyer expected. After Jane opted out of the OVDP, the IRS imposed 13 non-willful FBAR violations totaling $47,279 in the year 2010, alone.
When Jane Boyd refused to pay the non-willful FBAR penalties, the IRS took her to court in the Central District of California. There Boyd and the IRS each asked the court to decide how the maximum non-willful FBAR penalties were calculated: per year, or per account.
Until 2015, the IRS had taken the position that the U.S. Bank Secrecy Act allowed it to assess non-willful FBAR penalties on each person who owned each account each year. Tax lawyers across the country disagreed, and in May 2015, the IRS issued interim guidance saying that it would generally impose non-willful FBAR penalties on a per year basis going forward. (The IRS reserved the right to impose higher penalties in certain cases.) But the assessments in the Boyd case went far beyond the $10,000 maximum penalty for non-willful FBAR penalties allowed under the interim guidance. When the case went to court, the IRS relied on its old reading of the Bank Secrecy Act, claiming the power to assess penalties for each account not reported each year.
U.S. District Court Judge Michael Fitzgerald agreed. He admitted that the language in the statute wasn’t clear whether non-willful FBAR penalties could be assessed per year or per account. However, to resolve that ambiguity, he turned to grammar contained in the reasonable cause exception found in another part of the statute. That law said that penalties should not be imposed 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.” (Emphasis by the court). The judge said that because “the account” was singular, it suggested that Congress meant each FBAR violation to relate to one specific account. That meant the IRS could impose non-willful FBAR penalties for 13 violations in a single year.
Jane Boyd’s attorneys will probably appeal the judge’s decision in U.S. vs. Boyd. But until the Ninth Circuit Court rules on the issue, taxpayers can expect the IRS to use Boyd to justify bigger non-willful FBAR penalties in future cases. This means taxpayers who innocently, or negligently failed to file FBARs disclosing their foreign financial accounts may be facing much stiffer penalties in years to come.
For example, consider Benjamin and Steven, a married couple, who have checking and savings accounts in a Swiss bank. One year, the interest and other deposits into those two accounts pushed them over the $10,000 reporting requirement, but they didn’t realize it because by the end of the year the balances are once again below $10,000. They don’t file FBARs disclosing the two accounts.
Under the 2015 interim guidance, Benjamin and Steven would each face a maximum non-willful FBAR penalty of $10,000, for a total penalty of $20,000 for the year. But under Boyd, Benjamin and Steven could each face two violations: for failing to report the checking account and the savings account, separately. That could expose them each to two non-willful FBAR penalties of up to $10,000, and create a total penalty of up to $40,000 for a single mistake.
The Boyd decision means taxpayers must be especially vigilant in managing their foreign financial accounts and filing the proper tax returns and FBARs every year. When mistakes are made, it is essential that you work with a tax attorney who knows how to negotiate with the IRS to protect you and your assets from facing bigger non-willful FBAR penalties than you need to.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are facing non-willful FBAR penalties across multiple foreign financial accounts, contact Joe Viola to schedule a free consultation.