Federal Circuit Court Weighs In on Willful FBAR Penalty Cap Issue

Federal Circuit Court Wei…

The question of just how expensive an IRS willful FBAR penalty can be has been making its way through trial courts across the country for more than a year. Now the first of those cases are coming up on appeal. As the Federal Circuit Court weighs in on the issue, find out what the court’s opinion means for taxpayers going forward.

Appeals Court Takes on Norman v United States

The case of Norman v United States is making news again. Last year, this blog addressed the case twice: once on how the judge defined “willfulness” in civil FBAR penalty cases, and a second time on the issue of the proper willful FBAR penalty cap. However, both of those posts were based on the trial court decision issued by the Federal Court of Claims. Now, over a year later, the case has made its way up on appeal, and the Federal Circuit Court has rendered its own opinion.

As a reminder, in Norman v United States, Mindy Norman, a school teacher, asked the court to review an $803,530 willful FBAR penalty issued by the IRS. Norman had a Swiss bank account at UBS from 1999 to 2008. Between 2001 and 2008, the account balance sat between $1.5 million and $2.5 million. But Ms. Norman never filed the mandatory reports of foreign financial accounts (FBARs) required under the Bank Secrecy Act. When she got a new accountant in 2008, she filed amended returns and delayed FBARs that disclosed the account, which triggered an IRS tax audit, a finding that she willfully violated the statute, and a substantial financial penalty.

Ms. Norman paid the penalty in full and then sued the IRS, saying that its findings were flawed. She asked the trial court, and then the Federal Circuit Court to determine that her failure to file FBARs was non-willful, and that even if it was willful, the maximum penalty the IRS could impose was $100,000 based on its own internal regulations.

Federal Circuit Court Says Failure to Read Tax Returns is Reckless

The Federal Circuit Court took up the willfulness finding first. It said that according to a 2007 Supreme Court decision, in civil cases (as opposed to criminal tax fraud charges), “willfulness” includes “not only knowing violations of a standard, but reckless ones as well.” While the IRS may not be able to find a willful FBAR violation if a taxpayer did not know about their ownership of an account or the tax consequences, the failure to learn about filing requirements could sometimes be enough to support the penalty if there were other factors to suggest the taxpayer was reckless. That included Ms. Norman’s case. In finding that Ms. Norman acted recklessly, the court relied on her active management of the account and the fact that she used a numbered account and took steps to avoid disclosure (including receiving withdrawals in cash).

The court also said that Ms. Norman’s false tax returns gave support to her willfulness. Her 2007 tax return falsely stated she had no interest in any foreign bank account. Norman said she had not read the return before signing it, but the court said that did not excuse her for the inaccuracies. In fact, it supported the finding that she had acted recklessly.

Court of Appeals Takes on Willful FBAR Penalty Cap Issue

Having determined that Ms. Norman acted willfully, the court of appeals next turned to how much the IRS could charge her for that mistake. This issue has been making its way through the trial courts, but this is the first decision at the Circuit Court level. The taxpayers’ arguments are all generally the same.

The Bank Secrecy Act used to only penalize willful FBAR violations. The cap under the old law limited the maximum penalty to $25,000 or the balance of the account with a maximum of $100,000 per violation. To execute the law, the IRS created a regulation authorizing its agents to issue penalties up to the same limits.

Then in 2004, Congress changed the law, adding a $10,000 non-willful FBAR penalty, and raising the willful FBAR penalty cap to $100,000 or 50% of the highest balance in the account during that tax year, whichever is higher. This resulted in far higher penalties for taxpayers found to have willfully failed to file FBARs. But the IRS never changed its regulation. Tax attorneys, including Ms. Norman’s attorney, say that the old regulation still applies because the Secretary of the Treasury may choose to set a penalty limit lower than the statutory maximum.

When trial courts have sided with the government on the issue, they have generally held that the 2004 statutory amendment replaced the regulation because statutes have more regulatory power than regulations. But the Federal Circuit Court went further. In addition to saying Congress changed the regulation by amending the statute, it also said that the Secretary didn’t have the authority to do what the tax attorneys say was done:

“[T]hat the Secretary ‘may’ impose a penalty--merely gives the Secretary discretion as to whether to impose a penalty in any particular case. This language does not mean that the Secretary has the authority to set a penalty cap on all cases that is different than the penalty cap Congress mandated.”

Some tax commentators believe this ruling to be incorrect. However it is now binding law, at least for tax cases filed in the Federal Court of Claims. Unless Ms. Norman appeals the issue to the U.S. Supreme Court (and the Court grants certiorari, which it often does not), taxpayers in that court will have to abide by a higher maximum willful FBAR penalty and won’t be able to rely on the old IRS regulation any more.

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.

Categories: FBAR