Inherited Secret Emergency Account Caused Willful FBAR Violations, Appeals Court Says
Is there ever a good reason to hide something from the IRS? A recent opinion from the U.S. Federal Circuit Court of Appeals suggests that even the best of reasons won’t matter if a taxpayer is later found to have willfully failed to file FBAR forms disclosing their family’s international bank accounts.
Jewish Family Passed Down a Secret Emergency Account After Escaping the Holocaust
In 1980, Alice Kimble’s parents opened an investment account at the Union Bank of Switzerland (UBS), making her a joint owner. The family intended this to be a secret emergency account, used only in case the family needed to flee to another country. The idea isn’t as unlikely as it sounds. Mr. Green’s parents had fled to the United States during the Holocaust. Some members of Mr. Green’s father’s family had not been so lucky, and had been killed by the Nazis. Mr. Green didn’t want anything like that to happen to him, or his daughter, so he created this investment account in secret, in case the U.S. government ever turned against his family.
Three years later, Alice Green married an investment analyst, Michael Kimble. Mr. Green told his new son-in-law about the UBS account, and why it needed to remain a family secret, untouched, except for emergencies. Alice and Michael Kimble honored Mr. Green’s wishes. Even after Mr. Green’s death in 1997, the couple kept the account secret. Michael Kimble took over the account’s management and filed joint tax returns that excluded the interest earned on the account.
In 2000, the Kimbles divorced, and Alice hired a CPA to help her with her tax returns. The CPA never asked about foreign financial accounts, and, honoring her father’s wishes, Ms. Kimble didn’t say anything. She continued to file tax returns without the UBS income on them. While she signed the returns, Ms. Kimble would later testify she never read them.
It wasn’t until the Treasury Department’s investigation of UBS for tax fraud made the news that Ms. Kimble learned she may have been legally required to tell the IRS about her family’s secret emergency account. She applied to the now-closed Offshore Voluntary Disclosure Program in 2012 the IRS offered a settlement where she would be required to pay $377,309 in penalties. Instead, she withdrew from the program. After completing its examination of her accounts, the IRS nearly doubled the penalty to 50% of the balance of the account, a total of nearly $700,000.
Federal Circuit Court Says Daughter Committed Willful FBAR Violations by Not Disclosing the Account
Ms. Kimble paid the assessment, but then she took the IRS to court for a refund. This blog covered the trial court’s ruling on that case in two separate posts: one about the trial court’s decision that Ms. Kimble’s actions supported a willful FBAR violation, and a second about her claim the penalty was an unconstitutionally high fine. Losing on both counts, Ms. Kimble took the matter further, filing an appeal with the Federal Circuit Court.
The Circuit Court said that “Ms. Kimble knew about the numbered account and took efforts to keep it secret by, among other things, not disclosing the account to her accountant.” The Court summarized:
“In other words, Ms. Kimble had a secret foreign account, she had constructive knowledge of the requirement to disclose that account, and she falsely represented that she had no such accounts.”
The Court said this was enough to determine she had committed a willful FBAR violation. In a footnote, the Court addressed Ms. Kimble’s family legacy, and her reasons for protecting the secrecy of the account, saying:
“Ms. Kimble’s reasons for the violation (her subjective belief about the need for secrecy, advice from her ex-husband, etc.) do not alter our inquiry. A taxpayer can be ‘willful’ even if her violation has good reason.”
Interestingly, the Bank Secrecy Act does include a “reasonable cause” exception to non-willful FBAR violations. However, there is no similar exception to justify choosing to hide a foreign financial account.
Should the IRS Have Mitigated the Willful FBAR Penalty?
The Court also considered several defenses that Ms. Kimble raised related to the amount of her penalty, including the question of the unconstitutional fine. However, it found each one meritless. Among those arguments, Ms. Kimble said the IRS failed to properly mitigate her penalty in light of her circumstances, instead assessing the maximum penalty allowed under the statute.
The Court found that the IRS used the mitigation guidelines, but still found the maximum penalty should apply based on the size of the account (more than $1 million). Deviation is allowed in certain circumstances, but Ms. Kimble’s family concerns, and her reliance on her ex-husband’s advice as account manager didn’t apply.
Ultimately, the Federal Circuit Court upheld the trial court’s determination that Ms. Kimble had willfully violated the FBAR reporting requirements, and the IRS properly assessed a 50% penalty on the account. Mr. Green’s concerns about privacy and persecution by the government could not persuade that government to be lenient to his daughter.
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.