Courts Split Over Finding Multiple FBAR Violations In One Tax Year

Courts Split Over Finding…

When U.S. taxpayers do banking overseas, they don’t often choose an investment strategy based on the number of accounts they will hold. However, the IRS maintains that it can assess penalties for multiple FBAR violations in one tax year. That could mean a mistake in reporting a diversified international portfolio could sometimes cost more than intentional tax fraud.

U.S. Taxpayer Worked with the IRS, but Still Faced $200,000 in FBAR Penalties

Florida resident and U.S. citizen, Evelyn Solomon held up to 20 international bank accounts between 2004 and 2010, but she never disclosed those accounts to the IRS by filing a “Report of Foreign Bank and Financial Accounts” (FBAR). After consulting with an attorney, on March 13, 2012, she signed on to the IRS’s now-defunct Offshore Voluntary Disclosure Program (OVDP), and filed late FBARs for each year. She voluntarily disclosed her financial interests in these accounts, in exchange for avoiding willful FBAR penalties.

The purpose of the OVDP was to encourage taxpayers to work with the IRS to correct their tax reporting errors in exchange for a promise of lower penalties. Non-willful FBAR penalties are capped at $10,000 each, while willful FBAR penalties can be as high as 50% of the balance of the unreported account.

However, after 6 years of working with the IRS, and agreeing to two extensions of the statute of limitations, Ms. Solomon was in for a surprise. Once the IRS finally completed the OVDP process, it determined that she owed a total of $200,000 for twenty separate non-willful FBAR penalties, including multiple FBAR violations in several of the seven tax years included in the investigation.

When the IRS finally issued its assessment on December 12, 2018, Solomon refused to pay. Two years later the IRS took her to court in the United States District Court for the Southern District of Florida (West Palm Beach Division).

Florida District Court Bucks the Trend on Multiple FBAR Violations in One Tax Year

When they went to court, both the IRS and Solomon asked the judge to enter a summary judgment on the issue of whether the IRS could impose multiple FBAR violations in one tax year. Whether the FBAR penalties were issued “per account” or “per year” depended on how the court interpreted the word “violation” in the Bank Secrecy Act. Was that violation the failure to file a form, or the failure to report a foreign bank account? The Court went with the second interpretation, saying:

“The FBAR ‘form’ is simply the procedural mechanism by which the regulated person complies with her legal duty under § 5314 to ‘report’ her interest in foreign bank accounts and transactions. It is that failure to timely ‘report’ the underlying interest in the foreign bank account or transaction that constitutes the relevant ‘violation’ for purposes of assessing penalties under § 5321—not the failure to ‘file’ a FBAR ‘form.’”

It found that Solomon had committed 20 “violations” during the 7 years because “she failed to timely disclose the existence of twenty foreign bank accounts during the relevant period.”

Decisions Show a Split Between Courts on FBAR Assessments

The IRS’s claim that it is entitled to assess a separate FBAR penalty for each account not included in an FBAR isn’t a new one. Several district courts from Texas to Connecticut have already considered this argument and rejected it, protecting U.S. taxpayers from having to pay multiple FBAR violations in one tax year. Only the Southern District of Florida seems willing to read the Bank Secrecy Act in a way that turns each account into its own potential violation. The only case the Solomon Court could cite in support of its position was United States v Stromme, another decision by the same court issued in January 2021.

The Court “acknowledge[d] the contrary authority on this subject but respectfully reaches a different view.” This “contrary authority” included a Seventh Circuit Court of Appeals decision, United States v Boyd, covered previously on this blog. That court ruled that the undefined “violation” allowing for FBAR penalties included:

  • Failing to file the report on time
  • Failing to include the information required by the IRS or the statute

The accuracy of the untimely form in that case meant that the IRS could not assess multiple FBAR violations in one tax year. The Seventh Circuit Court said the taxpayer's penalty should have been limited to $10,000.

Boyd isn’t binding on the Southern District of Florida, which is in the Eleventh Circuit. However, if the Eleventh Circuit affirms either Solomon or Stromme, it could create a split between the courts that would invite the United States Supreme Court to weigh in on the issue of whether the IRS can impose multiple FBAR violations in one tax year. By doing so, the Court could eliminate the benefit of non-willful FBAR penalties issued on diverse portfolios of accounts.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are facing multiple FBAR penalties from one tax year, contact Joe Viola to schedule a free consultation.

Categories: FBAR, Tax News