The Ninth Circuit Court of Appeals recently ruled in favor of a taxpayer subject to a non-willful civil penalty for failure to timely file an accurate Foreign Bank Account Report (FBAR), agreeing with a position advanced in a friend of the court brief written by Kostelanetz & Fink partners Caroline Ciraolo and Caroline Rule on behalf of the American College of Tax Counsel (ACTC).
The ACTC brief in United States of America v. Jane Boyd asked the appellate court to rule in the taxpayer’s favor and overturn a district court decision that held that a $10,000 penalty for a non-willful FBAR violation should apply to each unreported foreign account, rather than to a single failure to file an accurate FBAR. A majority of the Ninth Circuit judicial panel reversed that decision.
In a Tax Notes article on the decision, Ms. Ciraolo said, “The court recognized not only the difference between the purpose and calculation of civil penalties for non-willful and willful FBAR violations, but the fact that a late-filed FBAR constituted a single non-willful violation of the regulations.”
Ms. Ciraolo also commented on both the majority opinion and the dissent in an interview with Forbes, at the same time mentioning a separate FBAR case decided this week by the U.S. Court of Appeals for the Federal Circuit, Kimble v. United States: “The Ninth Circuit reached the correct conclusion in limiting the failure to file a timely FBAR to a single violation and single non-willful FBAR penalty. What comes as a shock is the dissent’s mischaracterization of Appellant as a tax evader. The FBAR is not a tax form and the failure to file an FBAR does not result in a tax due and owing, an element of tax evasion. Moreover, even the government, which advocates for an extremely broad interpretation of willfulness as indicated in Federal Circuit’s recent decision in Kimble, determined that Appellant engaged in non-willful conduct. The suggestion that the Ninth Circuit’s interpretation of statutes and regulations applicable to non-willful FBAR penalties unfairly favors the tax evader is simply beyond reason.”
Also speaking to Forbes, Ms. Rule explained the connection between the Boyd decision and Kimble: “The Kimble decision holds that signing a tax return that does not disclose a foreign bank account means that a taxpayer is reckless in not filing an FBAR and hence is liable for a willful FBAR penalty. This essentially leaves no room for the non-willful penalty, since an individual who voluntarily files an untimely FBAR, like the taxpayer in Boyd, will very likely have previously signed and filed a tax return that did not disclose her foreign accounts. But the taxpayer in Kimble did more than merely sign the tax returns, carrying out her father’s wishes to preserve the secrecy of a foreign bank account and giving instructions to the foreign bank that would ensure that the account was not disclosed to the U.S. Her affirmative acts to ensure the account’s secrecy evidenced that the she knew there was a requirement to disclose a foreign account in the U.S. and she was avoiding that requirement. There was therefore evidence to support a willful penalty without a need for the court’s reductive holding based only on her signing a tax return.”
Ms. Ciraolo observed in a Law360 article that, overall, courts are expanding the definition of willfulness related to FBAR penalties.
“Courts around the country continue to water down willfulness in the context of FBAR penalties, leading us to what will inevitably be strict liability for civil penalties that are often far in excess of any loss to the government,” she told Law360. She added that Congress established the non-willful FBAR penalty in 2004, but given these recent court cases, “It may be time for Congress to step in again and right the ship.”
