Failure to Report Foreign Account Results in Fine of 50% of Account Balance

Taxpayer liable for maximum willful FBAR penalty of 50% of account balance for failing to report foreign assets.

The willful FBAR penalty battle rages on. The recent holding in Kimble vs. United States is a tremendous setback to taxpayers who have been delinquent with their foreign account reporting. Here is a brief summary of a Court of Federal Claims case that set a taxpayer back nearly $700,000.

Hiding funds in Switzerland

Alice Kimble inherited a UBS Swiss bank account from her father in 1997. Before he died, her father told her that the purpose of the account was to provide a safe haven in case the family (members of which had perished in the Holocaust) needed to escape America. He told her not to touch the funds in the account unless there was a “dire emergency,” and never to tell anyone about it.

Mrs. Kimble’s husband had always handled their finances and never reported their foreign accounts on their U.S. tax returns. After her divorce in 2000, Mrs. Kimble hired a new accountant and did not tell him about her foreign accounts. She also never asked her accountant whether her foreign investment income needed to be reported. Her federal tax returns were all timely filed, but they never reported any foreign investment income. Every year’s 1040 Schedule B, Question 7(a), which asks whether the taxpayer has an interest in a foreign account in a foreign country, was checked “No”.

Mrs. Kimble did not review her tax returns for accuracy before signing them.

In 2008, Mrs. Kimble read an article in the New York Times about the UBS Scandal and learned for the first time that she was obligated to disclose her foreign accounts. At the time, her UBS account balance was $1,365,661 and she had another account at HSBC valued at $134,129 (a year later she would close that account and transfer the funds to UBS). After reading the NY Times article, Alice hired legal counsel to assist her in complying with her foreign requirements.

Attempt to come clean

Mrs. Kimble’s tax attorney got her into the new 2009 OVDP program. Amended tax returns were filed for tax years 2003 through 2008, and which reported a total underpayment of $99,366. For unknown reasons, the answer to Schedule B, Question 7(a) on the amended returns was never changed to “Yes.” As part of the process, Mrs. Kimble’s delinquent FBARs were also filed, revealing the existence of her foreign accounts.

In October 2012, Mrs. Kimble and the IRS negotiated a Closing Agreement, which required that she pay a miscellaneous penalty of $377,309 (20% of the maximum account balance for 2003 through 2008). She signed it, but later stated that she did not know whether or not it was ever submitted to the IRS. In 2013, she decided to withdraw from the OVDP rather than pay the high penalty. She would later testify that she had decided to “take her chances” although she had been informed that opting out of the OVDP might result in a higher penalty.

After Mrs. Kimble’s withdrawal from the OVDP, the IRS audited her returns and determined that her failure to file an FBAR for 2007 was “willful.” The IRS then proceeded to assess a penalty of $697,229 (50% of her UBS account’s high balance that year) pursuant to 31 U.S.C. § 5321(a)(5)(C)(2004). She paid the penalty and then sued for recovery in the Court of Federal Claims.

Objection to “willfulness” determination

Mrs. Kimble’s first objection was that the IRS should not have imposed a “willful” FBAR penalty (which is obviously higher than the non-willful FBAR penalty), since (1) she was not aware that she had a legal duty to report her foreign accounts to the IRS until 2008, a year later; (2) the IRS did not base its “willfulness” determination on the types of evidence required per I.R.M. Section 4.26.16.6.5.2; and (3) Congress created the higher (50%) penalty to punish “bad actors,” which she is not. She added that she did not fail to report consciously, did not use her foreign accounts for any illegal activities, and that every case cited by the government “involved conduct significantly more egregious” than her own.

The court disagreed, noting that Mrs. Kimble:

  1. Did not disclose the existence of her UBS account to her accountant until around 2010;
  2. Never asked her accountant how to properly report her foreign investment income;
  3. Didn’t review her tax returns for accuracy from 2003 through 2008; and
  4. Falsely reported on her 2007 income tax return that she had no foreign bank accounts (for checking “No” on Schedule B, Question 7(a)).

The court determined that items (3) and (4) above show that Alice showed “reckless disregard” of her legal duty to report her foreign accounts and is sufficient for the imposition of a “willful violation” penalty under 31 U.S.C. § 5321(a)(5)(C). It noted that it is well settled that a taxpayer who signs a tax return has “constructive knowledge” of the contents of that return and cannot claim that they are not responsible for inaccuracies in it. In addition, it stated that “it is reasonable to assume that a person inheriting a Swiss bank account worth over a million dollars would inform themselves of their obligations related to such an account.”

Objection to maximum penalty assessment

Mrs. Kimble acknowledged that she owed a penalty for failure to report her foreign accounts, but objected to the IRS assessing a 50% penalty as an abuse of the IRS’ discretion and claimed that she was entitled to rely on the $100,000 maximum penalty set forth under 31 U.S.C. § 5321(a)(5)(C) in effect in 2003. The court disagreed.

Before 2004, the maximum willful FBAR penalty was in fact $100,000, but IRC Section 5321(a)(5)(C) was amended in 2004, increasing the penalty to the greater of $100,000 or 50% of the account balance. As we noted in our August 30, 2018 blog post, the court in United States vs. Colliot disregarded the 2004 amendment to Section 5321(a)(5)(C) since the penalty in the corresponding regulation had not been changed and remained capped at $100,000.

This court, however, pointed out that the Colliot holding conflicts with another case in which a revised federal tax penalty was not dismissed merely because a corresponding (Department of Energy pricing) regulation had not be formally withdrawn. See Barseback Kraft AB v. United States. The Kimble court therefore refused to apply the 31 U.S.C. § 5321(a)(5)(C)(2003) maximum penalty of 50% of the account balance and summarily dismissed Mrs. Kimble’s claim.

Another attempt at FBAR penalty mitigation

Note that Mrs. Kimble also tried to have her penalty reduced by arguing that she did not “actively manage” the UBS account. The court also rejected this argument, since between 1998 and 2008 she had met with UBS representatives six times in NY and once in Switzerland. This was sufficient in the eyes of the court for the IRS to properly conclude that Mrs. Kimble actively managed the foreign account.

Harsh penalties for FBAR noncompliance

Unless this case is reversed on appeal, it appears that the Court of Federal Claims will not be sympathetic to taxpayers seeking a refund of their FBAR fines – particularly to taxpayers who gambled on a lower penalty by opting out of the OVDP.

Whether or not you have come clean with your FBAR compliance, you need a tax law firm with a successful record of minimizing FBAR penalties. The tax attorneys at Moskowitz, LLP have extensive experience getting taxpayers into compliance and aggressively litigating FBAR claims when necessary. Contact our San Francisco office for a confidential consultation.

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