Schoolteacher’s failure to file FBAR results in $800,000 penalty

The Court of Federal Claims holds that actions and failure to inquire into reporting requirements for a foreign account by a taxpayer who had made a 'quiet disclosure' showed willfulness.
By Mark Aquilio, CPA, J.D., LL.M.

The Court of Federal Claims ruled that a taxpayer's failure to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), was willful, as she concealed her income and avoided learning of her reporting requirements, and her actions reached the standard for reckless disregard for the law. Also, it held that the penalty of one-half of the balance of her unreported financial account was properly assessed.

Facts: In 1999, Mindy Norman, a schoolteacher, signed documents to open a numbered bank account, which concealed her income and financial information, with Union Bank Switzerland (UBS). In 2000, she further concealed her financial information from U.S. authorities by signing to waive her right to invest in U.S. securities.

In 2008, Norman transferred her funds from UBS after being informed it would no longer provide offshore banking and would assist the U.S. government in identifying U.S. clients who may have engaged in tax fraud.

In addition to concealing her financial information, Norman did not attempt to find out her reporting requirements.

Norman claimed on her 2007 tax return not to have a foreign account. In 2009, rather than apply to the Offshore Voluntary Disclosure Program, which provided for a reduction in FBAR penalties, Norman filed a "quiet disclosure" through her Swiss accountant by filing amended tax returns and FBARs for the years 2003—2008 without notifying the IRS or admitting violating 31 U.S.C. Section 5314.

In 2013, the IRS assessed an $803,530 penalty for a willful failure to file an FBAR in connection to the Swiss bank account she had in 2007, which was 50% of the unreported balance in her account. Norman paid the penalty and sued for a refund.

Issues: Pursuant to 31 U.S.C. Section 5314(b), a U.S. citizen with an interest in or control over one or more foreign financial accounts with an aggregate value above $10,000 at any time during a calendar year generally is required to file an FBAR on or before April 15 (June 30 in 2007) of the following year. Under 31 U.S.C. Section 5321(a)(5)(A), the IRS may assess an inflation-adjusted "civil money penalty on any person who violates ... any provision of section 5314," which currently generally may not exceed $12,459 ($10,000 in 2007) per nonwillful violation. Under 31 U.S.C. Sections 5321(a)(5)(C) and 5321(a)(5)(D)(ii), the maximum inflation-adjusted penalty for each willful violation involving a failure to report the existence of an account is the greater of $124,588 ($100,000 in 2007), or 50% of the balance in the account at the time of the violation.

A person who knowingly or recklessly fails to file an FBAR willfully violates 31 U.S.C. Section 5314. A willful violation may be proved by inference from action intended to conceal sources of income and financial information and from a conscious effort to avoid learning about reporting requirements (Sturman, 951 F.2d 1466 (6th Cir. 1991)).

The issues decided were whether Norman willfully violated 31 U.S.C. Section 5314 by knowingly or recklessly failing to file an FBAR in 2007 and if the penalty assessed was appropriate.

Holding: The court held that Norman willfully violated 31 U.S.C. Section 5314, as she "acted to conceal her income and financial information, and also that she either recklessly or consciously avoided learning of her reporting requirements." It did not find Norman's testimony credible and rejected her claim that she did not know of her duty to report her foreign income until 2009 and did not willfully fail to file an FBAR. It held that when she signed her 2007 tax return, she was "put on inquiry notice of the FBAR requirement" but did not seek more information. The court stated that "simply not reading the return does not shield Ms. Norman from the implications of its contents." It ruled that her:

repeated and admitted lack of care in (1) filing inaccurate official tax documents without any review, (2) signing foreign banking documents without any review, and (3) later providing false sworn statements both to the IRS and to this Court, both with and without review, reaches the standard of reckless disregard for the law required to constitute a willful violation of § 5314.

The court rejected Norman's post-trial argument relying on a recent district court case, Colliot, No. AU-16-CA-01281-SS (W.D. Tex. 8/16/18), that a regulation adopted before an amendment to 31 U.S.C. Section 5321 in 2004 capped the maximum penalty at $100,000. The Court of Federal Claims held that Congress clearly raised the maximum penalty when it amended 31 U.S.C. Section 5321, which rendered the regulation invalid. Thus, the penalty assessed under 31 U.S.C. Section 5321 in the amount of 50% of her account's balance was appropriate, the court held.

  • Norman, No. 15-872T (Fed. Cl. 7/31/18)

— By Mark Aquilio, CPA, J.D., LL.M., professor of accounting and taxation, St. John's University, Queens, N.Y.

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