The Fourth Circuit affirmed penalties for a husband and wife's failure to file Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR), that the court held was objectively reckless despite the couple's claim they were unaware of the FBAR filing requirement.
Facts: Peter Horowitz and his wife, Susan, U.S. citizens, moved to Saudi Arabia in 1984 to enable Peter Horowitz to work as a doctor. Beginning in 1988, they opened bank accounts in three Swiss banks including Union Bank of Switzerland (UBS). While in Saudi Arabia, the Horowitzes understood that they were required to pay U.S. income taxes on the money they earned in Saudi Arabia. After they moved back to the United States in 2001, they maintained their UBS account. However, they contended that they did not know of the requirement to file an FBAR until 2009, when they met with a tax attorney. The Horowitzes did not file an FBAR from 1984 through 2008. They entered Treasury's Offshore Voluntary Disclosure Program in 2010, under which they filed FBARs for 2003 through 2008. They also filed amended income tax returns reporting additional income and paid more than $100,000 in back taxes.
The government determined that the Horowitzes' failure to timely file FBARs was willful and in 2014 assessed enhanced penalties of $247,030 against each spouse for both 2007 and 2008. When the Horowitzes refused to pay, the government commenced an action to collect the penalties, along with interest and additional penalties for late payment. On the parties' cross-motions for summary judgment, the district court entered judgment in favor of the government against Peter Horowitz for a total of $654,568 in penalties and interest and against Susan Horowitz for a total of $327,284 in penalties and interest for 2007 only. The district court concluded that even if the Horowitzes had lacked actual knowledge of the FBAR reporting requirement, the undisputed facts established that they recklessly disregarded the filing requirement and that this recklessness "sufficed for a finding of willfulness." The Horowitzes appealed to the Fourth Circuit.
Issues: 31 U.S.C. Sections 5321(a)(5)(C) and (D) (part of the Bank Secrecy Act of 1970, P.L. 91-508, as amended) prescribe a civil penalty for willfully failing to file an FBAR of up to the greater of $100,000 or 50% of the balance in the account at the time of the violation. A willful civil violation has been held to include both knowing and reckless violations.
The Horowitzes argued that the district court erred in concluding that their failure to file was willful, since they did not have knowledge of the filing requirement. The government argued that the Horowitzes should have known of the requirement, given the undisputed facts.
Holding: The Fourth Circuit affirmed the district court's conclusion that the Horowitzes' failure to file the FBARs for 2007 and 2008 was objectively reckless.
The Fourth Circuit reviewed the Supreme Court's decision in Safeco Insurance Co. v. Burr, 551 U.S. 47 (2007), to determine the meaning of "willful" in the civil penalty context. "[T]he Safeco Court recognized that 'where willfulness is a statutory condition of civil liability,' the word is 'generally taken ... to cover not only knowing violations of a standard, but reckless ones at well," the Fourth Circuit stated.
The court held that recklessness, in a civil context, encompasses an objective standard. Specifically, "the civil law generally calls a person reckless who acts or ... fails to act in the face of an unjustifiably high risk of harm that is either known or so obvious that it should be known" (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)).
The court noted that the taxpayers discussed with friends whether their Swiss bank account and the interest income from it were taxable but did not mention the accounts to their accountant, who prepared their tax returns for years. They also failed to inform their accountant of their account in Switzerland, had all mail related to the account held in Switzerland, and signed tax returns that inaccurately responded "no" to a question about the existence of any foreign bank accounts.
- Horowitz, No. 19-1280 (4th Cir. 10/20/20)
— By Maria M. Pirrone, CPA, LL.M., and Joseph Trainor, CPA, Ph.D., CFE, both associate professors of accounting at St. John's University, Queens, N.Y.