Court Rules Non-Willful Per Violation FBAR Fine is Excessive

Court Finds that Non-Willful Per Violation FBAR Fine is Excessive

Court Finds Non-Willful Per Violation FBAR Fine is Excessive: In United States v. Zvi Kaufman No. 3:18-cv-00787, the U.S. Government sought to enforce IRS non-willful FBAR penalties against the taxpayer for several years of noncompliance. There was no dispute as to the fact that taxpayer filed the FBAR late — but rather the dispute goes to whether penalties were justified. More specifically, the courts considered:

• Did Taxpayer show Reasonable Cause to avoid penalties; and
• If not, are FBAR penalties issued per form or per violation

In general, Courts across the nation are in flux about how to uphold FBAR penalties. At one time, it was believed (by IRS’ own personnel) that the IRS should have to meet the clear and convincing evidence burden — but this standard has been rejected by courts nationwide. There is also a lack of continuity involving what constitutes willfulness vs. non-willfulness — and what the maximum penalty can be for willful FBAR violations.

TL;DR

In this District Court ruling, the court concluded that the US government is limited to a $10,000 penalty per form — and not a $10,000 penalty per violation. In other words, if taxpayer had 12 accounts on the FBAR, there was the potential to be hit with a per violation penalty (up to a maximum amount) — but the court reeled the U.S. Government in, and capped any penalty to $10,000 per year — for a potential total maximum penalty of $30,000.

United States v. Zvi Kaufman No. 3:18-cv-00787

The court was faced with the questions as to whether or not the IRS should have issued penalties in the first place. and if so, what was the maximum penalty amount that could be issued.

Let’s take a look at some of the key facts of the case:

• • • Kaufman, a former managing director of a pharmaceutical company, is a United States citizen who has resided in Israel since 1979.

• • • During the years 2008, 2009, and 2010, Kaufman had a financial interest in or signatory authority over several financial accounts in Israel (“foreign financial accounts”).

• • • Specifically, he had thirteen foreign financial accounts in 2008, twelve in 2009, and seventeen in 2010. (Plf.’s SMF at ¶¶ 3–5.) During 2008, 2009, and 2010, the aggregate balance of the foreign financial accounts exceeded $10,000.

• • • As a result, Kaufman was required to file a Form TD F 90-22.1, entitled “Report of Foreign Bank and Financial Accounts” and commonly referred to as an “FBAR,” for each of those years. 31 C.F.R. § 103.24 (2009); 31 C.F.R. § 1010.350 (2011).

• • • Kaufman’s FBARs were due on June 30 of each successive calendar year. 31 C.F.R. § 103.27(c) (2009); 31 C.F.R. § 1010.306(c) (2011).

• • • It is undisputed that Kaufman did not file FBARs by those deadlines; instead, he filed his FBARs for the three years at issue on May 15, 2012. (Plf.’s SMF at ¶ 6; Kaufman Aff. at. ¶ 3.)

What does this Mean?

Taxpayer had several accounts that were not timely reported on the FBAR. Instead of filing a timely FBAR — taxpayer filed the FBARs late.

Multiple Account FBAR Violations Assessed

• • • On September 24, 2015, the Internal Revenue Service (“IRS”) assessed penalties against Kaufman for his non-willful failure to file timely FBARs—$42,249 for the 2008 FBAR, $42,287 for the 2009 FBAR, and $59,708 for the 2010 FBAR. (Plf.’s SMF at ¶ 7.)

    • At or near the time the FBAR penalties were assessed, the IRS sent a letter to Kaufman demanding payment.

• • • The parties do not dispute any substantive difference between these versions, and the Court cites to both the original and renumbered regulations because both the originally numbered regulations and the renumbered regulations were effective during the period at issue.

What does this Mean?

The IRS assessed multiple FBAR penalties against the taxpayer for noncompliance and then sought demand for payment. Taxpayer disputed that penalties were appropriate due to reasonable cause.

Dispute as to FBAR Liability and Amount of Penalties

• • • Kaufman disputes that he has any liability for the untimely FBAR filings and alternatively disputes the Government’s calculation of the penalties assessed.

    • On this latter issue, he argues that the maximum amount of civil monetary penalties that can be imposed for his non-willful violations is $10,000 for each year a FBAR was not filed for a total of $30,000. (Def.’s Opp. Mem. at 1, ECF No. 65-2.) Additional facts will be set forth as necessary.

Court Limits Non-Willful FBAR Penalty to Per Form

As provided by the Court:

• • • For the first three decades of the Bank Secrecy Act, Congress decided that no penalty should be imposed for non-willful violations. Kahn, 2019 WL 8587295, at

    • Then, when Congress amended the Bank Secrecy Act to impose penalties for non-willful violations, it wrote a penalty provision that at first glance imposes a strict $10,000 cap. See United States v. Horowitz, 978 F.3d 80, 81 (4th Cir. 2020) (observing but not holding that “[a]ny person who fails to file an FBAR is subject to a maximum civil penalty of not more than $10,000”).

    • And it did so with full awareness of the penalty provision for willful violations, which expressly uses the balance of the account as a benchmark for assessing the statutory cap. Absent more persuasive evidence to the contrary, the Court concludes that Congress did not intend for the statutory cap for non-willful violations to be determined on a per account basis.

District Court Ruling and the Danger of Bittner

While this is a great result for the defendant, it must be taken at face value for now. It is a District Court case ruling and not an Appellate or Supreme Court case. Recently, there was a case “Bedrosian,”in which the District Court had ruled that taxpayer was non-willful. That case went up on appeal where it was later remanded. In that case, the Appellate court essentially told the District Court to “try again” — with the understanding that the court did not apply sufficient facts and law to support a non-willful finding — which then resulted in the court issuing willful FBAR penalties.

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