Third Circuit Affirms Willful FBAR Penalty, US vs Collins (2022)

Third Circuit Affirms Willful FBAR Penalty, US vs Collins (2022)

The Third Circuit Affirms Willful FBAR Penalty

In recent years, the number of FBAR litigation cases has increased significantly. Unfortunately, the different circuit courts are split as to how certain penalties are issued. Primarily, the issue has been whether or not non-willful FBAR penalties should be issued on a Per Form or Per Account, Per Form basis – in other words, what constitutes a violation. Recently, in the Third circuit (which includes Pennsylvania, New Jersey, Delaware and the Virgin Islands) case of United States v Rollins the affirmed the lower court ruling involving willfulness and FBAR Penalties. This is a blow to taxpayers who may be considered willful – let’s go through the Courts Ruling, which is precedential.

US v Collins: There is No Dispute as to Missed Accounts

      • “There is no dispute in this case that Richard Collins failed to report his foreign accounts. Collins is a dual citizen of the United States and Canada who, since the 1960s, has worked as a professor in the United States, France, and Canada. He opened bank accounts in all three countries to deposit his earnings.

      • Collins also opened a Swiss bank account in the 1970s, though he never lived in Switzerland. Since Collins moved to the United States in 1994, he has maintained his foreign accounts and continued to receive small pension contributions into his French and Canadian accounts, which he would periodically sweep into his Swiss account. By late 2007, the balance of his Swiss account exceeded $800,000.”

PFIC Issues Make Matters Worse

      • “At that time, the IRS accepted Collins into its Offshore Voluntary Disclosure Program, and his accountant prepared amended returns for 2002 to 2009, which yielded modest refunds stemming from large capital losses in 2002. Upon filing the amended returns, Collins withdrew from the Voluntary Disclosure Program, prompting an audit that uncovered an unforeseen issue. Because Collins invested in foreign mutual funds, his Swiss holdings were subject to an additional tax on passive foreign investment companies, 26 U.S.C. § 1291et seq., which he failed to compute in his amended returns.

      • The IRS audit determined that Collins owed an additional $71,324 for 2005, 2006, and 2007, plus penalties. Collins made payment towards these overdue taxes and associated penalties.”

Willfulness Penalties

      • “Collins was liable for civil penalties under 31 U.S.C. § 5321(a)(5) for his “willful failure” to report foreign accounts. App. 417. The maximum FBAR penalty for the willful failure to report a foreign bank account is the greaterof $100,000 or 50 percent of the account balance at the time of the violation. See 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii).

      • Fortunately for Collins, the statute grants the agency some discretion, see id. 5321(a)(2) — and specifies a cap for the FBAR penalty, see id. § 5321(a)(5)(C)(i). The IRS found Collins eligible for mitigation and assessed a civil penalty totaling $308,064 for 2007 and 2008. After Collins failed to pay, the Government sued to recover the penalty.”

Were the Taxpayer’s Actions Willful?

      • “The District Court concluded that Collins’s failure to disclose his foreign accounts was willful — not just reckless, but with “an actual intent to deceive.” Collins, 2021 WL 456962, at *1. A “sophisticated taxpayer,” Collins was aware of his foreign accounts when he approved his tax filings and intentionally managed the accounts to avoid disclosure.

      • For example, Collins purposefully avoided receiving mail from his Swiss bank in the United States and, at one point, expressed a desire to “discreetly” transfer funds to the United States for a mortgage transaction.”

Why Court Affirmed Willfulness

      • “Our review of the record leads us to conclude that the District Court committed no error, much less clear error, when it found that Collins’s failure to disclose his foreign accounts was willful. Schedule B of IRS Form 1040 contains a check-the-box question (line 7a) that places a taxpayer on notice of this obligation. IRS, OMB No. 1545-0074, Schedule B (Form 1040) (2007). Schedule B directs taxpayers to check “Yes” if they had authority over, or an interest in, a foreign account. (“At any time during 2007, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account? See page B-2 for exceptions and filing requirements for [FBAR]”). Collins repeatedly checked “No” and filed no FBAR until 2010.

      • He filed returns indicating he had no foreign financial accounts while managing investments worth hundreds of thousands of dollars in his French, Canadian, and Swiss accounts (even after engaging an accountant in 2005). So we agree with the District Court that Collins did not plausibly claim he should not have known about the FBAR filing requirement. See Kimble v. United States, 991 F.3d 1238, 1242-43 (Fed. Cir. 2021),  denied, 142 S. Ct. 98 (2021) (holding that a taxpayer has inquiry notice of the FBAR reporting requirement even if failing to read line 7a of Schedule B).”

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