Two Cases Sustaining FBAR NonWillful Penalties on Per Unreported Account Basis (4/26/19)

I write today on two cases which are the first I am aware of that has sustained FBAR NonWillful penalties on a per account basis rather than per FBAR basis.  One of the cases is a default judgment case that did not discuss the issue of whether the NonWillful penalty should be per account or per FBAR.  United States v. Gardner, 2019 U.S. Dist. LEXIS 68032 (CD CA 2019), here.  I will not discuss that decision (but those who do read it will see that there is some odd wording in it.)

In United States v. Boyd (CD CA CV 18-803-MWF) Order (4/23/19), here, the Court did directly address the issue.  Boyd joined OVDP and then opted out.  The IRS then assessed a mitigated NonWillful penalty for 2010 on each of 13 accounts, for an aggregate NonWillful penalty of $47,279.

Just pausing right there, it appears that Boyd's opting out of OVDP penalty structure achieved a substantial savings.  Even at the lowest OVDP rate of 20%, the OVDP penalty would have been $155,943 (considering 2010 as the high unreported year with $779,716 aggregate high amount in the accounts).

Boyd felt that the penalty exceeded the amount legally allowed based on the purely legal claim that the NonWillful penalty statute required that the pertinent violation on which the maximum $10,000 penalty is based is the FBAR rather than per account.  The statute, 31 U.S.C. 5321(a)(5)(A), bases the penalty on the violation.  The maximum penalty is $10,000 per violation.  § 5321(a)(5)(B)(i). So the question is what is the violation -- the failure to file the FBAR or the failure to report each account on the FBAR not filed.

The Court resolves the issue as follows:

The Government argues that the better interpretation of the relevant statutory and regulatory language is that each non-willful FBAR violation relates to a foreign financial account, and that the IRS may penalize each such violation with a penalty not to exceed $10,000. (Mot. at 10). The Court agrees.  

In support of its argument, the Government points to the reasonable cause exception found in 31 U.S.C. § 5321(a)(B)(ii), which provides: "No penalty shall be imposed . . . with respect to any violation if . . . (I) such violation was due to reasonable cause, and (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported." Id. (emphasis added). The Government contends that Congress made clear that each violation relates to each "account," since Congress used the singular form of the word. (Reply at 3). In a similar vein, the Government points out that, with respect to willful violations, "an FBAR penalty can be the greater of $100,000 or 50% of the "balance in the account at the time of the violation." (Reply at 3 (citing 31 U.S.C. § 5321(a)(5)(C)-(D))). The Government contends that, "[i]n each instance, Congress selected the singular forms of ‘account' and ‘alance,' indicating that a violation relates to one, and only one account." (Id.). 

In Opposition, Defendant argues that the plain language of 31 U.S.C. § 5321(a)(5)(B) supports her position that a non-willful penalty for a given year cannot exceed $10,000. (Opp. at 4). Defendant argues further that, had Congress intended to impose a penalty based on each bank account required to be shown on the FBAR, Congress could have easily included such explicit language. (Id. at 5-6).  

The Court disagrees with Defendant that the relevant statutory language clearly supports her position. Rather, the Court views section 5321 as somewhat unclear as to whether the $10,000 negligence penalty applies per year or per account. See 1 Robert S. Fink, Tax Controversies--Audits, Investigations, Trials, § 17.03 (2018) ("Section 5321 is unclear as to whether the $10,000 negligence penalty applies per year or per account."). Nonetheless, given the relevant language the Government highlights above, the Court determines that the Government has advanced the more reasonable interpretation. 

Defendant next argues that if a violation relates to an account as the Government contends, the IRS could theoretically penalize an accountholder for each piece of information she fails to disclose regarding an account. (Opp. at 5). This question, however, is not presented in this action. In any event, the Government"s position is that "one, and only one, FBAR penalty may be assessed with respect to an undisclosed or improperly disclosed foreign financial account." (Reply at 3). 

At the hearing, the issue arose whether there is an administrative "rule of lenity." Defendant argued that there is, citing Fed. Commc"ns Comm"n v. Am. Broad. Co., 347 U.S. 284, 296 (1954). The technical issue before the Supreme Court was whether a criminal statute, dually enforced by the Justice Department and the FCC, could be subject to a different and broader interpretation by the FCC for administrative purposes than the Justice Department used for criminal purposes. That is not exactly the issue before this Court. 

The Ninth Circuit has observed that "tax provision[s] which impose[] a penalty [are] to be construed strictly; a penalty cannot be assessed unless the words of the provision plainly impose it." Bradley v. United States, 817 F.2d 1400, 1402-03 (9th Cir. 1987). Again, that is not exactly the issue here -- there"s no question that the civil penalty exists; that"s the basis for this dispute. But Bradley and, to a lesser extent, Federal Communications Commission do support to the argument that a rule of lenity should apply here. 

But that does not decide the issue. Even if a rule of lenity applies, that only dictates that the Court should choose the more lenient of two reasonable interpretations. In light of the prominence of "transactions" and "accounts" in the language of section 5321, the Court determines that the statute contemplates that the relationship with each foreign financial account constitutes the non-willful FBAR violation. 

Because the Court determines that more than one FBAR violation may be assessed per year, the Court need not address Defendant"s additional argument that the IRS is bound to follow the mitigation guidelines set forth in the IRM. And to the extent the Court determines that more than one FBAR violation may be assessed per year, the parties do not appear to dispute whether the IRS abused its discretion in determining the amount of each FBAR penalty. (See Opp. at 12; Reply at 3).  

The Government did not rely on any deference under Chevron or Skidmore and neither does the Court. Any sort of deference to the agency would bolster the Government"s position.

I will be posting the Government's and Boyd's motion papers when I receive them all.