Friday, November 6, 2020

Smith NPA and the FBAR Costs (Fines or Penalties?) Described (11/6/20)

I have written about the travails, self-imposed, of Robert T. Brockman and Robert F. Smith.  See Private Equity Guru Smith Got a Hell of a Deal (Federal Tax Crimes 10/23/20), here, and One Big Fish Indicted and Lesser Big Fish Achieves NPA for Cooperation (Federal Tax Crimes 10/16/20), here.  I offer another installment today, focusing on Smith who achieved a nonprosecution agreement (‘NPA”).  

My subject today is the FBAR penalties.  The Smith NPA, here, provides (par. 3.(i)) that Smith will pay FBAR penalties (boldface applied by JAT).

all penalties and interest computed by the IRS, pursuant to Title 31 U.S.C. §§5314 and 5322, in the amount of $82,930,165, related to Robert F. Smith's failure to timely file truthful and accurate Foreign Bank Account Reporting Forms TD F 90-22.1 ("FBARs"), reporting his financial interest in the foreign bank accounts referenced in the Statement of Facts for the calendar years 2012, 2013, and 2014.

Assuming that the NPA is accurate, the penalties and interest relate to the criminal FBAR penalty in § 5322, here, with respect to the reporting requirement in § 5314, here.  One problem is that, exception in the title of the section, § 5322 describes the monetary imposition as a criminal fine rather than a penalty.  The civil willful penalty, by contrast, is stated to be a penalty, both in the title and in the actual provision.  See § 5321(a)(5)(C), here.  I am not sure the quantified amount of $82,930,165 is consistent with the "fines" that could be imposed under § 5322.  Moreover, I am not sure that the criminal fines in § 5322 could be imposed without a conviction for the crime.  If anyone can provide more information on these issues, I would greatly appreciate it.

Assuming that the quantified amount includes, in whole or at least in significant part, the civil willful penalty under § 5321(a)(5)(C), I would like to develop an issue I have on the application of the civil willful penalty.  The willful penalty maximum of the greater of $100,000 or 50% of the amount in the unreported accounts.  Note that the penalty is stated as a maximum and can be less than the maximum, in the IRS's discretion.

Readers will recall that the willful penalty can, at least in theory, apply to each violation – for each year violation in the years still open under the statute of limitations for the willful penalty.  In its discretion under the statute, however, the IRS mitigates the potential application of the 50% calculation by generally (i.e., “in most cases”) applying the 50% to a single amount being the highest aggregate amount during the open years to which the willful penalty could apply and then spreading the single 50% amount over those open years.  See IRM (11-06-2015), Penalty for Willful FBAR Violations – Calculation, here.  But the IRM also provides that (emphasis supplied by JAT):

Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination.

Thus, even though the maximum willful penalty for multiple years could exceed 100%, the IRS will not assert penalties that, in the aggregate, exceed 100% of the high amount.  For example, assume a static offshore account balances of $1,000,000 during all years and on the reporting date (June 30 for older years) for 3 years still open, the penalty could be $500,000 per year for an aggregate of $1,500,000.  Notwithstanding that, the IRS exercises its discretion to impose only an aggregate FBAR penalty of $1,000,000.  This provision of the IRM seems to require that latter mitigation (aggregate $1,000,000 high amount in the account) no matter how egregious the conduct.  (That mitigation may be in anticipation of and to lessen the possibility of an Eighth Amendment excessive fines problem.)

The question I have is whether, if the IRS did impose the civil willful penalty, it quantified the amount under the exception in excess of 50% of the high amount in the open years because Smith's conduct was so egregious.  Enough information is not given to determine the answer.  I would say, however, that, if the IRS did not apply the higher amount for Smith's particularly egregious conduct, then I really can’t imagine a case in which the IRS would, if consistent, apply a higher amount.

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