Tuesday, March 23, 2021

Another Failed Judicial Contest of the FBAR Willful Penalty (3/23/21)

In Kimble v. United States, ___ F.3d ___ (Fed. Cir. 3/22/21), TN here, in an appeal from an adverse holding in a refund suit, the Court sustained the willful FBAR civil penalty.  Unfortunately for Kimble, neither the facts nor the law was helpful.

The Court almost summarily dispatched Kindle’s main arguments about the CFC’s holding sustaining the penalty.

Here, the parties do not dispute that Ms. Kimble failed to disclose a foreign bank account that she was required to disclose. Rather, Ms. Kimble argues that her violation was not “willful.” We hold that, based on the undisputed facts, it was not clear error for the Court of Federal Claims to find Ms. Kimble's violation willful.

Contrary to Ms. Kimble's argument that a taxpayer cannot commit a willful violation without “actual knowledge of the obligation to file an FBAR,” Appellant's Br. 32, we have held that “willfulness in the context of § 5321(a)(5)(C) includes recklessness,” Norman, 942 F.3d at 1115. Accordingly, a taxpayer signing their returns cannot escape the requirements of the law by failing to review their tax returns. Id. at 1116 (“[W]hether [the taxpayer] ever read her . . . tax return is of no import because '[a] taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as . . . she is charged with constructive knowledge of its contents.'”) (quoting Greer v. Comm'r, 595 F.3d 338, 347 n.4 (6th Cir. 2010)).

The undisputed facts show that Ms. Kimble knew about the numbered account and took efforts to keep it secret by, among other things, not disclosing the account to her accountant. She did not review her tax returns for 2003-2008, but she represented under penalty of perjury that she had reviewed her tax returns and had no foreign accounts. J.A. 17. In other words, Ms. Kimble had a secret foreign account, she had constructive knowledge of the requirement to disclose that account, and she falsely represented that she had no such accounts. Under these facts, it was not clear error for the Court of Federal Claims to hold that she committed a willful violation. n2 

   n2 Ms. Kimble's reasons for the violation (her subjective belief about the need for secrecy, advice from her ex-husband, etc.) do not alter our inquiry. A taxpayer can be “willful” even if her violation has good reason. See Bedrosian v. United States, 912 F.3d 144, 153 (3d Cir. 2018) (inquiring into “subjective motivations and the overall 'egregiousness' of [the taxpayer's] conduct . . . [is] not required to establish willfulness in this context”); Norman, 942 F.3d at 1116 (“Actions can be willful even if taken on the advice of another.”). And there is no “reasonable cause” exception for willful violations. 31 U.S.C. § 5321(a)(5)(C)(ii).

The Court then moved to Kindle’s hail Mary arguments and also handily dispatched them.

  • The Court rejected the argument that the applicable regulation limited the willful penalty to $100,000, saying that the Court had conclusively rejected that argument in Norman v. United States, 942 F.3d 1111 1115 (Fed. Cir. 2019).
  • The Court rejected the argument that the IRS failed to apply its IRM mitigation guidelines.
  • The Court rejected Kindle’s claim that, in asserting the maximum penalty, the IRS improperly treated her as a manager of the account because, well, she managed the account.
  • The Court rejected Kindle's Eighth Amendment excess fine argument because she had waived the argument by not presenting it in the complaint.

The Court rejected Kindle’s argument that the “the IRS improperly determined her to be the sole beneficiary of the account.” The Court said:  “The IRS made this determination based on her stipulation, but even assuming she was not the sole beneficiary, it is undisputed that she had a direct interest in the account, and Ms. Kimble provides no reason why one must be the sole beneficiary in order to receive the penalty stated in the guidelines.”

JAT Note:

1. Kindle was in OVDP but opted out.  Hindsight is always better than foresight, but hindsight indicates that was a bad choice.  Very costly both in terms of additional FBAR penalty over the miscellaneous offshore penalty in OVDP (and perhaps income tax and income tax penalties and resulting interest) and no relief for earlier years should the IRS choose to pursue earlier years.

2. Assuming the IRS chooses not to go beyond the years involved in the OVDP (or not too many years back), even with the higher willful penalty and civil fraud penalties costs (if any), I suspect that, considering the taxes, penalties and interest evaded by Kindle's father who set the account up "around or before 1980, Kindle and her father have been rewarded in net with untaxed and un-FBAR penalties financial assets well in excess of these costs.  Keep in mind that that is 28 years of untaxed income and, even considering the outrageous compensation they had to pay their Swiss bank helping them in the conspiracy to evade U.S. tax, they probably still are ahead financially.  I suppose that one option for the IRS in these times of fiscal concern might be to audit all opt outs to see if income tax, penalties and interest could be recouped for those earlier years where the statute is still open for fraud.   

3.  It struck me in the line of authority seeming to be a consensus holding that recklessness or some variant of recklessness is sufficient to meet the FBAR willful civil penalty operates somewhat like the willful blindness concept which can apply to criminal penalties with the Cheek willful requirement.  As I have noted, there is a key issue for criminal penalties with a Cheek willful requirement as to whether willful blindness was Ii) a disjunctive court-imposed element when the trier of fact cannot find the required Cheek intent or(ii) is circumstantial evidence of Cheek intent from which the trier could infer Cheek intent.  As I read the trajectory on the civil side, the court are treating reckless as included in the definition of willfulness so that recklessness is a disjunctive element for willfulness.  In other words, although the statute uses the word willfully for the both criminal and civil FBAR penalties, willfully for the criminal penalty is Cheek willfulness.  But, willfully for the civil penalty is either the Cheek definition or reckless conduct.  Reckless conduct is thus not just circumstantial evidence of the required intent under the Cheek standard.

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