CA9 Holds in Boyd that Nonwillful FBAR Civil Penalty Is Per Form Rather Than Per Account When Correct Delinquent FBAR Is Filed (3/24/21; 3/31/21))

Added 3/31/21 3:30pm:  Lavar Taylor, here, Boyd's lawyer and a force in the national tax community, emailed me some comments on my offering on the Boyd case.  Lavar authorized me to include his comments at the end of this blog.  I highly recommend his comments to readers interest in the general subject matter.

In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), CA9 here and TN here, the Court held that the FBAR nonwillful penalty is per annual form rather than per account that should have been reported on the form.  With this opinion, there seems to be a consensus on this holding that is likely to continue.

I have not tried to delve deeply into the majority and dissenting opinions to determine which of the two presents the best case (or whether neither of them does).  So, this blog is not about the merits of the bottom-line holding, but about some of the distractions I found in the opinions.

1. I was particularly surprised to see the dissenter (Judge Ikuta, Wikipedia here) say this as a concluding shot at the majority (Slip op. 31) :  “By holding otherwise, the majority misinterprets the relevant statutes and regulations in a manner that unfairly favors the tax evader.”  The dissenter is just wrong.  There was no tax evader in the case and the opinion does not favor tax evaders.  The case involved the nonwillful penalty, not the willful penalty.  The willful penalty is the one that would apply if tax evasion (a term of art) were involved.  Tax evasion is penalized under criminal and civil penalty regimes--§ 7201 (tax evasion) and 6663 (civil fraud), respectively.  The standard for both penalties is Cheek’s intentional violation of a known legal duty.  I explain that claim in Federal Tax Procedure 320-321 (Practitioner Ed. 2020), here. There is no suggestion in the case that Boyd was a tax evader or that any other taxpayer subject to the nonwillful penalty is a tax evader or subject to any of the income tax penalties (criminal or civil) applying to tax evaders.  Indeed, if the IRS thought Boyd (or any other taxpayer) were tax evaders, surely the IRS would assert the willful FBAR penalty for the failure to file the FBAR on its original due date.  Keep in mind in  this regard that the willful FBAR penalty, as interpreted  is subject to a looser standard than the Cheek standard, permitting the willful penalty for recklessness which could not support a criminal or civil tax penalty for criminal evasion or its civil counterpart, tax fraud.  So, in my opinion, Judge Ikuta is way out of bounds to make the closing sound bite, as cute as it is, of helping the tax evader.  And Judge Ikuta is particularly out of bounds to make the claim implicit in the quote that Boyd is a tax evader being helped by the majority's interpretation. 

2.  On the merits, the majority seems to limit its per account holding to cases where the following elements are both present:  (i) the FBAR was not timely filed and (conjunctive) (ii) a delinquent but correct FBAR was filed.  Is the Court saying that the result would be different (nonwillful penalty per account) if the taxpayer had not filed a delinquent correct FBAR (either not filed a delinquent FBAR or filed an incorrect delinquent FBAR)?  I thought the penalty applied on the date the FBAR was due (then 6/30) and not filed timely rather than anything that happened later. If that is correct, it should not matter whether a delinquent FBAR (whether correct or incorrect) was filed.  Of course, the delinquent filing of an incorrect FBAR, if  willful,  would subject the taxpayer to the willful penalty (but even there the date for measuring that penalty, I thought, was the filing date and the IRS should have to show willfulness in failing to file on that date).  As to the willful penalty, the correctly reported accounts on a delinquent return does not affect the penalty base for all accounnts willfully not reported on the filing due date.    The majority seems to adopt this view on p. 16 n. 10:  “Under both scenarios [willful and nonwillflul], the violation flows from the failure to file a timely and accurate FBAR.”  If the Court is correct on the conjunctive requirements, taxpayers missing the filing dates should always file correct delinquent FBARs if audited just to protect against the possibility that failure to do so might permit the penalty to apply per account (even as unlikely that a court would sustain that interpretation).

3.  The majority footnotes this claim (p. 12 n. 8): 

The regulations and FBAR require a person to report much more information than the number of accounts. Taken to its “logical” conclusion, the government’s argument could permit many more non-willful violations than those tied just to the number of accounts that should have been listed on an FBAR that was not timely filed.

I am not sure that is such a logical conclusion; even if it were, I am not sure that "logical" conclusions applied in extremis are or should be controlling.  I will have to think about that more.

4. Finally, important to the majority’s outcome is that penalties should be construed in favor of the party penalized rather than the Government.  Here is the discussion ( Slip Op. pp. 19, footnote omitted):

Even if the government’s reading of the statutory scheme were reasonable (and we think it is not), that reading does not arise from the plain words of either the statute or the regulations. And Boyd’s reading, even if it is not compelled, is reasonable. Thus, the rule we enunciated in Bradley would come into play, and we would strictly construe the statute against the government. The district court found the rule inapplicable because “that is not exactly the issue here--there’s no question that the civil penalty exists; that’s the basis for this dispute.” United States v. Boyd, No. 18-803-MWF (JEMx), 2019 WL 1976472, at *5 (C.D. Cal. Apr. 23, 2019). We disagree. The precise issue here is not whether the statute authorizes a non-willful penalty; it is whether the statute plainly authorizes a non-willful penalty for each account under the facts here, and it does not.13 Thus, the government’s position would also be unavailing under Bradley.

Added 3/31/21 3:30 pm:  Lavar Taylor, the lawyer for Boyd, provided by email some comments to the blog above that he authorized me to post on the blog:

Jack-

I decided to wait to send you comments re your blog post and re the 9th Circuit’s opinion until I was back in the office.  First, I don’t read the Ninth Circuit’s opinion as suggesting that there would be more than two non-willful penalties of  not more than $10,000 each if there is a non-willful failure to timely file an FBAR followed by non-willful filing of an inaccurate or incomplete FBAR.   The court noted that there are two separate regulations. One regulation requires the filing of a timely FBAR, the other regulation requires the filing of an FBAR that includes complete and accurate information.  I think there can be two separate penalties (of up to $10k each) where there is a failure to file a timely FBAR followed by the filing of an inaccurate or incomplete FBAR.  I don’t view that result as controversial, given that there can also be a separate penalty for a failure to maintain appropriate records.

The Court’s opinion, particularly footnote 8, suggests that, where a taxpayer non-willfully files an FBAR (timely or not) that has multiple inaccuracies or multiple fields that are not completed,  there should be only one penalty of up to $10,000, regardless of the number of fields that are either incorrect or incomplete.  The single “violation” in that situation is a violation of the regulation requiring the filing of a complete and accurate FBAR, 1010.350(a).  Footnote 8 strongly suggests that each incorrect or incomplete field on the FBAR is not a separate “violation” of 1010.350(a) in a situation where a penalty is imposed for filing an incomplete or incorrect FBAR.  And I think that it was proper for the Court to discuss this point, given the IRS’s insistence that the failure to file a single form can ever constitute more than one violation of the regulations.    

I think that the Court’s holding that the rule of lenity applies to FBAR penalties could be important in future  litigation regarding the manner in which willful FBAR penalties are computed.  For example, I am aware of cases where IRS imposed a willful penalty that was computed by taking the total number of non-compliant accounts and multiplying that number by $100,000, even though the balances in the non-compliant accounts were very modest.   Thus, assuming that there were 10 non-compliant accounts, and that  the total balances in the non-compliant accounts as of the relevant date under the statute  was  $180,000, I think that the statute should be interpreted to provide that the maximum possible  willful FBAR penalty is  the greater of $90,000 ( 50% of the balances in the non-compliant accounts as of the relevant date) or $100,000, not the greater of $90,000 or $1 million. The  minimum  penalty cap of $100,000 should apply to the non-compliant  accounts in aggregate, not to each account separately, in a single year. The rule of lenity supports that result. 

From a big picture viewpoint, I view the holding that the rule of lenity applies to FBAR penalties as being very important. The Court in Bittner did not want to go there. 

Best regards,

Lavar