Prologue – Before The Supreme Court – The Background To The Toth FBAR Case
This Is Post 7 in a series of posts describing the statutory and regulatory history of Mr. FBAR.
These posts are organized on the page “The Little Red FBAR Book“.*
Historically the strength of America has been found in its moral authority. As President Clinton once said:
“People are more impressed by the power of our example rather than the example of our power…”
The FBAR penalty imposed on Ms. Toth is an example of the legal power to impose penalty and NOT an example of the restraint on power and the application of law in a just way. I have heard it said that when a person (and by extension country) loses its character it has lost everything.
The Story Of Monica Toth – Three Perspectives
Perspective 1: The story of Ms. Toth’s encounter with Mr. FBAR as described by Justice Gorsuch in his dissent:
In the 1930s, Monica Toth’s father fled his home in Germany to escape the swell of violent antisemitism. Eventually, he found his way to South America, where he made a new life with his young family and went on to enjoy a successful business career in Buenos Aires. But perhaps owing to his early formative experiences, Ms. Toth’s father always kept a reserve of funds in a Swiss bank account. Shortly before his death, he gave Ms. Toth several million dollars, also in a Swiss bank account. He encouraged his daughter to keep the money there—just in case.
Ms. Toth, now in her eighties and an American citizen, followed her father’s advice. For several years, however, she failed to report her foreign bank account to the federal government as the law requires. 31 U. S. C. §5314. Ms. Toth insists this was an innocent mistake. She says she did not know of the reporting obligation. And when she learned of it, she says, she completed the necessary disclosures. The Internal Revenue Service saw things differently.
As a general matter, the FBAR is not a difficult tax form to prepare, at least for most taxpayers and their tax professionals. At its very basics, it merely asks for identifying information regarding the taxpayer and certain basic information regarding foreign accounts held outside the United States. Thus, one would suspect that the failure to timely file this seemingly innocuous information return should not result in significant penalties.
However, tax professionals know better. Under Title 31, a taxpayer’s willful failure to file a timely and accurate FBAR can result in penalties of up to 50% of the foreign account balances, a penalty that can be applied over multiple years. And because federal courts and the IRS view certain reckless behavior as constituting “willfulness,” the bar for willful FBAR penalties can be a seemingly low one.
On March 8, 2022, the Southern District of New York issued its Opinion in the case of United States v. Schik, No. 20-cv-0221 (MKV), 2022 U.S. Dist. Lexis 41148 (S.D.N.Y. Mar. 8, 2022). In that case, the United States brought a lawsuit against a Holocaust survivor for willful failure to file an FBAR for one year: 2007. Incredibly, the United States sought to assess the maximum willful FBAR penalty against Mr. Schik—i.e., 50% of the foreign account balance—which would have resulted in close to a $9 million FBAR penalty. As seems more and more common, the United States moved for summary judgment on the willfulness determination. This article discusses the Schik case.
Willful FBAR Penalties
The Schwarzbaum case has received a lot of attention in the last few years from tax professionals. For example, in 2020, the district court concluded—contrary to some other federal court decisions—that the simple act of signing a federal tax return and not filing an FBAR does not in and of itself constate a finding that there was a willful FBAR violation. See U.S. v. Schwarzbaum, No. 18-CV-81147, 2020 WL 1316232, at *8 (S.D. Fla. Mar. 20, 2020). In 2021, after finding that Schwarzbaum’s conduct in failing to file FBARs was willful, the district court granted the government’s motion for an order requiring Schwarzbaum to repatriate millions of dollars of foreign assets to provide security to the government for full payment on the affirmed willful FBAR penalties. See U.S. v. Schwarzbaum, 128 AFTR 2d 2021-6436 (S.D. Fla. Oct. 26, 2021). Months later, though, the district court changed course and granted Schwarzbaum a stay of repatriation until after the Eleventh Circuit reviewed the district court’s decision on willfulness. See here.
In most cases, IRS exam initiates FBAR assessments. And, after an IRS examiner determines that an FBAR penalty is appropriate, taxpayers are generally afforded pre- or post-assessment appeals rights with the IRS Independent Office of Appeals (“Appeals”). If Appeals agrees with IRS exam that the FBAR penalty is appropriate, Appeals will either recommend assessment (if a pre-assessment case) or sustain the assessment determination (if a post-assessment case).
But, what happens after the assessment? The short answer: litigation. And as discussed more fully below, this litigation is likely to occur whether the taxpayer wants it or not due to the unique collection procedures applicable to FBAR assessments under Title 31 of the Code.
United States persons who have a financial interest in or signature authority over one or more foreign financial accounts located in a foreign country with aggregate balances exceeding $10,000 at any time during the calendar year must file a timely and complete FBAR. If the United States person fails to file a timely and accurate FBAR, he or she can be liable for “willful”[i] or “non-willful” FBAR penalties.
FBAR penalties can be steep. Indeed, under current law, if a taxpayer “willfully” fails to file a timely and accurate FBAR, the taxpayer may be liable for civil penalties of $129,210 per year or 50% of the balance in the accounts at the time of the violation, whichever is higher.[i] And even non-willful violations—given the 6-year statute of limitations—can add up with civil penalties of $12,921 per year currently.[ii]
Because the amount of FBAR penalties often hinges on whether the conduct was “willful” or “non-willful,” tax practitioners must take careful notice of the distinction between the two when advising their clients of the results of failures to timely file. Thus, a recent federal court decision out of the Northern District of California is worth a read and provides some helpful insights to tax professionals and taxpayers alike as to how to potentially distinguish between the two types of conduct.[iii]
The Facts of Hughes.
A federal district court in Texas recently took up an interesting FBAR issue: whether civil FBAR penalties survive death? That is, if a taxpayer/account holder dies after the IRS assesses an FBAR penalty against them, do the FBAR penalties remain against the decedent’s estate? Or do the penalties die, so to speak, along with them?
The analysis typically turns on a subsidiary question: Are the penalties, for these purposes at least, penal or remedial? If penal, the FBAR penalties would potentially dissolve at death. If, on the other hand, they are remedial, maybe not.
FBAR penalties can be notoriously draconian. If a U.S. person fails to file an FBAR, the IRS can impose a civil monetary penalty. 31 U.S.C. § 5321(a)(5)(A). The amount of the penalty can vary. If, for example, the failure to file results from willful conduct, the statute provides for a penalty equal to the greater of $100,000 or 50% percent of the amount of “the balance in the account at the time of the violation.” 31 U.S.C. § 5321(a)(5)(C), (D).
The Report of Foreign Bank and Financial Accounts (i.e., the “FBAR”) was for many years confined to the lonely backwaters of Title 31 of the United States Code—the intriguingly-named Bank Secrecy Act. For years, compliance levels were abysmal. But penalties were generally not enforced. To put the situation in perspective, in the course of more than a decade, you could probably have counted the number of penalties assessed against non-compliant account holders on one hand—maybe, just maybe, two hands—at least according to contemporary reports from the Treasury Department to Congress.
But my how the times have changed. FBAR penalties are most certainly enforced these days. Some might argue that they are enforced with a vengeance—a vengeance that is disconnected with the purpose behind the FBAR filing requirement. Truly, the penalties associated with failing to file an FBAR are among the most punitive civil penalties on the books.
In a recent decision, a federal district court found that a long-time CPA/tax-return preparer recklessly failed to file FBARs to disclose several foreign financial accounts. As avid readers of our Insights are aware, many federal courts have found that reckless reporting failures are sufficient to impose “willful” FBAR penalties—and those penalties can be quite signficant.
The case was United States v. Kronowitz. And it is yet another reminder that courts addressing FBAR reporting failures tend to look critically at the account holder’s background, including educational and professional. Account holders with tax-related backgrounds or professionals with substantial business experience are often held to a higher standard.
The Foreign Accounts
You may be able to avoid paying FBAR penalties if you qualify for a delinquent FBAR submission or the Streamlined Compliance Procedures. These voluntary disclosure methods eliminate or reduce your tax penalties while getting you into reporting compliance.
Key Insights We Will Discuss:
The qualifications for a delinquent FBAR submission or the Streamlined Procedures.
The benefits of making a voluntary disclosure.
Other options if you don’t qualify for these offshore disclosure options.
Delinquent FBAR Submissions
A delinquent FBAR submission is the simplest way to correct your failure to file FBARs. However, this option is only available if you meet the following conditions:
While there has been no official change to the current FBAR penalty rules we laid out in 2015, it should be noted there was a recent court case which has reached an unfavorable result for FBAR Penaltiestaxpayers with regard to potential FBAR non-willful penalties.
In an April 2019 California District Court case (U.S. vs Boyd), the court ruled that while the penalty rules for non-willful failure to comply with FBAR reporting requirements are ambiguous, it agreed with the IRS that it is more appropriate to impose the penalty ($10,000 max for the years dealt with in the Boyd case) on unreported accounts, on an account by account basis rather than per a calendar year penalty. So, rather than a maximum $10,000 penalty for all unreported accounts in a given year, in Boyd, the taxpayer was assessed a $10,000 per account penalty per year of non-compliance.
Thoughts From A Conversation About Green Cards And Taxes
The purpose of this is to reinforce some very simple points. I find that people always have more trouble remembering what’s simple.
Moving to America
1. Taxation of income from your remaining “non-U.S. assets”
You will be shocked to find that many of your “foreign assets” will be subject to particularly punitive U.S. taxation.
2. Reporting of your “non-U.S. assets”
If you are moving to America, you are moving from another country. You will very likely retain financial assets and bank accounts in that country. From a U.S. perspective, these assets are “foreign” and therefore a “fertile ground” for taxation and penalties.