By: Samantha Levokove
The unanswered question of how non-willful FBAR penalties are computed is being litigated in the Connecticut district court in United States v. Kaufman, No. 3:18-cv-00787 (D. Conn. 2018).
Zvi Kaufman is a U.S. citizen who has lived and worked in Israel since 1979 and has maintained several bank accounts in Israel. Kaufman failed to timely file required FBARs for 2008, 2009, and 2010. The IRS is seeking more than $140,000 in penalties for Kaufman’s non-willful failure to file. Kaufman argues that he acted with reasonable cause, and therefore no penalty should be imposed for his failure to file. The United States has filed a motion for summary judgment on the matter asserting that Kaufman did not have reasonable cause for his failure to file. Kaufman, in his opposition memorandum, moved for partial summary judgment on the issue of the extent to which a non-willful penalty could be asserted if applicable.
Kaufman argues that non-willful penalties for failure to file FBARs can only be imposed for an unfiled FBAR form, not for each undisclosed account. Thus $30,000 in total ($10,000 per year) is the most the government can penalize him for his failure to timely file required FBARs for 2008, 2009, and 2010.
Section 5321(a)(5)(A) of Title 31 of the Code authorizes the imposition of a penalty for a non-willful failure to file an FBAR. Kaufman asserts that Section 5321 permits a penalty of $10,000 per “violation” and that his “violation” was the failure to file the FBAR, not the failure to report each account on the FBAR. He points out that the non-willful provisions of Section 5321 refer to a “violation” and by contrast, the provisions relating to a “willful” failure to file refer to “an account, [and] the balance of the account.” Kaufman’s opposition memorandum argues that this distinction in the drafting of the provisions was intentional, that the penalty for a non-willful and willful penalty should be computed in a different fashion. Kaufman further argues that the Treasury Department’s own publications support his interpretation of the law, citing the following examples: (1) Internal Revenue Manual 4.26.16.6.4.1.1 provides that “in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts;” (2) Financial Crimes Enforcement Network: Amendments to the Bank Secrecy Act Regulations—Reports of Foreign Financial Accounts, 75 FR 844-01, 2010 WL 667290, at *8854 (Fed. 26, 2010) provides that “[a] person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000;” and (3) FBAR Instructions provide that “[a] person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation” where the term “violation” refers back to failure to file “an FBAR”.
The method for determining how to compute a non-willful FBAR penalty has been adjudicated only before a district court in California: United States v. Boyd, No. 2:18-cv-00803-MWF-JEM (2019). In Boyd, the court held that non-willful FBAR penalties are imposed for each undisclosed account rather than only for an unfiled FBAR. Boyd is currently on appeal to the Ninth Circuit. (Kaufman would be appealed to the First Circuit). This issue of “account vs. FBAR” is also currently being litigated in Texas: United States B. Bittner, No. 19-cv-00415 (E.D. Texas) which would be applicable to the Fifth Circuit.
It is important to note that while the manner of computation of the non-willful FBAR penalty is still up for debate, this litigation sheds some light on how the government determines whether a taxpayer is non-willful.
“With regard to non-willful FBAR penalties, once the United States has established that the accountholder was required to file an FBAR, but failed to do so, the accountholder is liable for the penalty unless they can establish “reasonable cause.”
United States’ Reply in Support of Its Motion for Summary Judgment. In essence, if the government cannot establish that a taxpayer was willful, and the taxpayer cannot successfully establish reasonable cause, the taxpayer will be deemed “non-willful.”