Courts Affirms Reckless Disregard of FBAR Filing is Willful

Courts Affirms Reckless Disregard of FBAR Filing is Willful

Courts Affirms Reckless Disregard of FBAR Filing is Willful

Courts Affirms Reckless Disregard of FBAR Filing is Willful: When it comes to the FBAR (Foreign Bank and Financial Account Reporting aka FinCEN Form 114) one of the most difficult aspects of analyzing US Person Taxpayer violations is determining whether the violation was a mistake (negligence) and non-willful — or if the violation was willful. It is very important to understand the difference in these two different penalty schemes, because the outcome will determine potential fines and penalties for the US foreign account holder. For reference willfulness does not mean the person acted with intent. In fact, in a recent Court of Federal Claims Appellate Court Case, the Court held that mere “Reckless Disregared” was sufficient to prove willfulness in the Civil FBAR Penalty arena.

Let’s take a look:

FBAR Reckless Disregard & Willful FBAR Penalty Ruling 

(US v Kimble) FBAR Ruling on Willfulness and Reckless Disregard: While many Courts such as Kaufman, Girlaldi, and Boyd have ruled in favor of US Person Taxpayers in non-willful FBAR Penalty cases (These Courts all limited FBAR Violation Penalties to a per form and not per violation standard), it just got a whole lot easier for the US Government to pursue willful penalties against Taxpayers. In US v Kimble, the Court found in favor the US Government’s contention that signing a tax return (Under penalty of perjury) without including reference to foreign accounts is reckless disregard – and therefore willful.

U.S. v. Kimble United States Court of Federal Claims in No. 1:17-cv-00421-SGB

Let’s take a look at some of the key portions of the ruling:

Two important Facts:

  • Taxpayer entered OVDP (before the stand-alone Streamlined Procedures were enacted) and then withdrew after agreeing to pay a penalty; and
  • Taxpayer never paid the Penalty.

Kimble Had Foreign Accounts & Self-Prepared Tax Returns

      • “While he was married to Ms. Kimble, Michael Kimble prepared the couple’s joint federal tax returns. Those tax returns did not report any income derived from the UBS account nor did they disclose the existence of the foreign account. After the couple divorced in 2000, Ms. Kimble hired Steven Weinstein, a certified public accountant, to prepare her income tax returns.

      • Mr. Weinstein never asked Ms. Kimble if she had a foreign bank account, and Ms. Kimble did not volunteer that she owned the UBS account.

      • Accordingly, from at least 2003 to 2008, Ms. Kimble’s tax forms did not disclose her ownership of the UBS account or the income she derived from it. Those forms, which Ms. Kimble signed under penalty of perjury, represented that she did not have a foreign bank account and that she had reviewed the tax form. Nonetheless, according to Ms. Kimble, she did not review the accuracy of any federal income tax returns filed on her behalf from 2003 through 2008.”

In 2008 Kimble Learned About Foreign Account Reporting

      • “In 2008, Ms. Kimble read an article in the New York Times reporting on the Treasury Department’s investigation into UBS for abetting tax fraud with respect to its numbered accounts. Ms. Kimble testified that this was the first time she learned of her obligation to disclose her foreign bank accounts. Ms. Kimble later retained counsel to comply with the foreign reporting requirements. In 2009, UBS entered into a deferred prosecution agreement with the United States that required UBS to unmask its numbered accounts held by United States citizen clients.

      • That same year, Ms. Kimble applied for and was accepted into the Offshore Voluntary Disclosure Program (OVDP), a program designed for taxpayers exposed to potential criminal or substantial civil liability due to a willful failure to report foreign financial assets and pay taxes due stemming from those assets.”

Kimble Withdrew from OVDP and Did not Pay the Penalty

      • In 2012, Ms. Kimble and the IRS negotiated an agreement resolving the matter of her undisclosed foreign bank account, which required her to pay a penalty of $377,309. In 2013, Ms. Kimble withdrew from the OVDP and declined to pay the penalty.

Court Issued a Prior Summary Judgment for Willful FBAR Penalty

      • “The Court of Federal Claims granted summary judgment against Ms. Kimble. In holding that Ms. Kimble violated 31 U.S.C. § 5314, the court found undisputed that, until 2008, Ms. Kimble never disclosed the account to her accountant nor inquired about any need to report foreign income, that she indicated on her tax returns that she had no foreign accounts, and that she did not review her tax returns but signed that she had reviewed them and that they were correct under penalty of perjury.

      • The court held that these actions constituted a “reckless disregard” for the legal duty to disclose foreign bank accounts and that Ms. Kimble’s conduct was therefore “willful” under § 5321(a)(5). The Court of Federal Claims also found no dispute of material fact that the IRS did not abuse its discretion in setting a 50% penalty and noted that Ms. Kimble had waived any Eighth Amendment arguments by failing to plead them.”

Taxpayer Claims Non-Willfulness

      • 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.”

US Government Claims Reckless Disregard & Not Actual Knowledge is Required

      • “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.”

8th Amendment Excess Fine is Not Considered by Court

      • Finally, Ms. Kimble argues that the penalty violates the Eighth Amendment as an excessive fine, but this claim was waived. The Court of Federal Claims held that it did not need to address this argument because the Plaintiff did not raise it in her complaint.

      • Ms. Kimble contends that page 45 of her complaint raised the Eighth Amendment by seeking a return of the “excess penalty,” but, rather than invoking the Eighth Amendment, this wording fits with her other arguments that the penalty either should have been mitigated or violated IRS regulations. Appellant’s Br. 50.

      • The “traditional rule is that once a federal claim is properly presented, a party can make any argument in support of that claim.” Lebron v. Nat’l R.R. Passenger Corp., 513 U.S. 374, 379 (1995) (citations omitted). But distinct claims are waived if not pled in a complaint. See Casa de Cambio Comdiv S.A., de C.V. v. United States, 291 F.3d 1356, 1366 (Fed. Cir. 2002) (“[W]e need not address Casa’s agency theory because . . . [n]o mention of this theory appears in Casa’s complaint.”). Accordingly, we will not consider this claim on appeal.

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