Frost Law
Many US taxpayers with offshore accounts have been increasingly confronted with the growing judicial antagonism aimed at taxpayers who litigate FBAR penalties. Indeed, taxpayers’ efforts to avoid imposition of penalties altogether and/or arguments that penalty caps, at least, are merited, are more frequently than not unsuccessful.
However, on March 24, 2021, the U.S. Court of Appeals for the Ninth Circuit held that in the case of a taxpayer who filed a late, but accurate, Report of Foreign Bank and Financial Accounts (FBAR), the IRS may only impose one non-willful penalty per form, regardless of the number of foreign accounts reported on that FBAR. The case is United States v. Boyd—it is a case of first impression for the Ninth Circuit and a major US taxpayer victory at the appellate level.¹
Before we review this pivotal pro-taxpayer development, we want to emphasize that our readers should remember that the taxpayer involved had in fact previously demonstrated that she wanted to get “compliant” and had taken proactive steps to try to achieve that before the matter went to trial. If she had not already tried to become compliant—if, instead, the penalties were assessed prior to filing complete and accurate FBARs—the Ninth Circuit outcome may have been vastly different.
U.S. taxpayer, Jane Boyd (Taxpayer), had a financial interest in 14 financial accounts located in the United Kingdom. The accounts had an aggregate balance exceeding $10,000.
After Taxpayer’s father died and Taxpayer subsequently deposited her inheritance, the amounts in the accounts significantly increased between 2009 and 2011. And, although the Taxpayer received interest and dividends from these accounts, she failed to: (1) report these amounts on her 2010 federal income tax return, and (2) disclose the accounts to the IRS.
In 2012, Taxpayer requested to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP), a limited-amnesty program at the time which would allow her to voluntarily report the undisclosed offshore accounts “in exchange for predictable and uniform penalties.”² The IRS accepted Taxpayer into the program, and in October 2012, she submitted an FBAR listing the 14 foreign accounts for 2010, and an amended 2010 tax return reflecting the interest and dividends from the accounts.
In 2014, for unknown reasons, Boyd decided to opt out of the amnesty program. As such, Taxpayer was subject to an IRS examination of her income tax returns for those years in which no FBAR was filed. Significantly, this examination resulted in: (1) an IRS determination that the late-filed FBAR was complete and accurate, and (2) a determination of 13 non-willful violations (one violation per unreported account in calendar year 2010). In total, the IRS assessed a penalty of $47,279 for these non-willful reporting violations. And in 2018, the IRS sued Taxpayer to recoup that amount plus additional late-payment penalties and interest.
Taxpayer fought back. She argued that she had committed only one non-willful violation and that the maximum statutory penalty for a single non-willful violation was $10,000. The district court agreed with the IRS. Taxpayer brought her appeal to the U.S. Court of Appeals for the Ninth Circuit.
The FBAR requirement is applicable to US persons with interest in or authority over foreign financial account(s) exceeding an aggregate value of $10,000. The Boyd court’s analysis was focused on determining whether 31 U.S.C. §5321 authorizes the IRS to impose multiple non-willful penalties for the taxpayer’s single failure to timely file an accurate FBAR that includes multiple foreign accounts. In other words, did Taxpayer:
commit one nonwillful violation for her single failure to timely file the FBAR, or did she commit thirteen (or fourteen) non-willful violations for her single failure to timely file an FBAR listing her fourteen relevant accounts?³
With that question in mind, the court turned to the applicable statutes and regulations for its answer.
First, the court considered that the IRS may act under §5321 to impose a civil monetary penalty on someone who violates §5314—the subsection ultimately requiring the timely filing of the FBAR to account for certain foreign accounts. The court continued by noting that §5314(a) is comprised of several provisions, including a filing mandate and a provision for the corresponding substantive requirements for such filing.
At this point the court found it necessary to consider the applicable regulations, 31 C.F.R. §1010.350, after which the court clarified the following:
There are two relevant regulations. The first requires a citizen (like Boyd) to report financial interests in foreign accounts “for each year in which such relationship exists and [to] provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 . . . . The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts [the FBAR] . . . .” 31 C.F.R. § 1010.350(a) (emphases added). The second requires that the FBAR “be filed . . . on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.”
Thus, the court explained that the first regulation, §1010.350, describes what must substantively be disclosed, while the second regulation, §1010.306, imposes the FBAR filing deadline. And, according to the court, since Taxpayer’s FBAR was ultimately deemed “accurate,” it was clear that Taxpayer could not have violated §1010.350’s substantive requirements. The court maintained that Taxpayer could only have violated the statutory and regulatory requirement to timely file the FBAR for calendar year 2010.
Significantly, the court was clear in denouncing the IRS’s arguments that multiple violations occurred. More specifically, the court rejected the IRS’s contention that the penalty should be based on the balance of any account which was unreported. The court emphasized that:
[t]he language in §5321(a)(5)(A) that “any violation of . . . any provision of section 5314” simply refers to the relevant regulations that prescribe how the provisions in §5314 may be violated. As discussed above, under the relevant regulations, Boyd committed one violation.
In other words, the court determined that §5321(a)(5)(A) would not be interpreted to impose a separate penalty for each foreign account that Taxpayer failed to list on her FBAR.
Furthermore, the court provided that “[s]ection 5321 establishes two types of civil penalties depending on whether the violation was willful or non-willful.”⁴ The court clarified that prior to 2004, only willful violations were penalized. However, while the court expressed that the amended statute “is not silent as to multiple account penalties” in the willful violation context, the court highlighted that the amended statute neither expressly permits nor prohibits multiple non-willful penalties per account.⁵ And using the “normal tools of statutory construction,” the court determined that in the case of a non-willful violation, such as Taxpayer’s, the statute establishes a single penalty capped at $10,000.⁶
Again, this decision is good news for individuals filing late FBARs—at least, for those taxpayers with non-willful FBAR violations. While taxpayers in these situations have generally been fighting an uphill battle in courts across the country, this Ninth Circuit decision may ultimately align with the Fifth Circuit (assuming Bittner survives appeal) to tip the balance in the taxpayers’ favor—such that the prevailing interpretation is one in which non-willful FBAR penalties are per form, not account.⁷ Otherwise, Congress may be required to intervene in order to eliminate outcomes where civil penalties far exceed harm done to the government.
If you have a FBAR case, contact Eli Noff and the Frost Law team at (410) 497-5947 or requesting a consult online.
Many US taxpayers with offshore accounts have been increasingly confronted with the growing judicial antagonism aimed at taxpayers who litigate FBAR penalties. Indeed, taxpayers’ efforts to avoid imposition of penalties altogether and/or arguments that penalty caps, at least, are merited, are more frequently than not unsuccessful.
However, on March 24, 2021, the U.S. Court of Appeals for the Ninth Circuit held that in the case of a taxpayer who filed a late, but accurate, Report of Foreign Bank and Financial Accounts (FBAR), the IRS may only impose one non-willful penalty per form, regardless of the number of foreign accounts reported on that FBAR. The case is United States v. Boyd—it is a case of first impression for the Ninth Circuit and a major US taxpayer victory at the appellate level.¹
Before we review this pivotal pro-taxpayer development, we want to emphasize that our readers should remember that the taxpayer involved had in fact previously demonstrated that she wanted to get “compliant” and had taken proactive steps to try to achieve that before the matter went to trial. If she had not already tried to become compliant—if, instead, the penalties were assessed prior to filing complete and accurate FBARs—the Ninth Circuit outcome may have been vastly different.
U.S. taxpayer, Jane Boyd (Taxpayer), had a financial interest in 14 financial accounts located in the United Kingdom. The accounts had an aggregate balance exceeding $10,000.
After Taxpayer’s father died and Taxpayer subsequently deposited her inheritance, the amounts in the accounts significantly increased between 2009 and 2011. And, although the Taxpayer received interest and dividends from these accounts, she failed to: (1) report these amounts on her 2010 federal income tax return, and (2) disclose the accounts to the IRS.
In 2012, Taxpayer requested to participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP), a limited-amnesty program at the time which would allow her to voluntarily report the undisclosed offshore accounts “in exchange for predictable and uniform penalties.”² The IRS accepted Taxpayer into the program, and in October 2012, she submitted an FBAR listing the 14 foreign accounts for 2010, and an amended 2010 tax return reflecting the interest and dividends from the accounts.
In 2014, for unknown reasons, Boyd decided to opt out of the amnesty program. As such, Taxpayer was subject to an IRS examination of her income tax returns for those years in which no FBAR was filed. Significantly, this examination resulted in: (1) an IRS determination that the late-filed FBAR was complete and accurate, and (2) a determination of 13 non-willful violations (one violation per unreported account in calendar year 2010). In total, the IRS assessed a penalty of $47,279 for these non-willful reporting violations. And in 2018, the IRS sued Taxpayer to recoup that amount plus additional late-payment penalties and interest.
Taxpayer fought back. She argued that she had committed only one non-willful violation and that the maximum statutory penalty for a single non-willful violation was $10,000. The district court agreed with the IRS. Taxpayer brought her appeal to the U.S. Court of Appeals for the Ninth Circuit.
The FBAR requirement is applicable to US persons with interest in or authority over foreign financial account(s) exceeding an aggregate value of $10,000. The Boyd court’s analysis was focused on determining whether 31 U.S.C. §5321 authorizes the IRS to impose multiple non-willful penalties for the taxpayer’s single failure to timely file an accurate FBAR that includes multiple foreign accounts. In other words, did Taxpayer:
commit one nonwillful violation for her single failure to timely file the FBAR, or did she commit thirteen (or fourteen) non-willful violations for her single failure to timely file an FBAR listing her fourteen relevant accounts?³
With that question in mind, the court turned to the applicable statutes and regulations for its answer.
First, the court considered that the IRS may act under §5321 to impose a civil monetary penalty on someone who violates §5314—the subsection ultimately requiring the timely filing of the FBAR to account for certain foreign accounts. The court continued by noting that §5314(a) is comprised of several provisions, including a filing mandate and a provision for the corresponding substantive requirements for such filing.
At this point the court found it necessary to consider the applicable regulations, 31 C.F.R. §1010.350, after which the court clarified the following:
There are two relevant regulations. The first requires a citizen (like Boyd) to report financial interests in foreign accounts “for each year in which such relationship exists and [to] provide such information as shall be specified in a reporting form prescribed under 31 U.S.C. 5314 . . . . The form prescribed under section 5314 is the Report of Foreign Bank and Financial Accounts [the FBAR] . . . .” 31 C.F.R. § 1010.350(a) (emphases added). The second requires that the FBAR “be filed . . . on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year.”
Thus, the court explained that the first regulation, §1010.350, describes what must substantively be disclosed, while the second regulation, §1010.306, imposes the FBAR filing deadline. And, according to the court, since Taxpayer’s FBAR was ultimately deemed “accurate,” it was clear that Taxpayer could not have violated §1010.350’s substantive requirements. The court maintained that Taxpayer could only have violated the statutory and regulatory requirement to timely file the FBAR for calendar year 2010.
Significantly, the court was clear in denouncing the IRS’s arguments that multiple violations occurred. More specifically, the court rejected the IRS’s contention that the penalty should be based on the balance of any account which was unreported. The court emphasized that:
[t]he language in §5321(a)(5)(A) that “any violation of . . . any provision of section 5314” simply refers to the relevant regulations that prescribe how the provisions in §5314 may be violated. As discussed above, under the relevant regulations, Boyd committed one violation.
In other words, the court determined that §5321(a)(5)(A) would not be interpreted to impose a separate penalty for each foreign account that Taxpayer failed to list on her FBAR.
Furthermore, the court provided that “[s]ection 5321 establishes two types of civil penalties depending on whether the violation was willful or non-willful.”⁴ The court clarified that prior to 2004, only willful violations were penalized. However, while the court expressed that the amended statute “is not silent as to multiple account penalties” in the willful violation context, the court highlighted that the amended statute neither expressly permits nor prohibits multiple non-willful penalties per account.⁵ And using the “normal tools of statutory construction,” the court determined that in the case of a non-willful violation, such as Taxpayer’s, the statute establishes a single penalty capped at $10,000.⁶
Again, this decision is good news for individuals filing late FBARs—at least, for those taxpayers with non-willful FBAR violations. While taxpayers in these situations have generally been fighting an uphill battle in courts across the country, this Ninth Circuit decision may ultimately align with the Fifth Circuit (assuming Bittner survives appeal) to tip the balance in the taxpayers’ favor—such that the prevailing interpretation is one in which non-willful FBAR penalties are per form, not account.⁷ Otherwise, Congress may be required to intervene in order to eliminate outcomes where civil penalties far exceed harm done to the government.
If you have a FBAR case, contact Eli Noff and the Frost Law team at (410) 497-5947 or requesting a consult online.
