Court of Federal Claims Ruling (Schedule B, FBAR & Foreign Accounts)
When it comes to Foreign Accounts and FBAR, the courts are all over the board.
District Courts and Appellate Courts are split on issues involving maximum FBAR penalties, enforcement procedures, etc.
With that said, there is one near constant — which is that if you were “willful” the IRS is going to hit you with penalties; and most likely, the courts are going to enforce the IRS penalties.
- 1 Court of Federal Claims & FBAR
- 2 Recent Case: Kimble vs. The United States
- 3 Alice Saves Herself
- 4 Alice Decides to Opt-Out
- 5 The IRS Pounces
- 6 Alice Pays and Seeks a Refund/Abatement
- 7 It All Boils Down to Willfulness
- 8 But Remember, Reckless Disregard Is Civil Willfulness
- 9 OVDP Has Ended, But You Still have Options
- 10 Golding & Golding, A PLC
Court of Federal Claims & FBAR
FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) was created by FinCEN (Financial Crimes Enforcement Network) but the form is enforced by the IRS.
FBAR compliance falls under title 31, not title 26. All that means to you, is that enforcement is tricky, and unnecessarily complicated.
The IRS does not have the same enforcement rights and procedures – and taxpayers do not have the same conventional FBAR relief procedures (aka Tax Court) as they otherwise would for a tax debt under title 26 – which results in the IRS filing suit in District Court, not Tax Court.
An alternative to District Court, is the Court of Claims, which is where we meet Alice Kimble.
Recent Case: Kimble vs. The United States
The following excerpts are from a recent ruling dated 12/27/2018 granting the U.S. Governments motion for Summary Judgement (Read: Not Good for Alice Kimble).
We have also provided additional summaries to help provide a roadmap to “Willfulness.”
During his marriage to Alice Kimble, Michael Kimble handled the couple’s finances and prepared their joint federal tax returns, but never reported any investment income derived either from the HSBC or UBS accounts.
Nor did Michael Kimble and Alice Kimble report the existence of their foreign bank accounts on their joint federal tax returns.
According to Michael Kimble, he did not know about the federal requirement to report foreign bank accounts until he learned about it in the “[l]ate ‘90s,” while using Turbo Tax.
In 2000, Alice and Michael Kimble divorced.
In or around 2000, Alice Kimble hired Steven Weinstein, a certified public accountant licensed in New York, to prepare her federal and New York state income tax returns. Mr. Weinstein never asked Alice Kimble if she had a foreign bank account.
Alice Kimble also never asked Steven Weinstein whether foreign investment income needed to be reported on her federal income tax returns
In 2008, Alice Kimble also learned from an article in the New York Times that the United States was “putting pressure on UBS to reveal the names of people who had secret accounts in UBS.”
In 2009, UBS entered a deferred prosecution agreement with the United States that required UBS to provide the IRS with the names and account information of United States citizen clients.
On October 24, 2009, Alice Kimble signed a document authorizing UBS to comply with the IRS’s request.
On each Form 1040 for tax years 2004 through 2007, Alice Kimble checked the box next to Question 7(a) labeled “No.”
On the Form 1040 for 2008, Alice Kimble left the spaces next to Question 7(a) blank.
Alice Kimble did not timely file a FBAR for calendar years 2003 through 2008.
An Issue as to Willfulness
There is an issue as to whether Alice knew or should have known she was supposed to report her foreign accounts. It is not entirely clear if this was a “Willful Blindness” issue prior to 2008, or if Alice really knew she should report.
The problem was that by 2008 Alice definitely knew she had to report and unlike her previously filed Schedule B — she did not mark off “No” as to ownership or signature authority over foreign accounts. She left it blank, after previously identifying “no,” which is suspect.
Alice Saves Herself
On April 8, 2009, Alice Kimble applied to the Offshore Voluntary Disclosure Program (“OVDP”), a “voluntary disclosure program specifically designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all tax due in respect of those assets.
On October 16, 2009, Alice Kimble was accepted into the OVDP.
OVDP (Pre-Dated) Streamlined
Back in 2009, when Alice entered into OVDP, she did not have the choice (prior to submitting) to decide between OVDP and Streamlined,
Remember, this was several years ago and the stand-alone “Streamlined Disclosure Programs” were not yet in effect — they came into effect in mid-2014.
So, just by submitting to OVDP back in 2009 did not make Alice Kimble willful per se.
Alice Decides to Opt-Out
In or around February 2013, Alice Kimble attempted to withdraw from the OVDP and declined to pay the miscellaneous penalty.
A letter from Alice Kimble’s attorney to the IRS, relaying her decision to withdraw from the OVDP, is dated “January 23, 2013,” but a follow-up letter dated “February 26, 2013” clarified that her decision was effective on the later date.
Alice Kimble testified that she decided to “take her chances” with the IRS. (“The penalty was so high that I was advised to appeal the penalty.”).
Thereafter, the IRS sent Alice Kimble a letter informing her that any opt-out from the OVDP would be irrevocable and might cause her to incur a higher penalty.
OVDP Opt-Out was Her Only Chance to Reduce the Penalty
Since there was no stand-alone Streamlined Program, if Alice believed she should received a reduced penalty, her only option was opt-out and subject herself to an audit — with the hopes of reducing the penalty.
The IRS Pounces
The IRS also rejected Alice Kimble’s request to apply a “reasonable cause” standard, 9 because her violation was “willful” and “the facts do not support that ordinary business care and prudence were exercised.”
Therefore, the IRS calculated the applicable penalty, in accordance with I.R.M. § 220.127.116.11.610 and I.R.M. Exhibit 4.26.16-2.
Next, the IRS added 50 percent of the balance in the UBS account, as of June 30, 2008 ($682,832), to 9 Title 31, U.S.C. § 5321(a)(5)(B)(ii) states that, for non-willful violations, “[n]o penalty shall be imposed” if: (I) such violation was due to reasonable cause, and (II) the amount of the transaction or the balance in the account at the time of the transaction was properly reported. 31 U.S.C. § 5321(a)(5)(B)
Opt-Out was Unsuccessful
The IRS determined that Alice did not qualify for a reduced or abated penalty under the Reasonable Cause rules, and instead hits her with a 50% penalty,
Alice Pays and Seeks a Refund/Abatement
On July 15, 2016, the IRS assessed a penalty in the amount of $697,229.
On or about August 3, 2016, Alice Kimble paid the full amount of the assessed penalty.
On September 8, 2016, Alice Kimble filed a Claim For Refund And Request For Abatement with the IRS.
It All Boils Down to Willfulness
The parties stipulated that Plaintiff failed to file a FBAR for 2007.
In addition, Plaintiff admitted that she is “not disput[ing] the FBAR penalty for the HSBC account.”
Plaintiff also admitted that she “is not seeking recovery of the 2007 FBAR penalty imposed for the HSBC account.”
As such, the court does not need to determine whether the penalty assessed by the IRS against the HSBC account was lawful. See RCFC 36(b) (“A matter admitted under this rule is conclusively established unless the court, on motion, permits the admission to be withdrawn or amended.”). Therefore, the threshold issue the court must determine is whether Plaintiff’s failure to file a FBAR for the 2007 tax year was “willful.”
But Remember, Reckless Disregard Is Civil Willfulness
The relevant stipulated facts in this case are as follows: • Plaintiff did not disclose the existence of the UBS account to her accountant until approximately 2010.
Plaintiff never asked her accountant how to properly report foreign investment income.
Plaintiff did not review her individual income tax returns for accuracy for tax years 2003 through 2008.
Plaintiff answered “No” to Question 7(a) on her 2007 income tax return, falsely representing under penalty of perjury, that she had no foreign bank accounts.
In the court’s judgment, stipulations ¶¶ 46 and 48 together evidence conduct by Plaintiff, as a co-owner of the UBS account that exhibited a “reckless disregard” of the legal duty under federal tax law to report foreign bank accounts to the IRS by filing a FBAR…see also Jarnagin, 134 Fed. Cl. at 378 (“A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”) (citations omitted).
Although Plaintiff had no legal duty to disclose information to her accountant or to ask her accountant about IRS reporting requirements, these additional undisputed facts do not affect the court’s determination that Plaintiff’s conduct in this case was “willful.” For these reasons, the court has determined, viewing the evidence in the light most favorable to Plaintiff, that there is no genuine issue of material fact that Plaintiff violated 31 U.S.C. § 5314 and that her conduct was “willful.” See 31 U.S.C. § 5321(a)(5) (2004); see also RCFC 56.
OVDP Has Ended, But You Still have Options
Even though OVDP has ended, you still have options.
If you are out of compliance, the penalties can be severe. Therefore, you may consider entering IRS offshore voluntary disclosure (Traditional IRM program), Streamlined Program or other IRS tax amnesty alternative — before it is too late.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.