Eleventh Circuit Appeals Affirms Lower Standard FBAR Willfulness

Eleventh Circuit Appeals Affirms Lower Standard FBAR Willfulness

Eleventh Circuit Appeals Affirms Lower Standard FBAR Willfulness

Eleventh Circuit Appeals Affirms Lower Standard FBAR Willfulness: When it comes to willful FBAR penalties, the US government has recently been coming out with guns blazing. And, while the IRS & US government have had some stumbling blocks when it comes to proving multiple non-willful FBAR violations should be assessed for each year of noncompliance — they have been having no problem convincing courts across the nation to enforce the lower standard of reckless disregard for willfulness penalties. In the Court of Appeals for the Federal Circuit, the recent appellate opinion in Kimble affirmed reckless disregard willful FBAR penalties — and now the Eleventh Circuit Court of appeals has done the same in the matter of US v Said Rum. It is important to note, that as egregious as willful FBAR penalties can be, courts nationwide have been affirming willful penalties in situations in which the taxpayer did not act with intent, but rather reckless disregard.

Let’s take a look through the case of USA v Said Rum. We have reproduced key portions of the ruling below for your reference:

USA vs Said Rum (USCA11 Case: 19-14464)

Here is a brief summary of the relevant procedural background:

      • This case involves the Government’s suit brought in the district court to enforce the IRS assessment of a penalty against Rum for failing for the year 2007 to file a Report of Foreign Bank and Financial Accounts (“FBAR”) pursuant to 31 U.S.C. § 5321.

      • The district court granted summary judgment in favor of the Government, enforcing the IRS assessment of a penalty for a willful violation. This is Rum’s appeal.

Taxpayer’s Arugment

  • He argues on appeal:
      • (A) that the district court applied an incorrect standard of willfulness (by holding that willfulness as used in 31 U.S.C. § 5321(a)(5)(C) includes a reckless disregard of a known or obvious risk);
      • (B) that the district court erred in concluding that there were no genuine issues of material fact as to whether his conduct rose to required level of willfulness/recklessness;
      • (C) that the district court erred in refusing to recognize that 31 C.F.R. § 1010.820(g)(2) limits the amount of a willful violation to $100,000
      • (D) that the district court erred when it held that the IRS’s factfinding procedures were sufficient and therefore applied the arbitrary and capricious rather than a de novo standard of review with respect to the amount of the penalty;
      • (E) that, even assuming the arbitrary and capricious standard applies, the district court erred in failing to conclude that the IRS fact finding procedures were arbitrary and capricious; and finally,
      • (F) that the district court erred in rejecting Rum’s challenge to the additions to the base amount (interest and late fees).

A Key Issue was Taxpayer’s Inconsistency

      • In 1998, Rum opened his first foreign bank account (“UBS account”) by depositing $1.1 million from his personal checking account. Rum opened the UBS account to conceal money from potential judgment creditors, although Rum provided two inconsistent versions concerning the details of the lawsuits giving rise to the judgment creditors.

      • Rum gave inconsistent statements on why he failed to return the money to the U.S. earlier.

      • Rum stated that he was afraid of being penalized with a fee for closing the foreign bank account, but he also declared that he was satisfied with returns on investment and thus decided to leave the funds undisturbed.

      • Rum admitted that “he was very active with communicating investment strategies to UBS” because he “wanted to ensure he was getting the best return on his investment with UBS.”

      • For that reason, he visited Switzerland several times to meet with bank officers and manage his account.

      • Rum owned the UBS account until October 26, 2008, when he closed it to transfer nearly $1.4 million to Arab Bank, another bank located in Switzerland.  Rum admitted that while he did not disclose the UBS account on his tax returns or the Free Application for Federal Student Aid (“FAFSA”), he disclosed the account on his mortgage application to demonstrate his strong financial position.

Defendant Used A Tax Preparer (Maybe)

      • Rum asserts that he used a tax preparer to complete his returns. However, Rum’s 2007 tax return is one of at least two tax returns that is marked as “SelfPrepared” on the tax preparer’s signature line.

      • Rum signed the 2007 tax return on February 27, 2008; this signature is found on Form 1040 immediately below the following standard provision: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”

*Shadow preparers are a common problem in which tax preparers prepare, but do not sign the return — putting all of the responsibility on the Taxpayer.

Taxpayer Was Audited and Misrepresented Account Ownership

      • In 2008, Rum was audited for the 2006 tax year. Rum told the agent that he had closed his UBS account but failed to tell her that he opened the new one at Arab Bank. Although the agent imposed additional taxes, she did not impose an FBAR penalty.

Late FBAR

      • Rum failed to file an FBAR repeatedly prior to tax year 2008; in fact, Rum filed an FBAR for tax year 2008 only because on October 6, 2009, UBS sent a written notice to Rum stating that Rum’s account with UBS appeared to be within the scope of the IRS Treaty Request it had received. Nine days later, Rum belatedly filed his first FBAR form, on October 15, 2009, for tax year 2008

Underreported Income

      • In November 2009, Arab Bank advised Rum that it was closing his account, so he transferred the funds—which were approximately $1.4 million—to a U.S. account. In February 2010, Rum filed a tax return for the 2009 year that reported approximately $40,000 of the $300,000 of investment income generated by the UBS and Arab Bank accounts.

      • In 2011, the IRS commenced an examination that encompassed Rum’s 2005 and 2007 through 2010 tax years and led to an examination of his failure to report his foreign accounts during that period. Agent Marjorie Kerkado determined that Rum had understated his income by hundreds of thousands of dollars during the 7 years at issue and therefore asserted tax deficiencies and civil fraud penalties.

      • She initially proposed a non-willful FBAR penalty against Rum, which her supervisor, Terry Davis, approved subject to the approval of area counsel. Kerkado and Davis initially proposed a non-willful penalty instead of a willful penalty based on the failure of the IRS agents to raise an FBAR penalty in Rum’s 2006 audit. Area counsel’s approval of the non-willful pena

      • Area counsel’s approval of the non-willful penalty was accompanied by the following language: It is our understanding that the revenue agent did not propose a willful penalty in this case because the prior revenue agent failed to raise the issue of filing FBAR forms in the earlier examination. In the absence of additional facts not stated in this memorandum, this office believes that there is sufficient evidence to impose the willful penalty should the Commissioner make that determination.

      • Any evidence that the prior revenue agent failed to raise the FBAR issue should be inadmissible in a court proceeding as not relevant to determining the taxpayer’s intent at the time the violations were committed. Once Kerkado and Davis realized that their initial reasoning was based on an irrelevant “factor when it comes to willful definition,” Kerkado reconsidered Rum’s case and proposed a willful penalty. Both Davis and area counsel approved Kerkado’s proposal and Kerkado never thereafter recommended anything lower than a willful penalty of 50% of the account balance at the time of the violation.

      • Both Davis and area counsel agreed with Kerkado that Rum was ineligible under the mitigation guidelines because of the proposed civil tax fraud penalty. The Internal Revenue Manual (“I.R.M.”) provides that if the maximum balance of the account exceeds a million dollars at the time of the violation, the FBAR statutory maximum applies.

      • It is undisputed that the account exceeded a million dollars during tax year 2007; however, the I.R.M. mitigation guidelines provide for an exception such that the statutory maximum could be reduced if a taxpayer meets four mitigating factors.

      • One of those four that Rum clearly did not meet provided: “IRS did not determine a fraud penalty … due to the failure to report income related to any amount in a foreign account.” I.R.M. § 4.26.16-1.

Propsoed Penalty Letter 3709

      • On June 3, 2013, at the conclusion of Rum’s IRS examination, the IRS sent Rum a Letter 3709 stating that it was “proposing a penalty” for willful failure to file the FBAR; the letter cited the amended statute that provided for the maximum penalty of 50% of the account at the time of violation.

      • The previous year Kerkado had sent Rum a letter informing him that because an agreement could not be reached pursuant to her offer of a reduced FBAR penalty (20% of the balance of his account) in exchange for agreeing to the civil fraud penalty, the maximum statutory penalty would apply for one tax year.

      • The June 3, 2013, Letter 3709 further explained that Rum could accept the penalty, appeal the decision, or do nothing and the IRS would assess the penalty and begin collection procedures. Along with the Letter 3709, Rum was provided with a Form 886-A Explanation of Items.

      • The Form set forth the detailed basis upon which the IRS proposed the willful penalty against Rum. While Kerkado had the authority to recommend the assessment of the willful FBAR penalty against Rum for several tax years, she exercised her discretion to recommend the imposition solely for tax year 2007. On July 2, 2013, Rum elected to appeal the proposed willful penalty by stating that he sought the “discretionary Assessment whereby the Penalty cannot exceed $10,000.”

      • Appeals Officer Svetlana Wrightson issued an Appeals Memorandum that sustained the willful FBAR penalty against Rum.

Reckless Disregard

      • The meaning of willfulness 1. Willfulness includes recklessness Rum argues that the district court erred when it applied a standard of willfulness that includes reckless disregard of a known or obvious risk of nonpayment. He argues that the proper standard should be violation of a known legal duty, which is the standard used in criminal cases under the Bank Secrecy Act.

      • In civil cases, willfully has traditionally been interpreted to include recklessness. In Safeco Insurance Co. of America v. Burr, 551 U.S. 47, 127 S. Ct. 2201 (2007), while examining the Fair Credit Reporting Act, the Court noted that “‘willfully’ is a word of many meanings whose construction is often dependent on the context in which it appears, and where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” 551 U.S. at 57, 127 S. Ct. at 2208 (internal quotations and citations omitted).

      • Like the Bank Secrecy Act, the Fair Credit Reporting Act contained both criminal and civil penalties and both included willfulness as the standard for violations. However, the Court rejected the call to require actual knowledge for both, limiting that higher standard to the criminal penalties. Id. at 60, 127 S. Ct. at 2210.

Key Facts Against Defendant

      • When audited in 2008, for the 2006 tax year, Rum sent the revenue agent a bank statement from UBS showing zero income and told the agent the account had been closed. However, at that time the UBS account had been closed about a year, and Rum did not tell the revenue agent that the UBS funds had simply been transferred to another Switzerland bank, thus evidencing his intent to conceal.

      • Rum filed only one FBAR for all of the years that he was required to do so. That FBAR was filed, belatedly in October 2009, for the tax year 2008. It was USCA11 Case: 19-14464 Date Filed: 04/23/2021 Page: 19 of 28 20 filed only after UBS informed him that his account appeared to be within the scope of the treaty request it had received, and that UBS had disclosed to the IRS the existence of his account. Significantly, Rum did not file an FBAR for the tax year 2009 despite affirmatively knowing of his responsibility as a result of filing the 2008 FBAR.

      • Although he stated that he thought he was not obligated to pay taxes on his earnings until they were repatriated, he reported only $40,000 of the $300,000 that he earned when he did repatriate the funds. Rum admitted that “he was very active with communicating investment strategies to UBS” because “he wanted to ensure he was getting the best return on his investment with UBS,” and visited Switzerland several times to meet with bank officers and manage his account.

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