Federal Circuit Court of Appeals Upholds FBAR Willful Penalty

Federal Circuit Court of Appeals Upholds FBAR Willful Penalty

Federal Circuit Court of Appeals Upholds FBAR Willful Penalty

Federal Circuit Court of Appeals Upholds FBAR Willful Penalty: In a major setback for FBAR cases nationwide, the United States Court of Appeals for the Federal Circuit has upheld the willful FBAR penalty ruling in U.S. vs. Norman. The appellant is on the hook for a more than $800,000 FBAR penalty.

FBAR Willfulness

Moreover, the court specifically provided that the opinion is “precedential,” which means it can be relied upon as “precedent.” In addition, the court held that:

  • Reckless Disregard can be willful.
  • Willful Blindness can be willful
  • FBAR Willfulness is not limited to $100,000
  • The prior regulation is no longer valid.

U.S. v. Norman 

Key excerpts from the case ruling:

“Ms. Norman, a school teacher, opened a foreign bank account with the Swiss bank UBS in 1999. More specifically, she opened a “numbered account,” which, unlike a “named account,” means income and asset statements for the account list only the account number and not Ms. Norman’s name or address. From 2001 to 2008, her account balance ranged between approximately $1.5 million and $2.5 million.

Ms. Norman was actively involved in managing and controlling her account. For instance, she frequently spoke with Mr. Thomann, her UBS representative, about the account, both in person and over the phone. She gave UBS instructions detailing how to invest her funds. For example, she signed a document inhibiting UBS from investing in U.S. securities on her behalf, which helped prevent disclosure of her account to the IRS.

UBS client contact records indicate that in April 2008, Ms. Norman expressed surprise and displeasure when she was informed of UBS’s “new business model,”2 which the Court of Federal Claims found referred to UBS’s business decision to “no longer provide offshore banking” and to work “with the US Government to identify the names of US clients who may have engaged in tax fraud.” See Norman, 138 Fed. Cl. at 194 (quoting statement by UBS representative Mark Branson while testifying at a Senate Subcommittee hearing).”

Just before UBS publicly announced this new business plan in July 2008, Ms. Norman closed her account with UBS and transferred her funds to another foreign bank.

Filing Requirement

Under 31 U.S.C. § 5314(a), U.S. persons who have relationships with foreign financial agencies are required to disclose such relationships to the Treasury Department. This disclosure is effectuated by filing a Report of Foreign Bank and Financial Accounts (“FBAR”).

In 2008, Ms. Norman was referred to an accountant who filed amended tax returns and late FBARs. The IRS subsequently opened an audit of Ms. Norman. During this audit, Ms. Norman made numerous false statements to the IRS. For instance, Ms. Norman told the IRS, both during an interview and in a letter, that she first learned of her foreign account in 2009.

Pursuant to 31 U.S.C. § 5321(a)(5)(A), the Secretary of the Treasury has the authority to impose civil money penalties on any person who fails to file a required FBAR. From 1986 to 2004, § 5321 only authorized penalties for willful violations of § 5314 and capped such penalties at $100,000. In 2004, Congress amended § 5321 to authorize penalties up to $10,000 for non-willful violations of § 5321 and to increase the maximum penalty for willful violations to the greater of $100,000 or fifty percent of the balance in the account at the time of the violation. 31 U.S.C. § 5321(a)(5)(A)–(D).

Willfulness FBAR Penalty

The IRS assessed an $803,530 penalty against Ms. Norman for willfully violating the FBAR reporting requirement. Ms. Norman paid the penalty in full and filed a complaint in the Court of Federal Claims requesting a refund. After a trial, the Court of Federal Claims upheld the penalty as appropriate. Ms. Norman appealed. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

What is FBAR Willfulness?

As an initial matter, the parties dispute the meaning of willfulness in the context of § 5321. The Supreme Court has made clear that “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.” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007). Neither party has pointed to any authority indicating that a different standard applies here.

Therefore, we hold, as did the Court of Federal Claims, that willfulness in the context of § 5321(a)(5)(C) includes recklessness. We 6 NORMAN v. UNITED STATES note that our interpretation of willfulness is consistent with both the Third and Fourth Circuits. See Bedrosian v. United States, 912 F.3d 144, 152–53 (3d Cir. 2018); United States v. Williams, 489 F. App’x 655, 658–59 (4th Cir. 2012).

Appellant Seeks to Rely on the IRM (Internal Revenue Manual)

Ms. Norman also argues that we should follow Internal Revenue Manual (“IRM”) §, which states that “[w]illfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.” It is well settled, however, that the IRM is not legally binding on courts. See, e.g., Estate of Duncan v. Comm’r of Internal Revenue, 890 F.3d 192, 200 (5th Cir. 2018). 

Facts Support the Lower Court Ruling

The Court of Federal Claims did not clearly err in finding that Ms. Norman’s failure to file an FBAR was willful. Ms. Norman signed her 2007 tax return under penalty of perjury, and this return falsely indicated that she had no interest in any foreign bank account. She did so after her accountant sent her a questionnaire that specifically asked whether she had a foreign bank account.

In addition, the evidence shows that Ms. Norman took the following steps, each of which had the effect of inhibiting disclosure of the account to the IRS: (1) Ms. Norman opened her foreign account as a “numbered account”; (2) she signed a document preventing UBS from investing in U.S. securities on her behalf; and (3) the one time she withdrew money from the account, her Swiss bank account manager delivered the money to her in cash.

Moreover, once the IRS opened an audit of Ms. Norman, she made many false statements to the IRS about her knowledge of, and the circumstances surrounding, the account. Ms. Norman told the IRS, both during an interview and in a letter, that she first learned of the account in 2009.

In her letter, she stated that she “was shocked to first hear about the existence of foreign accounts” in her name. In 2014, after retaining counsel, Ms. Norman sent the IRS another letter “to correct several misstatements.” Although Ms. Norman admitted in this 2014 letter that she knew 8 NORMAN v. UNITED STATES “more than a decade ago” that she had an “interest” in a foreign bank account, she maintained in the 2014 letter that “none of the money in the Swiss account(s) was mine[,] and I did not consider myself to have any kind of control over the account.” J.A. 146.

 In fact, Ms. Norman knew long before 2009 that she owned a foreign bank account and controlled its assets. She opened the account in 1999, actively managed the account for many years, and even withdrew money from the account in 2002.

“No Knowledge” Defense Rejected

Ms. Norman also argues that she could not have willfully violated the FBAR requirement because she did not read her 2007 tax return. But whether Ms. Norman ever read her 2007 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 he or NORMAN v. UNITED STATES 9 she is charged with constructive knowledge of its contents.” Greer v. Comm’r of Internal Revenue, 595 F.3d 338, 347 n.4 (6th Cir. 2010); see also United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000) (finding that taxpayer “signed the fraudulent tax form and may be charged with knowledge of its contents”).

$100,000 Penalty Cap Rejected

Next, Ms. Norman contends that the Court of Federal Claims legally erred in concluding that a 2004 amendment to 31 U.S.C. § 5321 rendered void 31 C.F.R. § 1010.820(g) (2010), a 1987 regulation capping penalties for willful violations of § 5314 at $100,000. We disagree.

The plain language of the statute, as amended in 2004, indicates that, for willful FBAR violations, “the maximum penalty . . . shall be increased to the greater of” $100,000 or fifty percent of the balance in the account at the time of the violation. 31 U.S.C. § 5321(a)(5)(A)–(D) (emphasis added). The use of the word “shall” means what follows is mandatory, not discretionary. See, e.g., Hyatt v. U.S. Patent & Trademark Office, 797 F.3d 1374, 1380 (Fed. Cir. 2015). Accordingly, Congress set a maximum penalty that must govern whenever the IRS imposes a willful FBAR penalty.

Prior Regulation Held Invalid

Because the 1987 regulation sets forth a maximum willful FBAR penalty that is inconsistent with the maximum penalty mandated by statute, the 1987 regulation is no longer valid. See, e.g., R&W Flammann GmbH v. United States, 339 F.3d 1320, 1324 (Fed. Cir. 2003); Barseback Kraft AB v. United States, 121 F.3d 1475, 1480 (Fed. Cir. 1997); Aerolineas Argentinas v. United States, 77 F.3d 1564, 1575 (Fed. Cir. 1996); see also Farrell v. United States, 313 F.3d 1214, 1219 (9th Cir. 2002).

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