Why the Molyneux FBAR case is Important for Willful Penalties

Why the Molyneux FBAR case is Important for Willful Penalties

The Molyneux FBAR case is Important for Willful Penalties

When it comes to civil foreign bank and financial account penalties, there are two main subcategories to be aware of: willful FBAR penalties and non-willful FBAR Penalties. How the IRS penalizes taxpayers for violating willful penalties is different than how penalties are assessed for non-willful FBAR violations. In recent years, willful FBAR penalties have become somewhat absurd and US taxpayers can be penalized upwards of 100% value or more of the foreign account balance –– depending on how many years of noncompliance period and the value of the accounts. The Molyneux case can help taxpayers get an understanding of just how bad willful FBAR penalties can be. Noting, the Internal Revenue Manual was updated in 2021 on the issue of willfulness penalties (which should be capped at 100% maximum value for the highest year of the compliance period, aka IRM 4.26.16.5.5.3 (7)).

Factual Background

• • • Molyneux was a U.S. person during calendar years 2014 and 2015 and resided within the United States or was otherwise subject to the jurisdiction of the United States.

    • On information and belief, Molyneux maintained a residence in Manhattan at all times relevant to the complaint.

    • During at least calendar years 2014 and 2015, Molyneux was familiar with the FBAR filing requirements because she had previously timely filed an FBAR for calendar year 2013. In addition, in 2014, Molyneux filed delinquent FBARs for calendar years 2005 through 2012. Also in 2014, JP Molyneux Studio, an entity in which Molyneux held an ownership interest, timely filed an FBAR for calendar year 2013.

Banque Neuflize Personal Bank Accounts

• • • From at least January 2014 through at least December 2015, Molyneux had signature authority over two accounts at Banque Neuflize in France, bearing account numbers Case 1:22-cv-10654-VM Document 1 Filed 12/16/22 Page 3 of 7 4 XXXXXXX0001 and XXXXXXX0002 (hereinafter, the “Banque Neuflize Personal Accounts”).1

    • The mailing address of the financial institution in which the Banque Neuflize Personal Accounts were held was 3 Avenue Hoche, Paris, Ile-de-France, 75008, France.

    • The Banque Neuflize Personal Accounts were bank, securities, or other financial accounts in a foreign country.

Molyneux’s FBAR Reporting Obligations for Calendar Year 2014

• • • During calendar year 2014, the Banque Neuflize Personal Accounts had a maximum aggregate balance of $29,310.

    • The aggregate balance of the Banque Neuflize Personal Accounts exceeded $10,000 during the 2014 calendar year.

    • Molyneux failed to file an FBAR with regard to the 2014 calendar year on or before June 30, 2015. 19. By failing to file an FBAR for calendar year 2014,

Molyneux willfully violated the reporting requirements of Section 5314

• • • Molyneux’s FBAR Reporting Obligations for Calendar Year 2015

    • During calendar year 2015, the Banque Neuflize Personal Accounts had a maximum aggregate balance of $64,736.

    • The aggregate balance of the Banque Neuflize Personal Accounts exceeded $10,000 during the 2014 calendar year.

    • Molyneux failed to file an FBAR with regard to the 2015 calendar year on or before June 30, 2016.

Assessment of Civil Penalties

• • • On March 4, 2020, a delegate of the Secretary of the Treasury sent Molyneux a notice to her business address in the United States, 750 Lexington Avenue, 5th Floor, New York, New York 10022. The notice proposed civil penalties totaling $400,000 (the “FBAR Penalties”) against Molyneux for her willful failures to comply with the FBAR filing requirements for calendar years 2014 and 2015.

    • Specifically, the notice proposed penalties in the amount of $200,000 ($100,000 per account) for Molyneux’s willful failure to file an FBAR for calendar year 2014, and $200,000 for Molyneux’s willful failure to file an FBAR for calendar year 2015.

    • On March 4, 2020, the IRS also sent Molyneux an IRS Form 13449, entitled “Agreement to Assessment and Collection of Penalties Under 31 USC 5321(a)(5) and 5321(a)(6)” to 750 Lexington Avenue, 5th Floor, New York, New York 10022. Above the signature line, the Form 13449 stated: “I consent to the immediate assessment and collection of the penalty amount specified above,” and listed $400,000 as the total proposed penalty.

How is this Level of Penalty Possible?

It is important to note that when it comes to willful FBAR penalties, the language is a bit complex. Because, while the code section provides the penalties go up to 50% value per violation, it also clarifies that the bottom penalty can be $100,000 per violation — and there is no clear-cut definition of the term violation. The Supreme Court has not issued any ruling as to whether willful FBAR violations are limited to form or per account. Thus, the IRS agents would seemingly have the ability to issue a $100,000 penalty per account, per year.

Maximum Penalty 100% Value in highest Year?

It is important to note that under the revised version of the Internal Revenue Manual, the IRS is (now) not supposed to issue penalties in excess of 100% value of the account during the compliance period, so hopefully, the taxpayer can use this information to reduce the penalty despite the fact having executed Form 13449.

IRM 4.26.16.5.5.3 (7)

• • • “In no event will the total penalty amount (among all open years) exceed 100 percent of the highest aggregate balance of all foreign financial accounts to which the violations relate during the years under examination. The “highest aggregate balance” is calculated as described in IRM 4.26.16.1.6.”

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

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