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Federal Circuit Upholds $803,000 Penalty for Willful FBAR Violation

(Parker Tax Publishing December 2019)

The Federal Circuit affirmed a decision by the Court of Federal Claims holding that a taxpayer was liable for a penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR). The Federal Circuit found that the taxpayer willfully failed to file an FBAR because she signed her tax return stating that she had no foreign bank accounts when she knew she owned a foreign account and controlled the assets in it and rejected the taxpayer's argument that the penalty amount was capped at $100,000. Norman v. U.S., 2019 PTC 435 (Fed. Cir. 2019).


Mindy Norman is a school teacher who opened a foreign bank account with the Swiss bank UBS in 1999. Norman's account was a numbered account rather than a named account, meaning that income and asset statements listed only the account number and not Norman's name or address. From 2001 to 2008, Norman's UBS account balance ranged between $1.5 million and $2.5 million.

Norman was actively involved in managing and controlling her UBS account. She frequently spoke with a UBS representative about the account and gave UBS instructions on how to invest the funds. For example, Norman directed UBS not to invest in U.S. securities on her behalf, which helped prevent disclosure of the account to the IRS. She also made a large cash withdrawal in 2002.

In April 2008, Norman learned that UBS would no longer provide offshore banking services and would work with the IRS to identify U.S. clients who may have engaged in tax fraud. UBS's client contact records indicated that the Norman expressed surprise and displeasure with UBS's business decision. Just before UBS announced the change in July 2008, Norman closed her UBS account and transferred her funds to another foreign bank.

Norman did not file a Report of Foreign Bank and Financial Accounts (FBAR) disclosing the existence of her UBS account in any year. In 2007, Norman signed her tax return which falsely indicated that she had no interest in any foreign bank account. She signed the return after completing a questionnaire from her accountant specifically asking whether she had an interest in any foreign bank accounts. In 2008, Norman filed amended returns and late FBARs. The IRS audited Norman and, during the course of the investigation, Norman made numerous false statements to the IRS. For example, she said she first learned of her UBS account in 2009. She later sent a letter stating that she knew of the account but that none of the money belonged to her and she had no control over the account.

The IRS assessed a penalty of $803,530 against Norman for willfully violating the FBAR reporting requirement. Norman paid the penalty in full and sued for a refund in the Court of Federal Claims. The Court of Federal Claims upheld the penalty, and Norman appealed to the Federal Circuit.

FBAR Reporting Requirement

Under 31 U.S.C. Sec. 5314, a U.S. person who has a relationship with a foreign financial agency must disclose the relationship by filing an FBAR. Failure to file a required FBAR is subject to a penalty under 31 U.S.C. Sec. 5321(a)(5)(A). From 1986 to 2004, Sec. 5321 only authorized penalties for willful violations of Sec. 5314 and capped the penalty at $100,000. In 2004, Congress amended Sec. 5321 to apply a penalty of $10,000 for non-willful FBAR violations and a higher penalty, equal to the greater of $100,000 or 50 percent of the account balance, for willful FBAR violations.

Norman argued that the Court of Federal Claims erred in finding that her FBAR violation was willful because willfulness requires a showing of actual knowledge of the obligation to file an FBAR. Norman claimed that if willfulness includes recklessness, then every failure to file an FBAR would be willful and the portions of Sec. 5321 addressing non-willful violations would be superfluous. She also cited language in the Internal Revenue Manual (IRM) stating that willfulness is shown by a person's knowledge of the reporting requirements and the conscious choice not to comply. Norman further contended that, regardless of how willfulness is defined in this context, the facts did not support the determination that her reporting failure was willful. Additionally, Norman claimed that she could not have willfully violated Sec. 5314 because she was merely following her mother's advice in opening and managing the account. She also claimed that she did not read her 2007 tax return. With respect to the penalty amount, Norman argued that the penalty was capped at $100,000 by 31 C.F.R. Sec. 1010.820(g), a 1987 regulation that was never amended or repealed after the 2004 amendment of Sec. 5321. Norman claimed that the regulation was binding on the IRS until it was repealed and that, as an interpretation of Sec. 5321, it was entitled to deference under Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984).

Federal Circuit's Analysis

The Federal Circuit affirmed the decision of the Court of Federal Claims. First, the Federal Circuit held that, in the context of Sec. 5321(a)(5)(C), willfulness includes recklessness under Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47 (2007), in which the Supreme Court made clear that, where willfulness is a statutory condition of civil liability, willfulness includes not just knowing violations of a standard but reckless ones as well. The Federal Circuit noted that its holding was consistent with the decisions of the Third Circuit in Bedrosian v. U.S., 2018 PTC 427 (3d Cir. 2018) and the Fourth Circuit in U.S. v. Williams, 2012 PTC 202 (4th Cir. 2012).

The Federal Circuit did not agree with Norman that including reckless violations made the non-willful portions of Sec. 5421 superfluous, reasoning that, for example, an FBAR violation would not be willful where a taxpayer did not know about, and had no reason to know about, a foreign bank account. The court also rejected Norman's argument relating to the IRM because the IRM is not legally binding on the courts. The court also noted that the IRM acknowledged that actual knowledge may not be required where a taxpayer fails to learn of the filing requirements and other factors are present, such as efforts to conceal the accounts and the amounts involved.

The court found that the Court of Federal Claims did not err in finding Norman's FBAR failure to be willful. The court noted that Norman signed a tax return falsely indicating that she had no foreign bank accounts, took steps to inhibit the disclosure of the account to the IRS, and made false statements to the IRS about the account. The court was not persuaded that Norman merely followed her mother's advice because Norman did not contend that her actions were the product of undue influence from her mother. The court also rejected her argument that she did not read her tax return because taxpayers are considered to have constructive notice of the contents of their tax returns.

The Federal Circuit also held that that $100,000 maximum penalty in 31 C.F.R. Sec. 1010.820(g) did not apply because the regulation was rendered void by the 2004 amendment of Sec. 5321. The court explained that Sec. 5321 was amended to provide that the maximum penalty "shall" be increased for willful violations. The court rejected Norman's contention that the regulation was binding on the IRS until repealed, reasoning that such a rule would prevent all newly enacted statutes from going into effect until all inconsistent regulations were amended or repealed. The court also found that the regulation was not entitled to Chevron deference because Sec. 5321 is unambiguous.

For a discussion of information reporting for foreign bank accounts, see Parker Tax ¶203,170.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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