An interesting tax case regarding the Foreign Bank Accounts Reporting Form (FBAR) and the associated penalty for non-filing has been prominent in the news recently.
The Report of Foreign Bank and Financial Accounts filing requirement was introduced by the Currency and Foreign Transactions Reporting Act of 1970, also identified as the Bank Secrecy Act (Title 31 of the United States Code). The purpose of the requirement is to obtain information that would be useful in criminal, tax or regulatory proceedings and potentially track hidden funds that are used for illicit purposes. This includes protecting against money laundering, tax evasion or international terrorism. A form was prescribed and required beginning in the mid-1990s.
The Report of Foreign Bank and Financial Accounts is commonly known as the FBAR and is reported on FinCEN Form 114. The Form requires reporting of the maximum value of all foreign accounts if the maximum balance of all foreign accounts in the aggregate exceeds $10,000 at any time during the calendar year.
Risks of Not Filing FBAR
The penalties for failing to file this report are substantial. For each non-willful violation, the penalty can be up to $10,000. However, if it can be proven that a taxpayer has willfully violated the FBAR requirements, the penalty is the greater of $100,000 or 50% of each account balance, with no maximum.
Historically, this form has been generally ignored; however non-compliance among taxpayers has been an increasing issue for Congress. As a result, they have implemented various strategies to improve outreach and taxpayer awareness. One of these initiatives was proceeding with punitive penalties for taxpayers who failed to comply.
The Pomerantz Case
Mr. Pomerantz, a U.S. citizen residing in Canada, was assessed a penalty for the non-filing of his FBAR forms for the years 2007-2009. They calculated this penalty for willful non-filing at $860,300.35 (U.S. Dollars). The government sued the taxpayer to collect on this assessment. An FBAR penalty is different than a tax penalty which has specific means of assessment and collection. For the FBAR penalty, the government must sue like normal commercial collection. The court when assessing the viability of the claim will evaluate if the underlying penalty is appropriate.
In Mr. Pomerantz’s case, the IRS claimed the taxpayer had 2 accounts at CIBC, a corporate account in Turks & Caicos, 5 accounts in Switzerland and one RBC account. They alleged he had more than the aggregate of $10,000 in the accounts, justifying the need for a FBAR.
When I agreed to represent him, I quickly found out the IRS was entirely mistaken in their facts. There were not 7 bank accounts, but rather only 3, but the bank had designated different account numbers to allow for deposits in different currencies. Furthermore, the RBC bank account was a U.S. based bank (so not subject to the FBAR reporting). The IRS framed their argument that the European bank accounts were used to hold investments, when actually this was an account that his European wife used to hold the funds temporarily from the sale of her personal residence, and he was a signatory on the account. Finally, the corporate accounts were from a company that wasn’t in existence during the years of the assessment.
The attorney for the U.S. took almost a year to find the taxpayer in Canada to serve him with the suit, and would get the court to grant substitute service after several motions.
We filed a motion to dismiss the case based on the government not pleading all the elements of the assessment. Namely, the fine they imposed was based on it being a willful non-filing. The government showed no evidence in their suit of it being willful other than they said it was willful.
Conclusion from the Court
The Court rendered its judgement on June 8, 2017 (slip copy 2017 WL 2483213). The Court first reiterated that it is the Government’s responsibility to allege facts supporting the inference that he acted willfully in the failure to file. In the filings, the Government stated that the failure to timely file the FBAR was willful because Mr. Pomerantz had constructive or actual knowledge of the reporting duty.
The Court evaluated both the constructive or actual knowledge. It held that:
“Actual knowledge of the duty to report may be inferred from a course of conduct that demonstrates a conscious attempt to conceal the failure to report”.
Under the theory of constructive knowledge, a taxpayer who is willfully ignorant of the reporting requirement may still be considered to have willfully evaded completing the forms. In the past, the Government has attributed completing a Schedule B form of the 1040 income tax filing, where there are questions about foreign banking, to be used as evidence of willful non-compliance when a corresponding FBAR was not filed. In this case, the plaintiff did not allege that Pomerantz filled out this Schedule B form or was otherwise aware of its contents and instructions regarding the FBAR reporting requirement, nor any other basis to infer willful ignorance.
The Court dismissed the Government’s complaint. They did however give the U.S. leave to amend the original complaint and refile the suit within 21 days. The Government has amended their claim, we have responded with a second motion to dismiss the case, on the same basis that the Government has not satisfied the necessary elements of their claim. This action is once again before the courts.
This may be a very important precedent for future FBAR cases as there is now appears to be a burden for the U.S. to demonstrate willfulness before assessing outrageous non-filing penalties on taxpayers.
This new, increased government activity in assessing penalties may motivate some non-compliant taxpayers to use the disclosure programs available, which if done properly should result in no penalties.
For more information, please contact:
Dr. Mark Feigenbaum is a US Attorney, CPA, and CA, practicing in Thornhill, Ontario specializing in cross-border taxation for individuals primarily in the sports, entertainment and music industries, and individuals moving to and from the U.S., businesses expanding to the U.S., estate planning, U.S. immigration, and tax litigation.
He can be contacted at email@example.com or 905-695-1269.