The FBAR report discloses information about each qualifying foreign account.
A person who fails to report when required may be subject to a penalty of up to $10,000 for a non-willful violation. For a willful violation, the maximum penalty increases to the greater of $100,000 or 50% of the amount of the transaction, when the violation involves a transaction, or the balance in the account at the time of the violation.
The taxpayer in this case was born in Romania, but immigrated to the United States and was naturalized in 1987. In 1990, he returned to Romania where he became a successful businessman and investor. He maintained dozens of bank accounts in Romania, Switzerland, and Liechtenstein. He was unaware that as a U.S. citizen, he was required to report his interests in certain foreign accounts. Consequently, he never filed FBARs while living in Romania.
Regresó a los EE. UU. en 2011. Al enterarse de sus obligaciones de presentación de informes, contrató a un contador público certificado que presentó FBAR para los años 2007 a 2011. Las sanciones para los años anteriores a 2007 habían expirado debido al plazo de prescripción. Sus FBAR revelaron toda la información y los saldos de cuentas bancarias extranjeras.
En junio de 2017, el IRS impuso $2,72 millones en sanciones por infracciones no intencionadas, $10.000 por cada cuenta no declarada entre 2007 y 2011 (61 cuentas en 2007, 51 en 2008, 53 en 2009, 53 en 2010 y 54 en 2011).
El contribuyente demandó al gobierno argumentando que sus violaciones se debieron a una causa razonable y por lo tanto no podían ser sancionados bajo 31 USC sección 5321, que la pena máxima permitida por una violación de informe no intencional es $10,000 por formulario FBAR anual, y que el Las sanciones impuestas violaron la cláusula de multas excesivas de la Octava Enmienda de la Constitución de los Estados Unidos.
El Tribunal de Distrito sostuvo que la pena máxima de $10,000 por una infracción no intencional se aplica según el desempeño.
Having thus interpreted the statute, it deemed the 8th Amendment defense moot. The court also rejected the reasonable-clause defense and ordered the taxpayer to pay $50,000 ($10,000 for each year from 2007 to 2011). Both the IRS and the taxpayer appealed the decision to the 5th Circuit Court of Appeals.
The 5th Circuit rejected the taxpayer’s reasonable cause defense saying he put no effort into ascertaining and fulfilling his reporting obligations. He testified he never even inquired about them, and when asked why, he answered, “Why should I?” “I didn’t feel like it,” and “Why? We’re in Romania.” The Court noted the onus was on the taxpayer to find out what he was supposed to do. Congress intended to place upon the taxpayer an obligation to ascertain the statutory deadline and then meet that deadline. As a sophisticated business professional, he held interests in dozens of companies, negotiated purchases of Romanian government assets, transferred his assets into holding companies, and concealed his earnings in numbered accounts. He even once inquired about tax obligations as a Romanian citizen owning property in Brussels before purchasing investment properties. A reasonable person with this level of sophistication, investments, and wealth would have sought advice regarding his obligation to file an FBAR.
Next, the court considered the IRS’s argument that the $10,000 penalty applies on a per account basis rather than a per FBAR form basis. The District Court ruled it applies on a per form basis, meaning the total penalty in this case equals $50,000 ($10,000 for each year from 2007 to 2011).
The 5th Circuit Court of Appeals noted that the law imposes:
- A statutory requirement to report each qualifying
transaction or relation with a foreign financial agency,
and - A regulatory requirement to file these reports on an
FBAR before a certain date each year.
By authorizing a penalty for “any violation of any provision of section 5314 [31 U.S.C.],” the statute refers to the requirement to report each account, not the requirement to file FBARs in a particular manner. The court stated this does not create an obligation to file a “single report,” but rather, it gives the IRS discretion to prescribe how to fulfill the requirement of reporting qualifying accounts. For example, the IRS could decide to require multiple FBARs instead of allowing one FBAR to report multiple accounts. Streamlining the process, however, does not redefine the underlying reporting requirement imposed by the statute. It merely honors Congress’s desire “to avoid burdening unreasonably a person making a transaction with a foreign financial agency.”
The use of the term “violation” in other parts of the statute confirms that the violation is the failure to report an account, not the failure to file an FBAR. For example, under the willful violation penalty, the maximum penalty is the greater of $100,000 or 50% of the amount of the transaction, when a violation involves a transaction, or the balance in the account at the time of the violation, when a violation involves a failure to report the existence of an account. This language plainly describes a violation in terms of a failure to report a transaction or an account, not a violation to file an FBAR. The court noted it is a basic canon of statutory construction that identical terms within an Act bear the same meaning. If a willful violation involves failing to report a transaction or an account, then presumably so too does a nonwillful violation.
Similarly, under the reasonable-cause exception, no penalty attaches to a non-willful violation if “such violation was due to reasonable cause” and “the amount of the transaction or the balance in the account at the time of the transaction was properly reported.” This language equates a “violation” with failing to report the amount of the transaction or the balance in an account. This exception to the penalty speaks in account-specific terms, not form-specific terms. If violation for purposes of the exception to the penalty is per transaction or per account, then violation for purposes of the penalty is also per transaction or per account.
The taxpayer argued that a per-account reading would lead to absurd results.
The court disagreed. An absurd result is a result no reasonable person would intend. But there is no absurdity in this case. Congress’s ce tral goal in enacting this law was to crack down on the use of foreign financial accounts to evade taxes. It is not absurd so suppose that Congress would penalize each failure to report each foreign account.
The court ruled that the law imposes a penalty on the failure to report a qualifying account, not the failure to file an FBAR. As a result, the $10,000 penalty cap applies on a per-account, not a per-form basis.
