The U.S. Court of Appeals for the Ninth Circuit upheld a district court ruling, finding that a taxpayer had willfully failed to file a Report of Foreign Bank and Financial Accounts (FBAR).

The court rejected a variety of the taxpayer’s arguments, ranging from the contention that the imposition of the penalty violated the U.S. Constitution’s ban against excessive fines, due process, and ex post facto clauses, to assertions that the court was barred by statute of limitations or treaty provisions.

Basics of FBAR filing

Each U.S. person who has a financial interest in or signature or other authority over foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, must file an FBAR each calendar year if the aggregate value of the accounts exceeds $10,000 at any time during the year. The civil and criminal penalties for noncompliance are significant. Civil penalties can range up to $10,000 for each violation.

If the violations are found to be willful, the penalties can range up to the greater of $100,000 or 50% of the amount in the account at the time of the violation. (These amounts are adjusted for inflation — for penalties assessed after January 15, 2017, the amounts are $12,663 for nonwillful violations and $126,626 for willful violations.) A “reasonable cause” exception exists for nonwillful violations, but not for willful ones.

Facts of the recent case

In June 2013, the IRS assessed a penalty of approximately $1.2 million against a woman for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. She didn’t pay the penalty and the IRS filed suit.

In that suit, the district court found that she had willfully failed to file an FBAR; the court granted partial summary judgment to the IRS but reduced the fine. The woman appealed.

While the taxpayer admitted that she’d willfully failed to disclose her financial interests in her overseas account on her 2006 tax return, she raised the following eight arguments, which the appeals court rejected:

  1. The IRS penalty violated the Excessive Fines Clause of the Constitution. Generally, “a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant’s offense,” according to a 1998 U.S. Supreme Court case (S. v. Bajakajian). The Ninth Circuit found that the penalty wasn’t grossly disproportionate to the harm the taxpayer caused because she’d defrauded the government and reduced public revenues.
  2. The IRS violated the statute of limitations. The appeals court determined that there were no violations of the applicable statute of limitations, which was six years. The taxpayer failed to disclose her financial interests in 2007, so the statute of limitations began to run at that time. The IRS assessed a penalty against her in June 2013 — within the statutory period — and the claim against the taxpayer was connected to that assessment, the appeals court said.
  3. The assessment violated the taxpayer’s due process rights. The court stated the penalty didn’t violate the taxpayer’s due process rights because the IRS could have brought the claim against her earlier. The IRS claim was connected to the taxpayer’s failure to report assets in 2007, so the court found that the tax agency couldn’t have brought its claim before 2007. In any event, the court said, the IRS brought its claim within the statute of limitations.
  4. The penalty violated the Ex Post Facto Clause of the Constitution. Not so, said the appeals court. That clause prohibits the imposition of a new criminal punishment for conduct that has already taken place. Because the Ex Post Facto clause doesn’t apply to civil statutes unless they have a punitive purpose or effect, the court determined that it wasn’t applicable here.
  5. The taxpayer received “multiple punishments” for the same underlying offense. Again, the court rejected the claim. It said that, even if the funds at issue here were traceable to the funds at issue in the taxpayer’s criminal prosecution, the offense in this case — failing to report her foreign bank account on her 2006 tax return — was unrelated to her criminal conviction.
  6. The IRS abused its discretion in calculating the penalty and the district court erred by not analyzing the reasonableness of the penalty. The Ninth Circuit stated that the district court reviewed the taxpayer’s penalty when it reduced it, and the assessment was consistent with the limits set by Congress.
  7. The government’s claim is barred by laches (an equity defense based on an unreasonable delay in asserting a claim). Noting that the United States isn’t generally “bound by laches in enforcing its rights” and that the courts have consistently adhered to the principle that “laches is not a defense against the sovereign,” the Ninth Circuit found that the laches defense was inapplicable here.
  8. Introducing banking evidence at the district court violated an international treaty between the U.S. and Switzerland. The Ninth Circuit concluded that the taxpayer wasn’t entitled to relief under this theory because she hadn’t shown that the treaty she relied on creates an enforceable right.

If you have questions about filing an FBAR, consult with your tax advisor.

© 2017