In an issue of first impression in the Second Circuit, a trial court in the District of Connecticut earlier this week held that the $10,000 statutory cap for non-willful FBAR violations must be calculated on a per FBAR form basis and not based on the number of non-compliant accounts.
United States v. Kaufman, No. 3:18-cv-00787-KAD (D. Conn. Jan. 11, 2021) presented facts familiar to most tax controversy practitioners and observers. The case involved a U.S. taxpayer residing abroad who had an interest in foreign accounts located in banks in Israel. After the IRS assessed FBAR penalties in connection with the taxpayer's Israeli accounts for three tax years, the Department of Justice (DOJ) filed suit in Connecticut federal court to reduce the IRS assessment to a legal judgment. Following discovery, DOJ moved for summary judgment on the issue of the taxpayer's liability for FBAR penalties, while the taxpayer sought summary judgment on the issue of whether the government may assess the statutory $10,000 FBAR penalty for non-willful violations per account (in other words, under the government's interpretation, a $50,000 FBAR penalty would be warranted for a taxpayer who failed to report five foreign accounts on the FBAR form) or per FBAR form (in other words, under the taxpayer's interpretation of the law, the government may only impose a single $10,000 FBAR penalty each year, regardless of the number of foreign accounts that should have been reported on the form).
Although the Kaufman court granted the liability prong of DOJ's summary judgment motion, it also granted the taxpayer's motion as to the penalty cap. In doing so, the court rejected the approach recently taken by a trial court in California in United States v. Boyd, 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019) and agreed with the approach more recently taken by a trial court in Texas in United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020) (both cases are currently on appeal), and found that the non-willful FBAR penalty is capped at $10,000 per FBAR form, not per non-compliant account. Echoing Bittner, the court reasoned that when Congress considered and crafted the FBAR penalty regime for non-willful violations, it had long before imposed penalties for willful violations as to specific bank accounts and the fact that Congress did not also tie non-willful FBAR violations to specific accounts was “persuasive evidence” that it intended that penalties for non-willful violations should be assessed per FBAR, not per specific bank accounts. The Kaufman court further reasoned that the “reasonable cause” defense set out in the FBAR statute was enacted at the same time that the non-willful penalty provision was enacted, and Congress expressly left out any reference to “account” or “balance in the account” in fashioning the provision. In addition, the court noted, the requirement to report foreign accounts on the FBAR is not triggered by any specific number of foreign accounts and, moreover, individuals who have an interest in 25 or more accounts need only note that simple fact on the FBAR (i.e., in such cases there is no requirement to even list out any account details on the form). This fact, the Court reasoned, bolstered the taxpayer's argument that a non-willful penalty should be calculated based per FBAR, not per each account that should have been reported on the FBAR.
In sum: Kaufman represents a rare victory for taxpayers who have (or had) foreign financial accounts and who have found themselves in an increasingly hostile litigation landscape where the government has aggressively sought to lower the bar when it comes to liability for FBAR violations. That said, Kaufman appears to be just the third federal trial court to have addressed this specific issue and no federal circuit court has yet weighed in. Therefore, it remains to be seen whether taxpayers can take comfort that FBAR penalties will be capped at $10,000 for non-willful reporting violations.
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