A recently released court opinion, penned by Kari Dooley of the United States District Court for the District of Connecticut, highlights the ongoing controversy regarding the IRS’s methodology employed in calculating and assessing non-willful FBAR penalties under 31 U.S.C. §5321(a)(5)(A), which provides, “In general -- Except as provided in subparagraph (C) [governing willful violations]... the amount of any civil penalty imposed… shall not exceed $10,000.” Despite the statutory language, the IRS assessed the defendant, Zvi Kaufman, $42,249, $42,287, and $59,708 for his non-willful failure to file his 2008, 2009, and 2010 FBARs, respectively (despite the case laying out facts that quite clearly could have supported a willful determination).

The controversy arises from the fact that the IRS sometimes, but not always, asserts that the statutory language of §5321 grants them the authority to assess the $10,000 penalty (adjusted for inflation) for each account that is not reported on an FBAR, rather than a single $10,000 penalty for the failure to file the form itself. The Government argues that references within the willful failure portion of statute to “the balance of the account” demonstrate congressional intent that a violation occurs with respect to each individual account untimely or inaccurately reported. The court in Kaufman, however, seized on the fact that references to individual account balances are conspicuously absent from the code sections dealing with non-willful penalties, and posits that if Congress had intended for non-willful violations to be applicable on a per account basis, they would have mirrored the language used in the code sections dealing with willful failures.

The Government put forth some additional questionable arguments, such as the fact that a “form-centric” reading of 5321 would yield absurd results, if, for instance, a taxpayer had reasonable cause for failure to report some of the accounts but not others. Again, the court deftly rejects this argument, finding that such an instance would still support the imposition of a $10,000 penalty because, despite having reasonable cause for failure to report certain accounts, the failure to report the other accounts, for which reasonable cause did not exist, would still constitute a non-willful failure to file a complete and accurate FBAR under the court’s construction. The court then flips the argument back on the Government, by pointing out that allowing the IRS to assess $10,000 on a per account basis could yield a larger non-willful penalty than those provided under the code for willful violators -- a truly absurd outcome that clearly contradicts the Congressional intent behind establishing a non-wilful penalty regime.

Ultimately, I think the court reached the correct conclusion in this case, and in doing so, provided a lucid rebuke of the IRS’s willingness to assert non-willful penalties on a per account basis, seemingly haphazardly. From our experience, the IRS chooses to assess just a single $10,000 non-willful penalty per year far more often than deciding to assess them on a per account basis, and the uncertainty as to the size of the hammer the IRS drops on a taxpayer filing delinquent FBARs undoubtedly has a chilling effect on taxpayers looking to come forward to rectify prior non-willful reporting failures.

As I stated earlier, Mr. Kaufman had some pretty bad facts cutting against his assertion of non-willfulness. For whatever reason, the IRS agreed that his failure was non-wilful but decided to assert their more punitive interpretation of the penalty regime, and I suspect the dubious nature of Mr. Kaufman’s non-willfulness is likely the culprit. That being said, an interesting aspect of the case, which was not addressed in the court’s decision, is the fact that Mr. Kaufman has been a resident of Israel since 1979. As such, assuming that his failures were truly non-willful, if he were to seek to rectify his delinquent FBAR filings today, he would be able to utilize the IRS’s Streamlined Foreign Offshore Procedures, which would result in no assessed penalties for his failure to file FBARs. Unfortunately for Mr. Kaufman, he filed his delinquent FBARs on May 15, 2012, a mere 109 days before the IRS introduced the SFOP program. Ergo, had Mr. Kaufman put off his attempts to get back into compliance for a few more months, he could have avoided this ordeal altogether and walked away scot-free. He is essentially being punished for his proactiveness. I’m not sure this argument was raised to the IRS during any of the administrative proceedings or litigation related to the proposed penalties, but it should have been, as it seems a rather compelling argument that the $10,000 per year penalty would have been sufficient, all things considered.

Unfortunately, as the court in Kaufman points out, the matter of the IRS assessing non-willful penalties on a per-account basis has only been addressed twice before in district courts (United States v. Boyd, No. CV 18-803-MWF (JEMx), 2019 WL 1976472 (C.D. Cal. Apr. 23, 2019) and United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020) ), and in both instances, the district courts ruled in favor of the ability of the IRS to assess non-willful penalties on a per account basis. So, we now have a split among the federal circuits. The appeal of the Boyd decision was argued in September of 2020 and a decision should be forthcoming in the near future. It is my hope that the Court of Appeals in that case chooses to follow the line of reasoning employed by Judge Dooley in Kaufman, potentially spelling an end to the IRS’s practice of arbitrarily deciding how they are going to assess penalties for non-willful FBAR violations. We shall see soon enough.