Originally published by Jack Townsend.
In Kimble v. United States, (CFC 2018), here, the Court of Federal Claims (Judge Braden) drank the Government’s kool aid on FBAR willful penalties, holding Kimble liable for the maximum willful penalty. (The drank the kool aid analogy may be a little strong for some uses of the term, see Urban Dictionary, here.)
I won’t recount the facts but, suffice it to say, they were not good facts for Kimble. Some of the facts are recounted in the excerpts from the legal discussion below.
Key holdings:
1. Kimble was reckless sufficient to invoke the FBAR civil willful penalty. Here are the key excerpts (bold-face supplied by JAT):
The relevant stipulated facts in this case are as follows:
• Plaintiff did not disclose the existence of the UBS account to her accountant until approximately 2010. Stip. ¶ 43.
• Plaintiff never asked her accountant how to properly report foreign investment income. Stip. ¶ 44.
• Plaintiff did not review her individual income tax returns for accuracy for tax years 2003 through 2008. Stip. ¶ 46.
• Plaintiff answered “No” to Question 7(a) on her 2007 income tax return, falsely representing under penalty of perjury, that she had no foreign bank accounts. Stip. ¶ 48.
In the court’s judgment, stipulations ¶¶ 46 and 48 together evidence conduct by Plaintiff, as a co-owner of the UBS account that exhibited a “reckless disregard” of the legal duty under federal tax law to report foreign bank accounts to the IRS by filing a FBAR. See Godfrey, 748 F.2d at 1577; see also Norman v. United States, 138 Fed. Cl. 189, 194 (Fed. Cl. 2018) (determining that a taxpayer was “put on inquiry notice of the FBAR requirement when she signed her tax return”) (internal quotations omitted), appeal docketed, No. 18-2408 (Fed. Cir. Sept. 18, 2018); see also Jarnagin, 134 Fed. Cl. at 378 (“A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”) (citations omitted). n23 Although Plaintiff had no legal duty to disclose information to her accountant or to ask her accountant about IRS reporting requirements, these additional undisputed facts do not affect the court’s determination that Plaintiff’s conduct in this case was “willful.”
n23 A May 23, 2018 Memorandum the IRS Office of Chief Counsel distributed to IRS program managers states that, “[t]he standard for willfulness under 31 U.S.C. § 5321(a)(5)(C) is the civil willfulness standard, and includes not only knowing violations of the FBAR requirements, but willful blindness to the FBAR requirements as well as reckless violations of the FBAR requirements.” Burden of Proof and Standard for Willfulness Under 31 U.S.C. § 5321(a)(5)(C), PMTA-2018-13, at 1 (May 23, 2018). For a comprehensive discussion of how other federal courts have construed whether a FBAR violation is “willful,” see Hale E. Sheppard, “What Constitutes A ‘Willful’ FBAR Violation?,” 129 J. TAX’N 24 (Nov. 2018) (collecting cases).
For these reasons, the court has determined, viewing the evidence in the light most favorable to Plaintiff, that there is no genuine issue of material fact that Plaintiff violated 31 U.S.C. § 5314 and that her conduct was “willful.” See 31 U.S.C. § 5321(a)(5) (2004); see also RCFC 56.
Practitioners should note that this rather cryptic holding seems to put at risk all taxpayers who on the Forms 1040 checked “No” in the foreign account box on Schedule B. Of course, Kimble’s facts beyond that Schedule B check mark were consistent with the willful penalty but as the Court posited its conclusion perhaps the “No” answer only would suffice.
2. The Court rejected the Colliot and Wahdan holding s that the willful penalty was limited to $100,000 because the FBAR regulations had not been revised. The Court held that the IRS could impose the willful penalty in the maximum amounts allowed by the statute.
JAT Comments:
1. The Court’s holding on the civil willfulness standard adopts the “reckless” rubric as constituting willfulness for civil penalty purposes. This seems to be the way courts are going now. See e.g., Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (Federal Tax Crimes Blog 12/21/18; 12/22/18), here.
2. Kimble joined OVDP but apparently opted out of the civil penalty structure of OVDP. (The Court’s language on this is a bit fuzzy, saying at one point that she attempted to withdraw from the OVDP (a withdrawal is different from opting out of the civil penalty structure and suggesting that Kimble had negotiated a Closing Agreement that was never signed).) The overall sense is that Kimble opted out (under the OVDP definition) which meant that she was still in OVDP (thus obtaining the relief from criminal prosecution benefit) and was audited under the opt out procedure.
3. The Court held that it had jurisdiction under the Tucker Act. 28 U.S.C. § 1491(a)(1), citing Jarnagin v. United States, 134 Fed. Cl. 368, 375 (Fed. Cl. 2017). After it did that, it added this paragraph (one footnote omitted):
The September 8, 2016 Claim For Refund is sufficient to satisfy Congress’s administrative refund scheme. See 26 U.S.C. § 7422(a) (“No suit or proceeding shall be maintained . . . until a claim for refund or credit has been duly filed [.]”); see also 26 U.S.C. § 6511(a) (establishing time limits for refund claims). n20
n20 See Court Appendix, infra, for the text of 26 U.S.C. § 6511(a). Plaintiff filed the September 8, 2016 Claim For Refund approximately one month after she paid the IRS the full amount of the assessed penalty, well within the 2-year and 3-year time limits set by 26 U.S.C. § 6511(a). Compare Compl. Ex. A with Stip. ¶ 70. Therefore, the court does not need to determine whether Section 6511 applies to an administrative claim requesting refund of a FBAR penalty assessed, pursuant to 31 U.S.C. § 5321(a)(5).
This raises an issue I mentioned earlier. See Bedrosian on Appeal; Interesting and Potentially Important Opinion on Jurisdiction in FBAR Penalty Cases (Federal Tax Crimes Blog 12/21/18; 12/22/18), here as to whether the IRC requirements for refund (including Flora full payment and claim for refund and denial or lapse of 6 months) apply. In this case, according to the facts, Kimble did pay the full amount of the penalty and did file a claim for refund, apparently on the IRS form for claims for refund. (The Court does not give the form number but described it as “Claim For Refund And Request For Abatement with the IRS.”)
4. The Court found that on 5 of 6 of the amended returns submitted in OVDP:
Kimble also did not amend her answer to Question 7(a), although income from both the UBS and HSBC accounts was included on amended Schedule B for each of those years. Stip. ¶ 59. Alice Kimble proffered no explanation as to why her answer to Question 7(a) for those years was never amended. Alice Kimble Tr. 82:15.
Kimble was one of the early applicants under OVDP. I can only recount my experience and anecdotal inquiries to other practitioners. When the OVDP process was new (in 2009) I had the return preparers prepare the amended returns and delinquent FBARs. When the drafts were given to me for review before submission under OVDP, some of them answered “No” to the Schedule B foreign account question, even though the returns reported the income and the FBARs reported the accounts. I caught the problem in each case and had the Schedules B corrected before we submitted the OVDP package. My informal inquiries to others confirmed that, during the early stages, this was not an uncommon phenomenon.
5. I previously wrote on the Kimble case: Government Pushes the Envelope on the Meaning of Willfulness in FBAR Willful Civil Penalty (Federal Tax Crimes Blog 7/15/18), here.
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