Beware of Your FBAR Obligations—U.S. v. Solomon

FBARs are no laughing matter. In recent years, the Internal Revenue Service, as well as other tax agencies around the world, have stepped up their efforts with respect to international civil tax enforcement. In particular, the Internal Revenue Service oversees investigations concerning FBAR compliance and assesses and collects civil penalties for those U.S. persons who fail to report foreign accounts. The penalties are steep—now a $12,921 maximum annual penalty. However, one relevant question is whether those penalties apply per FBAR filing or per account. In a recent decision by the Southern District of Florida, the Court determined that such FBAR penalties should be applied per account.

FBARs, Generally

The Bank Secrecy Act, passed by Congress in 1970, authorized the Department of Treasury to collect certain information from U.S. persons who have financial interests in or signature authority over financial accounts maintained with financial institutions outside the United States. Further, in April 2003, the Financial Crimes and Enforcement Network (“FinCEN”) delegated its enforcement authority with respect to FBARs to the Internal Revenue Service.[1]

U.S. persons must file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), if the aggregate maximum values of the foreign financial accounts exceed $10,000 at any time during the calendar year. For purposes of FBAR reporting, a “U.S. person” includes a citizen or resident of the United States, an entity created or organized in the United States or under the laws of the United States (including corporations, partnerships, and limited liability companies), a trust formed under the laws of the United States, or an estate formed under the laws of the United States.[2]

Moreover, the term “financial interest” has a broad scope, including, but not limited to situations such as:

• the U.S. person is the owner of record or holder of legal title, regardless of whether the account is maintained for benefit of the U.S. person or for the benefit of another person, including non-U.S. persons;
• The owner of record or holder of legal title is a person acting as an agent, nominee, attorney, or a person acting on behalf of the U.S. person with respect to the account; and
• The owner of record or holder of legal title is a corporation in which a U.S. person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock; or (ii) more than 50 percent of the voting power of all shares of stock.

31 U.S.C. § 5321

A U.S. person may be subject to certain civil and/or criminal penalties for FBAR reporting violations. 31 U.S.C. § 5321(a)(5) states, in part, as follows:

(5) Foreign financial agency transaction violation.—

(A) Penalty authorized.—

The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.

(B) Amount of penalty.—

Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.[3]

In turn, 31 U.S.C. § 5314(a), the related provision, describes the record and reporting requirements of the U.S. person:

(a) Considering the need to avoid impeding or controlling the export or import of monetary instruments and the need to avoid burdening unreasonably a person making a transaction with a foreign financial agency, the Secretary of the Treasury shall require a resident or citizen of the United States or a person in, and doing business in, the United States, to keep records, file reports, or keep records and file reports, when the resident, citizen, or person makes a transaction or maintains a relation for any person with a foreign financial agency. The records and reports shall contain the following information in the way and to the extent the Secretary prescribes:

(1) the identity and address of participants in a transaction or relationship.

(2) the legal capacity in which a participant is acting.

(3) the identity of real parties in interest.

(4) a description of the transaction.[4]

United States v. Solomon[5]

On October 27, 2021, the District Court for the Southern District of Florida issued its decision, denying Solomon’s motion for partial summary judgment and granting the U.S. government’s crossmotion for partial summary judgment. The United States brough a civil action against Ms. Solomon to enforce non-willful civil penalties assessed against Ms. Solomon for failing to timely report her financial interest in foreign bank accounts.[6]

Specifically, Ms. Solomon failed to file an FBAR for tax years 2014 through 2010. However, on March 13, 2012, Ms. Solomon filed FBARs for years 2004 through 2010, pursuant to the Internal Revenue Service’s 2012 Offshore Voluntary Disclosure Program. On December 12, 2018, the IRS assessed penalties against Ms. Solomon in the total amount of $200,000—$10,000 for each of the 20 unreported foreign bank accounts during years 2004 through 2010. On December 9, 2020, the United States filed a complaint against Ms. Solomon, seeking a judgment for the non-willful penalties. Ms. Solomon filed a motion for partial summary judgment, seeking a penalty reduction to $70,000 based, in part, on the argument that the penalties should be assessed per form, not per account. In turn, the United States responded and moved for partial summary judgment as well. The district court’s decision was based, in part, on the following analysis:[7]

The issue here is whether the term “violation” in 31 U.S.C. § 5321(a)(5)(A) is the failure to “file” a timely and accurate FBAR “form” or the failure to timely “report” the existence of a foreign transaction or foreign bank account. Under the former view urged by Solomon, her liability would be capped at $70,000—$10,000 for each of the seven years starting in 2004 through 2010. In her view, although she does not dispute that she maintained financial relationships with a total of twenty foreign accounts during those years and did not timely disclose those relationships, the violative conduct pertinent to calculating the applicable penalty is not the failure to disclose her interests in each of those foreign accounts but rather her failure to file a timely FBAR form during each calendar year. By contrast, the government argues that the violation as to which the IRS may impose a civil penalty is the failure to disclose the foreign account, and hence, that Solomon is liable for $200,000 because she did not disclose a total of twenty foreign accounts maintained during the 2004–2010 period.

Upon a full review of the statutory and regulatory structure at issue, the latter view is most faithful to the statutory and regulatory text: the IRS is permitted to impose a civil penalty for a “violation,” and a “violation” in this context is a failure to “report” a foreign transaction or bank account—not a failure to “file” an FBAR “form.” Admittedly, there is some confusion stemming from the use of the terms “form” and “report” in the legal landscape, but as a review of the relevant provisions ultimately reveals, the FBAR “form” is simply the procedural mechanism by which the regulated person complies with her legal duty under § 5314 to “report” her interest in foreign bank accounts and transactions. It is that failure to timely “report” the underlying interest in the foreign bank account or transaction that constitutes the relevant “violation” for purposes of assessing penalties under § 5321—not the failure to “file” a FBAR “form.” Here, Solomon committed 20 “violations” within the meaning of § 5321(a)(5)(A) when she failed to timely disclose the existence of twenty foreign bank accounts during the relevant period, and hence the Secretary properly imposed $200,000 in total penalties for those violations (20 × $10,000).[8]

Conclusion

Notably, the federal district court in Solomon decided not to follow the decision by the Ninth Circuit Court of Appeals earlier this year. In United States v. Boyd, 991 F.3d 1077 (9th Cir. 2021), the Ninth Circuit held that FBAR penalties were assessable on a per-form basis, not a per-account basis like the government argued here. Here, the district court emphasized Judge Ikuta’s dissent in Boyd—incorporating it by reference—and held that the overall statutory purpose and reporting scheme of the Bank Secrecy Act (and 31 U.S.C. § 5321(a)(5), in particular) is about disclosing information to the Internal Revenue Service about foreign transactions and accounts.[9] Thus, in the court’s view, a “violation” must be applied per account, not per FBAR form. This decision also breaks from other recent district court decisions that held that violations should be applied on a per-form basis—see U.S. v. Kaufman, No. 3:18-CV-00787 (KAD), 2021 WL 83478 (D. Conn. Jan. 11, 2021), and United States v. Bittner, 469 F. Supp. 3d 709 (E.D. Tex. 2020). It remains to be seen how this issue will be definitively addressed moving forward.

 

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[1] See IRS FBAR Reference Guide, available at https://ift.tt/3qLxshV.

[2] Id.

[3] 31 U.S.C. § 5321(a)(5)(A)-(B)(i). It should also be noted that the penalties prescribed by this section are indexed for inflation. Further, the penalty described above is for non-willful violations.

[4] 31 U.S.C. § 5314(a).

[5] United States v. Solomon, No. 20-82236-CIV, 2021 WL 5001911, at *1 (S.D. Fla. Oct. 27, 2021).

[6] Id. at *1.

[7] Id. at *2-3.

[8] Id. at *6-7.

[9] Id. at *9.

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