On December 27, 2018, the United States Court of Federal Claims in Kimble v. United States1 ruled that the IRS did not abuse its discretion in assessing a heightened FBAR penalty when a taxpayer violated the FBAR reporting requirements. The court concluded that despite the taxpayer having no legal duty to disclose information to her accountant or to ask about IRS reporting requirements, her conduct was nevertheless “willful.” Moreover, the Court rejected the recent holdings in two federal court cases, Colliot2 and Wahdan,3 that determined that the IRS may not assess a penalty greater than $100,000 for a FBAR violation committed after 2004.

Facts

Alice Kimble held foreign bank accounts in Switzerland and France which she failed to disclose on her annual federal tax returns. She also failed to file annual FBARs for the tax years 2003 to 2008. The balance in her foreign accounts as of 2008 exceeded $1.4 million. At that time, Kimble learned for the first time from an article in the New York Times that she had an obligation to disclose her foreign accounts. In April 2009, Kimble applied to the OVDP program and was accepted. In 2012, Kimble and the IRS negotiated a Closing Agreement that required amendments to her income tax returns for 2003 through 2008 to report undisclosed foreign income and pay the tax liability due. In addition, Kimble was required to pay a penalty of $377,000. However, Kimble did not pay the penalty and notified the IRS by letter in January 2013 of her decision to withdraw from the OVDP. Thereafter, the IRS sent Kimble a letter informing her that any opt-out from the OVDP would be irrevocable and might cause her to incur a higher penalty.

In 2013, the IRS began an examination of Kimble’s FBAR filings for the 2007 calendar year. After an IRS Revenue Agent conducted an audit of her foreign held accounts, it was determined that Kimble's failure to file a FBAR for 2007 was “willful.” Specifically, the IRS found: Kimble was required to file FBARs annually for many years but failed to do so; she qualified for mitigation, because she satisfied the four regulatory criteria; but her failure to file FBARs nevertheless was “willful.” The IRS rejected Kimble’s request to apply a “reasonable cause” standard, because her violation was “willful” and “the facts do not support that ordinary business care and prudence were exercised.”4 The IRS calculated the applicable penalty to be $697,229. On April 7, 2014, the IRS issued Letter 3709, advising Kimble that she owed a penalty of $697,229, pursuant to 31 U.S.C. § 5321(a)(5), for the willful failure to file a FBAR for 2007. Kimble paid the penalty and filed a refund suit in the United States Court of Federal Claims. Upon review, the court rejected Kimble’s claims and upheld the penalty.

The parties stipulated that Kimble failed to file her FBAR for 2007 and filed cross-motions for summary judgment. The threshold question presented was whether Kimble willfully failed to file her FBAR for 2007.

The Government argued that summary judgment was appropriate to resolve “willfulness,” because Kimble “(1) knew that she had funds in a Swiss bank account and in a French bank account; and (2) did not report her interest in the accounts on a timely FBAR, but despite that knowledge, falsely represented on her income-tax return that she had no foreign bank accounts.”5 In addition, Kimble: “manag[ed] her foreign accounts with the help of her Swiss bankers;” “did not maintain the account in her own name;” “hid the account from the United States by not investing in U.S. securities;” and “failed to tell her accountant that she had a foreign bank account.”6 Kimble responded that she never read her tax returns and had no knowledge of the FBAR rules or other federal tax reporting requirements. According to Kimble, the Government’s interpretation of “willful” was overbroad, because every taxpayer who fails to file the FBAR does so willfully.

The Court of Claims noted that the United States Supreme Court has held that, since “willfulness is a statutory condition of civil liability,” it is “generally taken[] to cover not only knowing violations of a standard, but reckless ones as well.”7 Therein, the United States Supreme Court defined “recklessness” as “violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.”8

The parties agreed to the following stipulated facts in this case:

  • Kimble did not disclose the existence of the foreign account to her accountant until approximately 2010. Stip. ¶ 43.
  • Kimble never asked her accountant how to properly report foreign investment income. Stip. ¶ 44.
  • Kimble did not review her individual income tax returns for accuracy for tax years 2003 through 2008. Stip. ¶ 46.
  • Kimble 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 were sufficient proof that Kimble exhibited a “reckless disregard” of the legal duty under federal tax law to report foreign bank accounts to the IRS by filing a FBAR. The court further concluded that “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 Kimble's conduct in this case was “willful.”9 For these reasons, the court determined, viewing the evidence in the light most favorable to Kimble, that there was no genuine issue of material fact that she violated 31 U.S.C. § 5314 and that her conduct was “willful.”10

Because the court concluded that Kimble’s conduct was willful, the court next addressed the question whether the IRS abused its discretion in assessing Kimble a civil penalty of $697,229. Kimble asserted that the IRS abused its discretion when it assessed a penalty for the 2007 FBAR violation, because (1) she was not the “sole beneficiary” of the Swiss account after her father’s death, since she was a co-owner with her mother, (2) she did not have any personal connection to Switzerland, and (3) she did not “actively manage” the Swiss account. Thus, Kimble asserted that the IRS’s assessment of the maximum penalty against her was an abuse of discretion, because the IRS did not adhere to regulations that set the maximum penalty of $100,000, and, the penalty assessed was an “excessive fine,” in violation of the Eighth Amendment to the United States Constitution.

The court considered each of Kimble’s claims, but rejected all of them. As to the ownership of the Swiss account, although the record evidences that Kimble was not the “sole beneficiary” of the account, the court found that she represented that she was the sole beneficiary in an April 15, 2005 “Verification of the beneficial owner's identity.” In addition, Kimble nevertheless failed to establish why being only a co-owner necessarily rendered the IRS’s penalty assessment unlawful or an abuse of discretion.

As to Plaintiff’s role in managing the Swiss account, the court noted that the parties stipulated that between 1998 and 2008, Alice Kimble met with Swiss representatives in New York at least six times and met with a bank representative in Switzerland at least once. Therefore, the IRS did not abuse its discretion in finding that Kimble was actively involved with the Swiss account.

Finally, the court held that Kimble was no longer entitled to be assessed a maximum civil penalty of $100,000, as set forth in 31 U.S.C. § 5321(a)(5) (2003). The court stated:

On October 22, 2004, Congress enacted a new statute that increased the statutory maximum penalty for a “willful” violation to “the greater of [] $100,000, or [] 50 percent of the ... balance in the account at the time of the violation.” See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, 1586, § 821 (Oct. 22, 2004) (“Jobs Creation Act”). And, on July 1, 2008, the IRS issued I.R.M. § 4.26.16.4.5.1, that stated: “At the time of this writing, the regulations at [31 C.F.R. § 1010.820] have not been revised to reflect the change in the willfulness penalty ceiling.” I.R.M. § 4.26.16.4.5.1. The IRS, however, warned that, “the statute [i.e., the Jobs Creation Act] is self-executing and the new penalty ceilings apply.” I.R.M. § 4.26.16.4.5.1. Although, the Jobs Creation Act is inconsistent with 31 C.F.R. § 1010.820(g)(2), it is settled law that an agency's regulations “must be consistent with the statute under which they are promulgated.” United States v. Larionoff, 431 U.S. 864, 873 (1977). Since the civil penalty amount for a “willful” violation in 31 U.S.C. § 5321(a)(5) (2003) was replaced with 31 U.S.C. § 5321(a)(5)(C)(i) (2004), the April 8, 1987 regulations are “no longer valid.” Norman, 138 Fed. Cl. at 196.

The court refused to follow the holdings of two recent United States District Court cases determining that, although the IRS theoretically may assess a penalty greater than $100,000 for a FBAR violation committed after 2004, the IRS is still bound by the maximum penalty in the pre-2004 statute.11 The court concluded that the reasoning of these cases conflicts with the decision of the United States Court of Appeals for the Federal Circuit in Barseback Kraft AB v. United States.12

For these reasons, the court determined, viewing the evidence in the light most favorable to Kimble, that the IRS did not abuse its discretion when it assessed a civil penalty against Plaintiff of $697,229, i.e., 50 percent of the balance in the Swiss account in 2007.