District Court Decides FBAR Penalty Assessment Case - Both A Win For The Government & For OVDP Participants

by Moskowitz LLP

[authors: Stephen M. Moskowitz, Esq., LL.M & Anthony V. Diosdi, Esq., LL.M]

Here at Moskowitz LLP, A Tax Law Firm based in San Francisco, CA, we have been following just how the Internal Revenue Service will collect FBAR penalties once imposed outside the scope of any Offshore Amnesty Program.      

In its decision November 8, 2012, the District Court for the District of Utah found in United States v. McBride that the assessment of FBAR penalties was lawful and that the IRS may proceed with its collection efforts.   In order to establish the lawfulness of FBAR penalty assessments, the United States has strategically ‘cherry picked’ the cases it has brought against taxpayers.     Both in United States v. Williams, (4th Cir. 2012) [non-precedential opinion], and now in United States v.  McBride, regardless of the evidentiary used by the court, it is hard to see how the Government couldn’t win its cases.   McBride is another case of “low hanging fruit” with case facts establishing conduct of blatant lying by the taxpayer(s) to the IRS agents, clear intent to underreport income via offshore accounts, etc.   

However, there does appear to be a significant victory in both McBride and Williams for taxpayers with unreported offshore accounts. It appears that neither court has agreed that it is permissible to impute knowledge simply because a taxpayer checked “no” on Schedule B.

It should be noted, in the right case, an interesting argument can be made that the willful penalty of $100,000 per year or 50 percent of the value of a foreign account may violate a taxpayer’s right to Due Process under the Fifth Amendment of the United States Constitution. In considering how the willful penalty infringes upon an individual’s right to due process, a taxpayer could analogize to due process theories applied in the punitive damages context. In BMW of North America v. Gore, 517 U.S. 559 (1996), the United States Supreme Court discusses whether a punitive damages award could be grossly excessive in proportion to related compensatory damages award. The Court asserted that “[p]unitive damages may be properly be imposed to further a State’s legitimate interests in punishing unlawful conduct and deterring its repetition……Only when an award can fairly be categorized as ‘grossly excessive’ in relation to these interests does it enter the zone of arbitrariness that violates the Due Process Clause.” Id. At 568. In evaluating whether evaluating whether an award is “grossly excessive,” the United States Supreme Court has instructed courts to consider three guideposts: “(1) the degree of reprehensibility of the defendant’s misconduct; (2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and (3) the difference between the punitive damages award by the jury and the civil penalties authorized or imposed in comparable cases.” State Farm Mutual Automobile Ins. Co. v. Campbell, 538 U.S. 408, 418 (2003).

In the right case, the above standard enunciated by the Supreme Court will not be too difficult to satisfy. Let’s assume that a taxpayer simply did not know he or she had a duty to report a foreign account on an FBAR. In that case it cannot be said that the taxpayer’s conduct was “particularly reprehensible.” Further if the taxpayer cooperated with the Internal Revenue Service, it would be extremely difficult to argue that the Government suffered a harm. Even in cases where the Government were to contend actual economic harm for the lost tax on a foreign account, the willful penalty seems ripe for a Constitutional challenge. The Supreme Court has traditionally held that “an award of more than four times the amount of compensatory damages might be close to the line of constitutional impropriety.” State Farm, 538 U.S. at 425. Given the way the willful penalty is drafted, it is not too difficult to imagine a situation where the Government intends to impose a willful penalty that exceeds four times the value of an undisclosed foreign account. Finally, there are no comparable cases to draw upon to determine the civil penalties for a taxpayer who simply didn’t know that they had to disclose foreign accounts on an FBAR. So, we are just going to have to wait and see if the Government attempts to impose the willful penalty against a taxpayer who simply did not know that the account had to be disclosed on an FBAR.

The strategies the tax law firm of Moskowitz LLP employs in defending our clients from offshore account related investigations vary according to the facts and circumstances of the case, the comfort zone of our client, and our experience.    

Disclaimer:  Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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