Court Upholds $800,000 FBAR Penalty Against Woman Who Concealed Swiss Bank Account

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Court Upholds $800,000 FBAR Penalty Against Woman Who Concealed Swiss Bank Account

Our tax law blog offers numerous cautionary tales of taxpayers who received hefty penalties after failing to report foreign bank accounts, such as the banker fined over $1 million for FBAR noncompliance, or the California taxpayer sued by the IRS for nearly $120 million. In a recent example that is notable for the size of the penalty imposed, taxpayer Mindy P. Norman received penalties in excess of $800,000 after willfully concealing a Swiss bank account that was active during 2007. In response, Norman attempted to contest the penalty, an effort she began in 2014. In the case’s most recent development, the United States Court of Federal Claims, which hears certain types of financial claims against the U.S. government, rejected Norman’s arguments against her FBAR penalties, siding with the Internal Revenue Service (IRS) and upholding the original penalty. Our international tax law attorneys examine Norman’s case in closer detail, discussing the Court’s rationale while providing an overview of the federal FBAR filing requirements for taxpayers with offshore bank accounts.

Do I Need to Report Foreign Bank & Financial Accounts or Offshore Investments and Businesses to the IRS?

In order for Norman’s case to make sense, one must have some background knowledge of the U.S. government’s foreign account reporting requirements, which are aggressively enforced by the IRS. Readers who are already familiar with these requirements may wish to proceed to the next section, or simply continue reading for a quick “refresher.”

To combat overseas tax evasion, the IRS requires U.S. taxpayers to report offshore investments businesses and financial accounts that meet certain criteria. These requirements extend to U.S. citizens, resident aliens (such as green card holders), and in some instances, even non-residents. American expats, U.S. retirees who are living abroad, and dual citizens can thus be impacted.

Both individuals and business entities may be subject to offshore reporting requirements, two of which are particularly important:

  1. The Foreign Bank Account Report (FBAR) filing requirement, which is established by the Bank Secrecy Act (BSA).S. citizens, resident aliens, domestic trusts, and domestic businesses must file an FBAR, also called FinCEN Form 114, if they have reportable offshore accounts or assets with an aggregate value exceeding $10,000. See Internal Revenue Manual (IRM) 4.26.16, here, for a comprehensive FBAR overview.
  2. The Form 8938 filing requirement, which is established by the Foreign Account Tax Compliance Act or FATCA (in turn, part of the HIRE Act). Taxpayers use Form 8938 to report “specified foreign financial assets” to the IRS. U.S. citizens, resident aliens, non-resident aliens, and U.S. trusts and companies are generally responsible for filing Form 8938 if their offshore assets exceed or exceeded $50,000 in combined value. FATCA is discussed in IRM 3.21.112 and IRM 4.60.1.

For more information about these and related requirements for international taxpayers, refer to our FBAR compliance archives, or simply schedule a reduced-rate appointment with one of our experienced FBAR tax lawyers.

 

Court Sides with IRS Against Taxpayer, Upholding $800K Willful FBAR Penalty

Norman’s tax issues began over a decade ago, with an unreported Swiss account she used during 2007. In 2013, the IRS assessed an FBAR penalty of more than $803,000, citing the taxpayer’s willful failure to report the offshore account, which violates 31 U.S. Code § 5314 (pertaining to “records and reports on foreign financial agency transactions”). This figure represents the willful FBAR penalty, which, at up to 50% of the taxpayer’s unreported account balance, dwarfs the $10,000 maximum non-willful penalty. Norman’s conduct was determined to be willful based on a string of damaging details, which, according to court records, included “repeated and admitted lack of care in (1) filing inaccurate official tax documents without any review; (2) signing foreign banking documents without any review; and (3) later providing false sworn statements both to the IRS and to the court” hearing her case.

In 2014, Norman challenged the IRS, disputing the penalty by arguing that it should it have been capped at $100,000. However, the following year, the IRS Office of Appeals sided against her, finding the original penalty to be correct and valid. Norman’s argument relied on regulations dating back to 1987, which have since been amended.

Norman paid the penalty in 2015 but was not finished fighting the case. Later that year, she filed a complaint with the U.S. Court of Federal Claims, setting in motion answer, “discovery” (when key information is gathered), and other stages of the tax litigation process. This finally culminated in a one-day trial on May 10, 2018, after which the Court found “that… Norman willfully failed to file an FBAR for 2007 in violation of [31 U.S. Code] § 5314, and that she was properly assessed a penalty in the amount of 50 percent of the balance of her unreported foreign account.”

Notably, the Court’s Opinion and Order referenced not only “the documents” and “Norman’s testimony,” but furthermore, her “demeanor.” While our discussions of the red flags for tax fraud typically focus on tax issues (such as unfiled returns or underreported income), the IRS does also look at the taxpayer’s behavior (“conduct”), described in IRM 25.1.2.3(6) – a detail  taxpayers should keep in mind during any tax audit.

 

FBAR + FATCA Compliance Attorneys for International Taxpayers

At the Tax Law Office of David W. Klasing, we are international tax lawyers who provide assistance with FBAR- and FATCA-related issues, ranging from foreign account tax audits and criminal tax investigations to tax planning for non-citizens. If you have questions about Form 8938, FinCEN Form 114, or other offshore filing requirements, contact us online for a reduced-rate consultation, or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.

See our 2011 OVDI Q and A Library

See our FBAR Compliance and Disclosure Q and A Library 

See our Foreign Audit Q and A Library

In addition to our staffed main offices in Irvine,  the Tax Law Offices of David W. Klasing has unstaffed (conference room only) satellite offices in Los AngelesSan BernardinoSanta BarbaraPanorama CityOxnardSan DiegoBakersfieldSan JoseSan FranciscoOakland, Carlsbad and Sacramento.

 

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