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Tax Notes Quotes Zhanna Ziering: Stakes Rising in Litigation of Non-Willful FBAR Violations
Caplin & Drysdale

Tax Notes Quotes Zhanna Ziering: Stakes Rising in Litigation of Non-Willful FBAR Violations

Date: 8/1/2019

Whether the IRS can impose maximum penalties for non-willful violations of foreign bank account reporting by year or by account is again the subject of litigation, and this case involves a much higher potential penalty.

. . .

The crux of the litigation turns on how to count violations. The government is seeking nearly $3 million in penalties and accruals for the FBAR violations, assessing $10,000 per account per violation under 31 U.S.C. 5321(a)(5).

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But Bittner argues that the “astronomical penalties of nearly $3 million . . . is far in excess of any appropriate punishment.” Bittner owed only $625 in tax for the years at issue, the answer asserts. He also argues that the amount rises to the level of a criminal sanction and constitutes an unconscionable punishment.

“The sheer comparison of the penalties . . . to the income that had to be picked up, it’s absurd,” said Zhanna Ziering of Caplin & Drysdale.

“There is no mechanism built into either the statute or the [Internal Revenue Manual] which would settle up the duplication of accounts. . . . When you’re dealing with a non-willful penalty, you might be penalizing the failure to report the same exact money as it travels from account to account,” Ziering said, adding that this goes beyond the intent of the statute.

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Under IRM 4.26.16.6.4.1, in most cases examiners will recommend one penalty per year for non-willful violations, though facts and circumstances may dictate otherwise. It also states that in no case will non-willful penalties exceed 50 percent of the highest aggregate balance of all unreported accounts. This penalty cap, first instituted in a May 2015 memo, has largely been viewed as the IRS’s attempt to address concerns that FBAR penalties might otherwise run afoul of the Eighth Amendment.

“The IRM guidance suggests one penalty per FBAR, and only in special circumstances [assert otherwise]. And in a case where somebody only has [$625 in taxes] and seems to have a plausible explanation, it is not clear on the face of the complaint what were the special circumstances,” Ziering said.

For the full article, please visit Tax Notes’ website (subscription required).

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