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Tax Notes Quotes Zhanna Ziering on Federal Circuit Court's Opinion on the FBAR Penalty Cap

November 11, 2019, Tax Notes

Penalties for willful violations of foreign bank account reporting are not capped by regulation at $100,000, the first appellate court to decide the issue held in what could prove a troubling opinion for taxpayer litigants.

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"'May' . . . merely gives the Secretary discretion as to whether to impose the penalty in any particular case. This language does not mean that the Secretary has the authority to set a penalty cap on all cases that is different than the penalty cap Congress mandated," the court held.

Zhanna A. Ziering of Caplin & Drysdale was puzzled by those sentences of the decision, which she found unclear and possibly in conflict with each other.

“If [the court] is saying you just can’t establish a cap lower, I’ll take that. But if they’re saying Congress told you what the penalty has to be and your only decision is whether to impose it or not, then we can kiss the mitigation guidelines in the [Internal Revenue Manual] goodbye,” Ziering said. “There’s enough ambiguity in [the court’s language] that should the IRS want to take that position, they could at least argue that.”

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Ziering found disconcerting the emphasis the court seemed to place on the return signature.

“We are in danger where [the return signature] . . . is becoming the most governing factor,” Ziering said. “Does this language mean that taxpayers can never rely on the accountant and their work because they are required to go through their return with a fine-tooth comb?”

Ziering was also troubled by the court’s language used to discard Norman’s argument that if recklessness were willful, portions of 31 USC section 5321 on non-willful penalties would be superfluous. The court cites instances of FBAR violations in which a taxpayer did not know about their foreign accounts as examples of why the non-willful conduct statutory language is not rendered superfluous.

“What the court ignores is that non-willful penalties have reasonable cause as a defense . . . and lack of knowledge about the account would certainly be reasonable cause,” Ziering said. “If their example of non-willfulness is not knowing about the existence of the account, that leaves a lot of room for what falls into willfulness.”

Ziering acknowledged, however, that the court also pointed to several other examples of Norman’s conduct that had “the effect of inhibiting disclosure,” including opening a numbered rather than named account, signing a document to prevent UBS from investing in U.S. securities, and having her money withdrawn from the account delivered in cash. Norman also made “many false statements to the IRS” about her knowledge of her account, the court noted.

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

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