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Failure to properly review US tax return incurs maximum FBAR wilful penalty

Thursday, 3 January, 2019

The US Internal Revenue Service has scored a victory over the taxpayer in Kimble v USA, a case concerning the reporting of foreign bank accounts.

The taxpayer, Alice Kimble, held Swiss accounts at both HSBC and UBS in the early 2000s, and was not aware until 2008 that she was obliged to report them to the IRS on her tax return and on Foreign Bank Account Report (FBAR) forms.

In 2009, when the IRS introduced its Offshore Voluntary Disclosure Program (OVDP), she joined the programme and filed amended tax returns that reported income from the offshore accounts. By an oversight, she ticked the 'no' box on schedule B asking whether she had offshore accounts. According to offshore tax specialist Jack Townsend, this was not an uncommon mistake for OVDP applicants to make in the early stages of the programme.

However, the IRS considered this action to amount to wilful non-compliance, and assessed her for an FBAR non-filing penalty of USD697,229, equal to 50 per cent of the highest balance in the accounts. Kimble paid the penalty and sued for recovery in the Court of Federal Claims (CFC).

The CFC has now issued a summary judgment upholding the penalty. The agreed facts of the case – that Kimble had signed a 2007 income tax return without first reviewing it, and that the return falsely answered 'no' to the question about foreign bank accounts – amounted to reckless disregard of her legal duties. Moreover, because a taxpayer who signs a tax return is charged with constructive knowledge of its contents, she could not claim lack of knowledge, said the CFC judgment.

Kimble is thereby liable for the maximum penalty for wilful non-filing of an FBAR. She must pay USD700,000 for her 'reckless disregard' of her duty.

'In effect, the CFC opinion makes the FBAR wilful penalty a strict liability statute', comments tax expert Robert Horwitz of US law firm Hochman Salkin Toscher Perez. 'The [much lighter] non-wilful penalty would appear to apply only if the taxpayer files an FBAR form listing all accounts but makes a clerical error, such as in the amount in the account or the account number. Unless the Federal Circuit reverses [Kimble], the CFC will be an unfriendly forum for taxpayers seeking a refund of the FBAR penalty,' he said.

'Practitioners should note that this rather cryptic holding seems to put at risk all taxpayers who on the Forms 1040 checked 'no' in the foreign account box on schedule B', said Jack Townsend. 'The Court's holding on the civil wilfulness standard adopts the 'reckless' rubric as constituting wilfulness for civil penalty purposes.’

Sources