Significant FBAR Penalties Upheld by Court

Taxpayers have lost and the US Internal Revenue Service has scored a victory over the taxpayer in Kimble USA, a court 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 required 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 program and filed amended tax returns that reported income from the offshore accounts. By an oversight, she checked the ‘no’ box on schedule B asking whether she had offshore accounts. The error was a common mistake for OVDP applicants to make in the early stages of the program.

However, the IRS considered this action to amount to willful non-compliance and assessed her for an FBAR non-filing penalty of $697,229, equal to 50 percent of the highest balance in the accounts. Kimble paid the penalty and sued for recovery in the Court of Federal Claims (court).

The court has now issued a summary judgment upholding the penalty. The 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 a 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 court judgment.

Kimble is thereby liable for the maximum penalty for willful non-filing of an FBAR and must pay $700,000 for her ‘reckless disregard’ of her duty.

The court opinion makes the FBAR willful penalty a strict liability statute. The $10,000 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. The ruling seems to unfairly put at risk all taxpayers who on the Forms 1040 checked ‘no’ in the foreign account box on schedule B. The ruling is inconsistent with several other rulings in other courts.

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