On November 8, 2019, the Federal Circuit Court of Appeals (the “Court”) upheld the decision of the Court of Federal Claims to uphold the IRS assessment of a willful FBAR penalty in the amount of $803,530 with respect to Ms. Mindy Norman’s failure to file her 2007 FBAR. The Norman case deserves special attention because of its facts and circumstances and how the Court interpreted them to uphold the willful FBAR penalty.
The Norman Case: Facts of the Case
Ms. Norman is a school teacher. In 1999, she opened a bank account with UBS bank in Switzerland. It was a “numbered account” – i.e. income and asset statements referred to the account number only; Ms. Norman’s name and address did not appear anywhere on the account statements. Between 2001 and 2008, the highest balance of the account ranged between about $1.5 million and $2.5 million.
The Court described how Ms. Norman was actively engaged in managing and controlling her account. She had frequent contacts with her UBS banker in person and over the phone; she decided how to invest her funds and she signed a request with UBS to prohibit investment in US securities on her behalf (which could have triggered a disclosure of the existence of the account to the IRS). In 2002, she withdrew between $10,000 and $100,000 in cash from the account. In 2008 she closed the account when UBS informed her that it would cooperate with the IRS in identifying noncompliant US taxpayers who engaged in tax fraud; it should also be noted that the IRS presented into evidence UBS client contact records which stated that Ms. Norman exhibited “surprise and displeasure” when she was informed about the UBS decision.
Sometime in the year 2008, Ms. Norman signed her 2007 US tax return which, it appears, contained a Schedule B which stated (in Part III) that she had no foreign accounts. Moreover, she signed this return after her accountant sent her a questionnaire with a question concerning foreign accounts.
Also in 2008, Ms. Norman obtained a referral to an accountant. It appears that the accountant advised her to do a quiet disclosure, filing her amended returns and late FBARs. The quiet disclosure triggered the subsequent IRS audit.
The Court found that, during the audit interview, Ms. Norman made numerous false statements, including denying the knowledge of the existence of her foreign account prior to 2009. She also submitted a letter to the IRS re-affirming her lack of knowledge about the existence of this account.
Then, after retaining an attorney, Ms. Norman completely reversed herself in her second letter, stating that she did in fact know about the existence of the account. She further explained that her failure to timely file her FBARs occurred due to her belief that none of the funds in the account were hers and she was not a de-facto owner of the account.
The Norman Case: Penalty Imposition and the Appeals
It appears that the false statements and radical shifts in claims about what she knew about her account completely damaged her credibility with the IRS agent in charge of the audit. Hence, the IRS found that Ms. Norman willfully failed to file her FBAR and assessed a penalty of $803,530.
Ms. Norman paid the penalty in full and filed a complaint with the Court of Federal Claims requesting a refund. The Court of Federal Claims sustained the penalty; hence, Ms. Norman appealed to the Federal Circuit Court of Appeals. The Court upheld the penalty imposition.
The Norman Case: Issues on the Appeal
Ms. Norman raised three issues on the appeal: (1) the Court of Federal Claims erred in finding that she willfully violated the FBAR requirement; (2) a 1987 Treasury regulation limits the FBAR willful penalty to $100,000; and (3) a penalty so high violates the 8th Amendment. The Court did not consider the 8th Amendment argument for procedural reasons.
The Norman Case: Recklessness as part of Willfulness
At the heart of the dispute over the imposition of the willful penalty was whether the IRS can use recklessness in its determination of willfulness. It is important to point out here that the IRS imposed the willful penalty even though it could not prove that Ms. Norman actually knew about the existence of FBAR. Rather, it relied on recklessness in its imposition of the willful FBAR penalty.
In the appeal, Ms. Norman argued that one can only violate the FBAR requirement if one has the actual knowledge of the existence of the form. She adopted a strict interpretation of willfulness as the one found in the Internal Revenue Manual (“IRM”): “willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.”
The Court, however, did not agree with this interpretation. First of all, it pointed to the well-established law that the IRM is not binding in courts. The courts in several circuits have determined that recklessness should be considered as willfulness. Second, the IRM itself stated that actual knowledge of FBAR is not required for the imposition of a willful penalty. Rather, the IRM allowed for the possibility of the imposition of a willful penalty where the failure to learn about FBAR is combined with other factors, such as attempts to conceal the existence of the account and the amounts involved.
Then, the Court explained its reasoning for believing that Ms. Norman’s behavior was reckless: she opened the foreign account, actively managed it, withdrew money from it and failed to declare it on her signed 2007 tax return. The fact that Ms. Norman made contradictory and false statements to the IRS during the audit further damaged her credibility with respect to her non-willfulness claims.
The Norman Case: 1987 Treasury Regulation No Longer Valid
Ms. Norman also argued that a 1987 regulation limited the willful FBAR penalty to $100,000. The Court disagreed, because this regulation was rendered invalid by the language found in the 2004 amendment to 31 U.S.C. §5321(a)(5)(C).
The Norman Case: Most Important Lessons for Audited US Taxpayers with Undisclosed Foreign Accounts
The Norman case contains many important lessons for US taxpayers who have undisclosed foreign accounts and who are audited by the IRS. Let’s concentrate on the three most important ones.
First and foremost, do not lie to the IRS; lying to the IRS is almost certain to backfire. In the Norman case, the taxpayer had good facts on her side at the beginning, but her actions during the audit made them almost irrelevant. Ms. Norman’s false statements damaged her credibility not only with the IRS, but also with the courts. It made her appear as a person undeserving of sympathy; someone who deserved to be punished by the IRS.
Second, Ms. Norman fell prey to an incorrect advice from her accountant and did a quiet disclosure. Given how dangerous her situation was as a result of an impending disclosure of her foreign account by UBS, doing a quiet disclosure in 2008 was a mistake. Instead, a full open voluntary disclosure should have been done either through the traditional IRS voluntary disclosure option or a noisy disclosure (unfortunately, the 2009 OVDP was not yet an option in 2008).
Finally, the Norman case highlights the importance of having the appropriate professional counsel. During her quiet disclosure and the subsequent IRS audit Ms. Norman did not hire the right professional to assist her until it was too late – the damage to the case became irreversible. Instead of retaining the right international tax attorney, she chose to rely on an accountant. In the context of an offshore voluntary disclosure and especially an IRS audit involving offshore assets, relying on an accountant is almost always a mistake – only an experienced international tax attorney is right choice.
Contact Sherayzen Law Office for Professional Help With Your US Tax Compliance and an IRS Audit Concerning Foreign Accounts and Foreign Income
If you have undisclosed foreign accounts and you wish to resolve your US tax noncompliance before the IRS finds you, you need to secure competent legal help. If you are already subject to an IRS audit, then you need to retain an international tax attorney as soon as you receive the initial audit letter. As stated above, Ms. Norman paid a very high price for a failure to do so timely; you should avoid making this mistake.
For this reason, contact Sherayzen Law Office for professional help as soon as possible. Our team of tax professionals headed by the highly experienced international tax attorney, Mr. Eugene Sherayzen, have helped hundreds of US taxpayers to resolve their prior US tax noncompliance issues and successfully conclude IRS international tax audits. We Can Help You!
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