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The Norman Case: Willful FBAR Penalty Upheld | FBAR Lawyers Miami

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!

Contact Us Today to Schedule Your Confidential Consultation!

Colombian Bank Accounts | International Tax Lawyer & Attorney Miami

Even today many US owners of Colombian bank accounts remain completely unaware of the numerous US tax requirements that may apply to them. The purpose of this essay is to educate these owners about the requirement to report income generated by these accounts in the United States as well as the FBAR and FATCA obligations concerning the disclosure of ownership of Colombian bank accounts to the IRS.

Colombian Bank Accounts: Individuals Who Must Report Them

Before we discuss the aforementioned requirements in more detail, we need to determine who is required to comply with them. In other words, is every Colombian required to file FBAR in the United States? Or, does this obligation apply only to certain individuals?

The answer is very clear: only Colombians who fall within one of the categories of US tax residents must comply with these requirements. US tax residents include US citizens, US Permanent Residents, an individual who satisfies the Substantial Presence test and an individual who properly declares himself a US tax resident. There are important exceptions to this general rule, but, if you fall within any of these categories, you need to contact an international tax attorney as soon as possible to determine your US tax obligations concerning your ownership of Colombian bank accounts.

Colombian Bank Accounts: Income Reporting

All US tax residents are subject to the worldwide income reporting requirement. In other words, they must disclose on their US tax returns not only their US-source income, but also their foreign income. The latter includes all bank interest income, dividends, royalties, capital gains and any other income generated by Colombian bank accounts.

The worldwide income reporting requirement also requires the disclosure of PFIC distributions, PFIC sales, Subpart F income and GILTI income. These are complex requirements which are outside the scope of this article, but US owners of Colombian bank accounts need to be aware of the existence of these requirements.

Colombian Bank Accounts: FinCEN Form 114 (FBAR)

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts (commonly known as “FBAR”) mandates US tax residents to disclose their ownership interest in or signatory authority or any other authority over Colombian bank and financial accounts if the aggregate highest balance of these accounts exceeds $10,000. Every part of this sentence has a special significance and contains a trap for the unwary.

The most dangerous of these traps is the definition of an “account”. The FBAR definition of account is much broader than how this word is generally understood by taxpayers. For the purposes of FBAR compliance, this term includes checking accounts, savings accounts, fixed-deposit accounts, investments accounts, mutual funds, options/commodity futures accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In fact, it is very likely that the IRS will find that an account exists whenever there is a custodial relationship between a foreign financial institution and a US person’s foreign asset.

FBAR has its own intricate penalty system which is widely known for its severity. The FBAR penalties range from incarceration to willful and even non-willful penalties which may easily exceed the value of the penalized accounts. In order to circumvent the potential 8th Amendment challenges and make the penalty imposition more flexible, the IRS has implemented a system of self-imposed limitations, but it is a completely voluntary system (i.e. the IRS can, and in fact already did several times, disregard these limitations).

Colombian Bank Accounts: FATCA Form 8938

While Form 8938 is a relative newcomer (since tax year 2011), it has occupied a special place among the US international tax requirements. In fact, one could argue that it is currently as important as FBAR for US taxpayers with Colombian bank accounts.

The Foreign Account Tax Compliance Act (“FATCA”) gave birth to Form 8938, making it part of a taxpayer’s federal tax return. This means that a failure to file Form 8938 may render the entire federal tax return incomplete, and the IRS may be able to audit the return. Immediately, we can see the profound impact Form 8938 has on the Statute of Limitations for the entire tax return.

Given the fact that it is a direct descendant of FATCA, it is not surprising Form 8938’s primary focus is on foreign financial assets. Form 8938 requires a US taxpayer to disclose all Specified Foreign Financial Assets (“SFFA”) as long as he satisfies the relevant filing threshold. The filing thresholds differ depending on the filing status and the place of residence (i.e. inside or outside of the United States) of the taxpayer.

SFFA includes an enormous variety of foreign financial assets, including foreign bank and financial accounts. In fact, with respect to bank and financial accounts, Form 8938 is very similar to FBAR, which often results in double-reporting of the same assets. It is important to emphasize that Form 8938 does not replace FBAR, both forms must still be filed. In other words, US taxpayers should report their Colombian bank accounts on FBAR and disclose them again on Form 8938.

Form 8938 has its own penalty system which contains some unique elements. In addition to its own $10,000 failure-to-file penalty, Form 8938 directly affects the accuracy-related income tax penalties and the ability of a taxpayer to use foreign tax credit.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Colombian Bank Accounts

US international tax compliance is extremely complex. It is very easy to get yourself into trouble, and much more difficult and expensive to get yourself out of this trouble. This is why, if you have Colombian bank accounts, you should contact the experienced international tax attorney and owner of Sherayzen Law Office, Mr. Eugene Sherayzen. Mr. Sherayzen has helped hundreds of US taxpayers with their US international tax issues, and He can help You!

Contact Mr. Sherayzen Today to Schedule Your Confidential Consultation!