Wednesday, February 16, 2022

11th Cir Remands Willful FBAR Penalty Case Back To IRS To Correctly Calculate Based On Balances on June 30th

On November 9, 2022 we originally posted West Palm Beach Man Must Repatriate $18.2M To Satisfy FBAR Penalty Assessment, where we discuss that a
 federal magistrate judge correctly decided that Isac Schwarzbaum must repatriate funds in his overseas accounts to satisfy the judgment for his failure to timely file his reports of foreign bank and financial accounts with the IRS, U.S. District Judge Beth Bloom said in an order Monday. Now on appeal, the Eleventh Circuit has conclude that the district court should have remanded the matter back to the IRS to determine the appropriate penalty amount.

Taxpayers who fail to disclose overseas accounts with more than $10,000 face penalties under the Bank Secrecy Act. For willful violations the IRS can impose a penalty of up to the greater of $100,000 or 50% of the balance in each undisclosed account at the time of the violation.

The case of United States v Schwarzbaum, involves a wealthy German-born naturalized U.S. citizen who starting in the early 2000’s had multiple bank accounts in Costa Rica and Switzerland. Schwarzbaum self-filed an FBAR in 2007 and listed only one account. He did not file any FBAR in 2008, and in 2009 he filed an FBAR that only listed three accounts. IRS assessed over $12 million in penalties, and brought suit to collect.

On appeal, Schwarzbaum argued, among other things, that the IRS’s actions in calculating the penalties were “not in accordance with the law” under 5 U.S.C. § 706(2)(A). In typical tax penalty cases, courts can take a fresh look at both the propriety of imposing the penalty and the amount of the penalty, assuming that they conclude that the penalty is warranted in the first instance. Title 31 FBAR penalties differ. The APA shines a light on agency conduct, and reviewing courts are generally empowered to examine whether the agency acted rationally and provided a reasoned contemporaneous explanation based on the record at the time of the original agency action.

Here the IRS assessed over $12 million in willful FBAR penalties on Schwarzbaum based upon the Internal Revenue Manual “formula that determines the maximum willful penalty that it will assess at 50% of the highest amount in the accounts in all willful years. The IRM then allocates that penalty in equal portions over the willful years.”

The problem with that IRM is that the statute itself sets the maximum penalty to each account’s balance as of the date that the taxpayer failed to file the FBAR, (formally June 30 and now April 15) a date that IRM formula neglects and one that the IRS did not use in calculating Schwarzbaum’s penalty.

The Eleventh Circuit held that the IRS errored in its calculations of Schwarzbaum’s FBAR penalties as it started with the wrong numbers. The statutory maximum penalty for a willful FBAR violation is the greater of $100,000 or 50% of the account’s June 30 balance. See 31 U.S.C. § 5321(a)(5)(C)(i), (D)(ii); 31 C.F.R. § 1010.306(c).

The IRS’s Errored In It Calculations Of Schwarzbaum’s FBAR Penalty By Using 50% Of The Highest Amount In The Accounts During The Year. 

This led the Eleventh Circuit to conclude that the district court should have remanded the matter back to the IRS to determine the appropriate penalty amount. In vacating the district court’s judgment, the Eleventh Circuit instructed the district court to remand the matter back to the IRS to recalculate the penalties.

This is consistent with our post on May 20, 2020, IRS Loses 2 FBAR Penalty Calculation Cases, where we discussed that n Margaret J. Jones v. U.S and in U.S. v. Isac Schwarzbaum the courts both held that the penalty assessed by the government did not conform to statutory requirements because they did not use utilizing 50% of the balance in each account at the time of the violation, which was the deadline to file the FBAR or June 30 of each year.

Have an FBAR Penalty Problem?  
 Contact the Tax Lawyers at 
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