New Jersey Court Limits Annual Non-Willful FBAR Penalty (New)

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New Jersey FBAR Penalty

New Jersey FBAR Penalty

New Jersey FBAR Penalty

New Jersey Court Limits FBAR Penalty to One Violation Per Year: In USA vs. Giraldi, the US District Court for New Jersey followed a recent trend by other District Courts across the nation — and limited FBAR penalties to a single Non-Willful FBAR Penalty Per Form violation — instead of issuing penalties on a “per violation standard.” In other words, even if a Taxpayer had 15 unreported foreign bank and financial accounts in a single year, the non-willful annual FBAR Penalty Violation would be limited to a single penalty of $10,000 based on the form itself — and not the number of accounts listed on the form.

This is a welcome decision for US person foreign account holders with late or unfiled FBARs.

USA v Giraldi (Civil Action No. 20-2830)

Let’s see what the court had to say:

Government Seeks $160,000 for (16) $10,000 Penalties

The Government sought $40,000 per year in non-willful penalties representing 4 missed accounts per year for four (4) years.

      • Defendant is a U.S. citizen who resides in New Jersey and owned four (4) foreign financial accounts during the tax years currently at issue—2006, 2007, 2008, and 2009 (“Relevant Tax Years”). 
      • The Government maintains that Defendant should have disclosed his four (4) accounts on an FBAR form for each of the Relevant Tax Years.  In September 2014, Defendant entered the Internal Revenue Service’s (“IRS”) voluntary disclosure program and self-reported that he did not file FBAR forms for any of the Relevant Tax Years. 
      • On November 2, 2017, the Government proposed a penalty assessment of $160,000 against Defendant for his alleged non-willful failure to file FBAR forms.
      • The Government’s proposed assessment is comprised of sixteen (16) separate $10,000 penalties, including one penalty for each of Defendant’s four (4) accounts that were not disclosed on four (4) FBAR forms.

The Court has a Few Different Penalty Options

The Court has multiple penalty options available:

      • This Court must ascertain whether Congress intended to penalize non-willful violations of Section 5314 on a per FBAR form or per account basis, particularly when an FBAR form is required but never filed. More specifically, the parties ask this Court to determine
      • Defendant’s maximum penalty under Section 5321(a)(5)(B)(i): either (a) $160,000, consisting of $10,000 for each of his four (4) foreign financial accounts ($40,000) multiplied by four (4) (the number of FBAR forms Defendant failed to file); or (b) $40,000, comprised of $10,000 for each of the four (4) FBAR forms Defendant did not file. 
      • Indeed, the BSA’s non-willful provision simply states that penalties “shall not exceed $10,000” and does not expressly answer the question presented. See 31 U.S.C. § 5321(a)(5)(B)(i).
      • Moreover, this is an issue of first impression in this District, and no federal appellate court has addressed the intended scope of the BSA’s non-willful penalty provision. Although Congress created the non-willful provision nearly sixteen years ago pursuant to the Act’s 2004 amendment, only three district courts have addressed this narrow issue, including two within the last nine months.

The Court Limits Non-Willful FBAR Penalties

This court agrees with prior rulings in limiting penalties to a single non-willful penalty per YEAR, not Per Violation.

As provided by the Court:

      • Furthermore, as articulated in Bittner and Kaufman, it would be incongruous to attach penalties for non-willful violations on a per account basis for a plethora of additional reasons. First, the FBAR reporting requirement does not depend on the number of foreign financial accounts an individual maintains, but rather an aggregate account balance over $10,000. Bittner, 469 F. Supp. 3d at 720; see 31 C.F.R. § 1010.306(c).
      • For example, an FBAR form need not be filed if an individual has fifty (50) foreign financial accounts with an aggregate balance that never exceeds $10,000 in a calendar year. See 31 C.F.R. § 1010.306(c). By contrast, if another individual has twenty-five (25) accounts with an aggregate balance of $10,001, an FBAR form must be filed.
      • Absent explicit direction from Congress, it is illogical to interpret Section 10 Akin to Bittner, the Government also fails to consider that the reasonable cause exception may be invoked irrespective of an individual’s reporting of the proper “balance in the account.” See 31 U.S.C. § 5321(a)(5)(B)(ii)(II). Instead, the exception may apply when “the amount of the transaction” is properly reported. See id. Accordingly, under the Government’s logic, the non-willful penalty provision need not necessarily apply on a per account basis, but rather per transaction. Bittner, 469 F. Supp. 3d at 720 n.4. 11 To illustrate the potential disparity under the Government’s approach, particularly with respect to the reasonable cause exception, suppose this same individual could invoke the exception for five (5) out of twenty-five (25) accounts reported on the FBAR form.
      • If the non-willful provision permits a penalty for each of the remaining fifteen (15) accounts, then the Government could impose a penalty up to $150,000 (15 accounts x $10,000 penalty). The maximum penalty is $139,999 more than the aggregate balance in all twenty-five (25) accounts. 14 5321(a)(5)(B)(i) to provide penalties on a per account basis when the FBAR reporting requirement is completely independent of how many accounts an individual maintains. Bittner, 469 F. Supp. 3d at 720.
      • The inherent imbalance that would result should this Court adopt the Government’s position is highlighted further by the following hypothetical. Suppose two individuals each maintain $5 million across multiple foreign financial accounts in a single calendar year. One individual has five (5) accounts that each hold $1 million. 
      • The other individual has fifty (50) accounts that each hold $100,000. Under the Government’s approach, if both individuals nonwillfully fail to file FBAR forms for the same tax year, the maximum penalty for the first individual would be $50,000 (5 accounts x $10,000 penalty), and $500,000 for the second individual (50 accounts x $10,000 penalty). See Bittner, 469 F. Supp. 3d at 721 (providing a similar example). 
      • The Government presents nothing to suggest that Congress intended to create such vast penalty discrepancies when individuals maintain the same or similar balances across a different number of accounts. (See generally D.E. 24.)

Courts Are Establishing a Non-Willful Ruling Trend

In conclusion, in another win for Taxpayers, The New Jersey District Court follows a recent trend that limits penalties for Non-Willful FBAR Violations to a per form and not a per account standard.

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