Court Upholds $800,000 FBAR Penalty Imposed on School Teacher

The US Court of Appeals for the Federal Circuit has upheld a decision by the US Court of Federal Claims affirming an IRS penalty imposed on willful non-filer of a required return.  The Internal Revenue Code §5314 mandates than US persons with foreign financial accounts disclose such relationships by filing an annual Report of Foreign Bank and Financial Accounts (“FBAR”) return.  In cases where a taxpayer willfully failed to file an FBAR return, the law allows the IRS to impose a penalty of up to $100,000 or half of the amount that is in the offending account at the time of the failure to report, whichever is greater.

The name of the taxpayer in this case was Mindy Norman, a school teacher.  Ms. Norman opened a bank account with the Swiss bank UBS in 1999.  She was actively involved with the management of the account and took multiple steps to hide the existence of the account from the IRS.  From 2001 to 2008 her account balance ranged from $1.5 to $2.5 million.  In April 2008, UBS informed Ms. Norman that the bank had changed its policy and would now cooperate with the US Government to identify the names of US clients who “had engaged in tax fraud.”  Ms. Norman proceeded to close her UBS account and attempted a “quiet disclosure” by filing amended tax returns and the late FBARs.  As a result, the IRS opened an audit and assessed her a penalty of $803,530 for willfully failing to file an FBAR return in 2007.  Ms. Norman paid the penalty and filed a complaint in the Court of Federal Claims.  That court sustained the penalty, and Ms. Norman appealed to the Federal Circuit.

Among the factual and legal arguments presented by Ms. Norman on appeal and rejected by the Federal Circuit, she argued that the penalty violates the 8th Amendment of the Constitution as an “excessive fine.”  The court did not address this issue directly, only saying that this particular argument was not properly reserved for appeal.  This may be a case to watch in the future if the Supreme Court wishes to weigh in on how the 8th Amendment might apply to large delinquency penalties such as the ones in this case.

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