Alice Kimble v. US, (CA-FC), 2021-1 USTC 50,110

Because the penalty for willfully failing to file FBAR is a maximum penalty of the greater of $100,000 (inflation adjusted to $136,399 for 2021) or 50% of the balance in the account or the amount of the transaction, the determination of willful versus non-willful is meaningful.

What’s willfulness? The US Supreme Court in Safeco Ins. Co. of Am. v. Burr, 551 US 47, 57 (2007), defined “recklessness” as “violating an objective standard: action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known.” On Nov. 6, 2015, the IRS issued IRM §4.26.16.6.5.1 and IRM §4.26.16.6.5.2. The IRM defines “willfulness” as “knowledge of the reporting requirements and [a] conscious choice not to comply.” A May 23, 2018, memorandum the IRS Office of Chief Counsel distributed to IRS program managers stated that “[t]he standard for willfulness under §5321(a)(5)(C) is the civil willfulness standard and includes not only knowing violations of the FBAR requirements, but willful blindness to the FBAR requirements as well as reckless violations of the FBAR requirements.”

Applied to OVDP. Alice Kimball had Swiss bank accounts since the 1980s. She did not report the investment income from the accounts or file required FBAR returns. With the advice of counsel, she applied and was accepted into the IRS OVDP program. She filed amended returns to report investment income from her foreign accounts and she filed the missing FBARs. The Oct. 5, 2012, OVDP Closing Agreement required Ms. Kimble to pay a miscellaneous penalty of $377,309. She refused and withdrew from the program. Ms. Kimble testified that she decided to “take her chances” with the IRS. “The penalty was so high that I was advised to appeal the penalty.” Thereafter, the IRS sent Ms. Kimble a letter informing her that any opt out from the OVDP would be irrevocable and might cause her to incur a higher penalty — i.e., the willful penalty versus the reduced OVDP penalty.

“Willful” penalty applied at appeal. Because Ms. Kimble (1) did not disclose the existence of the UBS account to her accountant until 2010, (2) never asked her accountant how to properly report foreign investment income, (3) did not review her individual income tax returns for accuracy for tax years 2003 through 2008, and (4) answered “No” to Question 7(a) on her 2007 income tax return, falsely representing under penalty of perjury, that she had no foreign bank accounts, the court determined that there was no genuine issue of material fact that Ms. Kimble violated §5314 and that her conduct was “willful.” She was assessed a “willful” penalty of $697,229.