A Reminder for Those with Offshore Bank Accounts

If you are maintaining an offshore bank account, let the following case be a cautionary warning to make sure you are always complying with the rules. Learn more about the case and the outcome below.

Kimble v. US, 991 F.3d 1238 (2021 Fed. Cir.). No Actual Knowledge Required for Willfulness.

The Petitioner was a U.S. citizen whose parents opened an investment account with a foreign bank (UBS). The Petitioner was named by her parents as a joint owner of the account. She stated that the purpose of opening the account was to provide a safety net should the Petitioner’s parents face persecution as residents of the United States.

During the Petitioner’s lifetime and following her marriage, her father apprised the Petitioner’s husband, an investment analyst, of the existence of the foreign bank account and his desire for the account to remain secret. The Petitioner’s husband agreed not to disclose the existence of the account.

Following the death of the Petitioner’s parents, the Petitioner signed a number of documents, including documents that directed UBS to maintain the account as a numbered account and retain all correspondence about the account at the bank. During this time, the Petitioner’s husband was preparing the couple’s joint tax returns. The tax returns prepared by the Petitioner’s husband did not reflect any income derived from the UBS account or disclose the existence of the UBS account.

Following the Petitioner’s divorce, she retained a CPA to prepare her income tax returns. She never disclosed to her CPA that she owned a foreign bank account, and the CPA did not inquire. From 2003 until 2008, her tax returns therefore did not reflect ownership of the UBS account.

In 2008, the Petitioner learned of widespread fraud related to UBS numbered accounts and later retained counsel in order to assist her with complying with foreign reporting requirements. Following the Petitioner’s entrance into the Offshore Voluntary Disclosure Program (OVDP) in 2012, the Petitioner and the IRS negotiated an agreement which required the Petitioner to pay a penalty of $377,309. Petitioner declined to pay the agreed penalty and withdrew from OVDP. Following the Petitioner’s withdrawal, the IRS concluded its own inquiry and assessed the Petitioner a penalty of $697,299.

The Petitioner argued that even if she did fail to disclose the existence of a foreign bank account, the violation was not willful. Further, she argued that if the violation was willful, then the penalty was unduly high, so as to suggest an abuse of discretion by the IRS.

In its discussion, the Court observed that willfulness in the context of § 5321(a)(5)(C) extends to recklessness. The Court reasoned that the Petitioner may not escape the legal filing requirements by failing to review their tax returns. Further, in finding that the Petitioner was reckless, the Court took note of the fact that the Petitioner had made efforts to maintain the secrecy of the account by failing to disclose its existence to her accountant.

On the claim that the 50% penalty assessed by the IRS was an abuse of discretion, the Court found that the penalty assessed was suggested by the agency’s guidelines, and fell within its statutory authorization; therefore, the amount of the penalty did not rise to the level of an abuse of discretion by the IRS.

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