The Court of Appeals for the Ninth Circuit, affirming a district court, has found that a taxpayer wilfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) with regard to her foreign account. The Court rejected a variety of the taxpayer’s arguments, ranging from the contention that the imposition of the penalty violated the U.S. Constitution’s excessive fines, due process, and ex post facto clauses, to assertions that it was barred by statute of limitations or treaty provisions.
Background on FBAR. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing an FBAR with the Department of the Treasury.
The civil and criminal penalties for noncompliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation, and civil penalties for a willful violation can range up to the greater of $100,000 or 50% of the amount in the account at the time of the violation (these amounts are adjusted for inflation—for penalties assessed after Jan. 15, 2017, the amounts are $12,663 and $126,626, respectively). A “reasonable cause” exception exists for non-willful violations, but not for willful ones.
Facts. In 2002, Letantia Bussell was found guilty of
- Violation of 18 U.S.C. §371 (dealing with conspiracy to commit an offense or to defraud the U.S.);
- False statements, false oaths and concealed assets in bankruptcy, and aiding and abetting and causing an act to be done, in violation of 18 U.S.C. §152(1); and
- Attempt to evade or defeat tax, and aiding and abetting and causing an act to be done, in violation of Code Sec. 7201.
The court imposed a $2,393,527 criminal judgment for restitution owing to multiple businesses. The criminal judgment was amended in 2005 and 2009, and ultimately Bussell was ordered to pay a special assessment of $300, a fine of $50,000.00, costs of prosecution of $55,626, and restitution to non-federal victims totaling $1,200,871.
In June 2013, IRS assessed a penalty of approximately $1.2 million penalty against Letantia Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. Bussell did not pay the penalty, and IRS filed suit.
In that suit, the district court found that she had wilfully failed to file a FBAR, granting partial summary judgment to IRS, but reducing the fine.Arguments & appellate court’s conclusion. The Ninth Circuit affirmed the district court, rejecting all the arguments offered by the taxpayer.
While she admitted that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return, she raised several arguments on appeal, as follows (with the Ninth Circuits conclusion with regard to them):
- The Ninth Circuit rejected Bussell’s contention that IRS’s penalty against her violates the Excessive Fines Clause of the Constitution. Generally, “a punitive forfeiture violates the Excessive Fines Clause if it is grossly disproportional to the gravity of a defendant’s offense”. (U.S. v. Bajakajian, (S Ct 1998) 524 U.S. 321) The Court found that the assessment against Bussell was not grossly disproportionate to the harm she caused because she defrauded the government and reduced public revenues. (U.S. v. Mackby, (CA 9 2003) 339 F.3d 1013)
- The Court determined that IRS did not violate the statute of limitations. The applicable statute of limitations was six years. (31 U.S.C. § 5321(b)(1)) Because Bussell failed to disclose her financial interests in 2007, the statute of limitations began to run at that time. IRS assessed a penalty against her within the statutory period in June 2013, and IRS’s claim against Bussell was connected to that assessment.
- The Court rejected Bussell’s assertion that the assessment against her violated her due process rights because IRS could have brought the claim against her earlier. The Court found that because IRS’s claim was connected to her failure to report assets in 2007, IRS could not have brought its claim before 2007, and, in any event, IRS brought its claim within the statute of limitations.
- The Ninth Circuit also rejected Bussell’s claim that the assessment against her violates the Ex Post Facto Clause of the U.S. Constitution (Art. I, §9, cl. 3), which prohibits the imposition of a new criminal punishment for conduct that has already taken place. Because the Ex Post Facto clause doesn’t apply to civil statutes unless they have a punitive purpose or effect, the Court determined that it wasn’t applicable here.
- The Court rejected Bussell’s contention that she received “multiple punishments” for the same underlying offense. Even if the funds at issue here were traceable to the funds at issue in her criminal prosecution, the offense here—failing to report her foreign bank account on her 2006 tax return—was unrelated to her criminal conviction.
- The Court also determined that Bussell failed to show that:
- IRS abused its discretion in calculating the penalty amount, and
- That the district court committed legal error by not engaging in analysis of the reasonableness of the penalty.
The district court reviewed Bussell’s penalty when it reduced it, and the assessment was consistent with the limits set by Congress (see Mackby, which explains the penalties available under the False Claims Act)
- Although offering no authority for applying laches (an equity defense based on an unreasonable delay in asserting the claim) against the government in this context, Bussell argued that the government’s claim was barred by laches. “Generally, the U.S. isn’t bound by laches in enforcing its rights.” (Chevron, U.S.A., Inc. v. U.S., (CA 9 1983) 52 AFTR 2d 83-6403) The Ninth Circuit found that Bussell’s laches defense was inapplicable here.
- Bussell argued that introduction of banking evidence at the district court violated an international treaty between the U.S. and Switzerland. The Court concluded that Bussell was not entitled to relief under this theory because she had not shown that the treaty she relied on creates an enforceable right. (U.S. v. Mann)