updated 2:57 PM CEST, Sep 21, 2023

U.S. Supreme Court declines to hear FBAR case

Foreign Bank Account Report-watchers have long wondered when an FBAR case would finally reach the Supreme Court, and in so doing, at last begin settling questions having to do with the scope of FBAR penalties, which can be draconian.

But as Monday's Supreme Court announcement denying Alice Kimble the writ of certiorari that she had petitioned for back in June showed, the wait for the great, long-awaited FBAR showdown is set to run a little longer than some might have hoped it  would...

Not that Kimble's case would have resolved the great Willful vrs Non-Willful debate anyway, as her case merely sought a Supreme Court review of various aspects of how the IRS and lower courts interpret, and apply, a statutory requirement that taxpayers act willfully, when asked whether they own offshore bank accounts. 

Kimble is an American taxpayer who held accounts with UBS in Switzerland and HSBC in Paris in the early 2000s, but who said she had not been aware until 2008 that she was obliged to report them to the IRS on her tax return and on Foreign Bank Account Report forms, according to court documents. 

The Swiss account had been opened by her father, who lost members of his family in the Holocaust while a child, and who, according to the court papers, "feared being persecuted in the United States and needing to flee to another country as his parents had."  

Kimble initially joined the IRS's Offshore Voluntary Disclosure Program (OVDP) in 2009, filed amended tax returns that reported income from these offshore accounts, but, after having negotiated an agreement "resolving the matter of her undisclosed foreign bank account, which required her to pay a penalty of US$377,309" in 2012, she  withdrew from the program the following year, and declined to pay the penalty.  

Although tax experts said at the time that this was not an uncommon mistake for OVDP applicants to make during the early stages of the OVDP program, the IRS saw her case as an example of "willful non-compliance" and assessed her its standard penalty of 50% of the highest balance in her UBS account, which amounted to around US$700,000. 

Kimble paid the penalty and immediately launched what was to be the first of a series of actions that led her as far as the steps of the Supreme Court – but as of this week, no further, the Supreme Court docket posted on Monday in the matter reveals. 

Jack Townsend, a Charlottesville, Virginia-based offshore tax expert whose FederalTaxCrimes.blogspot.com blog is avidly-read by other cross-border tax practitioners, said that, as he noted in a blog posting in March of this year – after a U.S. Court of Appeals upheld an earlier ruling that Kimble had wilfully failed to disclose her offshore holdings – "neither the facts" in the matter "nor the law was helpful" to her.

In its decision in March, the appellate court "almost summarily dispatched Kimble’s main arguments about the CFC’s holding sustaining the penalty,"  he wrote.

Quoting from the court's ruling, he added: "Here, the parties do not dispute that Ms. Kimble failed to disclose a foreign bank account that she was required to disclose. Rather, Ms. Kimble argues that her violation was not 'willful'...

"...[But] contrary to Ms. Kimble's argument that a taxpayer cannot commit a willful violation without 'actual knowledge of the obligation to file an FBAR'," the court held that "a taxpayer signing their [tax] returns cannot escape the requirements of the law by failing to review their tax returns...

"The undisputed facts show that Ms. Kimble knew about the numbered account and took efforts to keep it secret by, among other things, not disclosing the account to her accountant. She did not review her tax returns for 2003-2008, but she represented under penalty of perjury that she had reviewed her tax returns and had no foreign accounts.

"In other words, Ms. Kimble had a secret foreign account, she had constructive knowledge of the requirement to disclose that account, and she falsely represented that she had no such accounts."

This week, Townsend added that he thought her petition for a writ of centiorari raised "only one good issue that the Court might accept (might, not that it likely would).

"That issue is the proper standard for the civil willful FBAR penalty.

That issue is implicit in some of the six issues [raised, but Kimble's petition] does not make it explicit."

Townsend added that he didn't rule out the possibility that the Supreme Court could potentially be persuaded to take up Kimble's case in the future, however. 

"But there is a clear trend for the lower courts to accept a broader definition of 'willfulness' for the civil penalty than for the criminal penalty, so that issue may not get the attention of the Supreme Court.

"The best hope for a writ of certiorari to be accepted would be if different lower courts were to reach different results in a similar matter.

"But so far as I am aware, all circuits that have addressed the issue decide it consistently in the same way as in this case, for a broader interpretation of civil willfulness than for criminal willfulness."

FBAR stampede to the bar

Alice Kimble v. United States is one of a virtual stampede of FBAR cases that have found their way into U.S. district courtrooms in recent years, a trend that has also seen regular coverage of such cases in tax journals, with the amounts of money the taxpayers in question are found to owe Uncle Sam typically mentioned in the headline.

In May of 2020, for example, a U.S. district court in Florida determined that a taxpayer there owed almost US$13m in penalties.

(This was said to be one of the largest individual assessments ever, although that title is still said to belong to a University of Rochester, New York professor named Dan Horsky, who was hit with a US$100m assessment in 2016, before being sentenced in February 2017 to seven months in federal prison for a tax evasion scheme that was alleged to have involved Swiss bank accounts.)

The seemingly large number of FBAR cases coming to court is in spite of the fact that only around 1.4 million individuals filed FBARS in 2020, according to FinCEN (Financial Crimes Enforcement Network), the Treasury bureau that oversees them.

One reason for the recent stampede of FBAR cases, as the Kimble case suggests, is partly due to the fact that the U.S. authorities didn't begin to crack down on the use of non-U.S. banks by some wealthy Americans to avoid their U.S. tax obligations until the early- to mid-2000s. And as the Kimble case shows, such cases can, and often do, take years to reach the courts. 

The alleged non-disclosure of bank accounts was said to have taken place over several years prior to 2008; Kimble first filed suit in the Court of Federal Claims in 2017. The case reached the Court of Appeals in 2019, and was not decided until March of this year.  As noted above, the petition for certiorari was filed in June, and denied this past week.