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Million Dollar FBAR Fine not Excessive, Court Rules

Letantia Bussell’s tax troubles, which read like the script of a reality show, started in the mid-1990s with the proverbial Swiss bank account. Bussell and her husband, John, were Beverly Hills doctors who tried to avoid paying taxes by opening up offshore bank accounts to receive pension funds. The IRS found out and assessed a deficiency and fraud penalty on the couple, so the couple opened another account in a second bank in 1997. Between that time and now, John Bussell committed suicide when faced with criminal charges, and Letantia Bussell was convicted for concealment of assets in bankruptcy, conspiracy to defraud, and tax evasion. She also was sentenced to three years in prison and was ordered to pay $2.4 million in restitution. However, her tax troubles did not stop there.

The 9th Circuit, in U.S. v. Bussell, recently upheld a $1.2 million civil penalty against Letantia for failing to disclose her overseas account on her 2006 tax return. Bussell’s latest tax woes originated in June 2013, when the IRS assessed the penalty for her willful failure to disclose the offshore account, which she was required to report in 2007. Bussell did not pay the penalty, and the government filed suit. Bussell admitted that she willfully failed to disclose her overseas account, but raised every possible defense seeking a reversal of the District Court’s penalty determination. They all failed. The 9th Circuit upheld the District Court’s ruling that the penalty was appropriately imposed and was not excessive.

FBAR Civil Penalties

Under federal tax law, taxpayers must file reports on their foreign accounts when the taxpayer’s aggregate account value exceeds $10,000 any time during the year. Filing is done on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), due on April 15th.

The IRS can impose one of two civil penalties on taxpayers who fail to file their FBARS. The first penalty is for nonwillfulness, where a taxpayer does not intend to slip up. That penalty is up to $10,000. The higher willfulness penalty may be imposed on a taxpayer that “willfully fails to file” an FBAR. Different courts have viewed the standard differently. Some courts say a willful failure to file involves the voluntary, intentional violation of a known legal duty and some use a lesser standard of reckless disregard for the rules. The penalty for willfulness is the greater of $100,000 or 50% of the balance in the account at the time of the violation. It is possible for civil penalties to exceed the balance in the foreign financial account. Also note that civil penalties can be imposed in addition to criminal penalties. Criminal penalties are only imposed for willful failure to file FBARs and can be up to $500,000 and 10 years in prison

Defenses to FBAR Penalty

Bussell first challenged the penalty as excessive under the 8th Amendment to the Constitution that bars excessive fines. The Supreme Court has held that “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, (1998)). The 9th Circuit explained that the assessment against her “is not grossly disproportional to the harm she caused” because Bussell defrauded the government and reduced public revenues. Other courts have pointed out that Congress specifically chose a 50% penalty.

Bussell also tried to argue that the 6-year statute of limitations had run, that she received multiple punishments for the same offense, that her due process rights had been violated, and that the introduction of her banking evidence violated the U.S. Switzerland treaty. The Court summarily dismissed all of these arguments and let the 50% penalty stand.

Conclusion

Although the Courts have reversed some FBAR penalties as excessive, those cases involved taxpayers who did not willfully fail to disclose their offshore accounts or had reasonable cause for the nonreporting. Ms. Bussell’s problem is that she was not a very sympathetic taxpayer. The Court obviously felt her pattern of nondisclosure over a long period of time did not warrant any leniency.

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