In this week’s blog, we do a case review of a district court decision involving FBAR instructions and penalties. The case joins a line of decisions addressing the scope and parameters of the FBAR rules. In this instance, the question arose as to whether a mistranslated version of the FBAR instructions was a good enough excuse for a U.S. expat to avoid willful FBAR penalties.
FBAR Instructions on the FBAR Obligation
According to the current iteration of the FBAR instructions, “A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. See General Definitions, to determine who is a United States person.”
The instructions define a United States person to mean, “United States citizens (including minor children); United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.”
FBAR Instructions on the FBAR Penalties
According to the FBAR instructions, a person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation. If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed.
A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations may also be subject to criminal penalties.
Currently, the FBAR instructions and regulations do not provide guidance for distinguishing willful versus non-willful FBAR filing violations.
In the IRS’s Internal Revenue Manual, the IRS suggests that the term “willful” should carry the same meaning as in the criminal context. It states that, “the test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.” It explains that willfulness is shown by a taxpayer’s knowledge of the FBAR reporting requirements and the person’s deliberate choice not to comply with the requirements.
The Internal Revenue Manual also suggests that so-called “willful blindness” may be enough to meet the “willful” standard. The Manual explains that “willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.” Recent court decisions have accepted the broader definition of being “at least recklessly indifferent to a statutory duty.”
The Kurotaki Decision – The Background
To give some background on the Kurotaki decision, the taxpayer, Mr. Kurotaki, was born in Japan, but later obtained a green card, which he continued to hold in 2011, 2012, and 2013—the years at issue. Despite his permanent resident status, he primarily resided in Japan and barely spoke English.
For many years, a local CPA who spoke English and Japanese prepared Kurotaki's U.S. tax returns. In 2014, the Japanese Tax Authority informed the IRS that Kurotaki received certain income from Japan that was not reported on his U.S. tax returns for the tax years 2008 through 2012. (It’s FATCA come to life!).
An IRS examination of Kurotaki's unpaid taxes then expanded to include the failure to file FBARs. The U.S. assessed civil penalties against Kurotaki in excess of $10 million for his alleged willful failure to timely file FBARs pertaining to several foreign accounts.
A Case of Mistranslation
The case was brought before a district court, during which the IRS filed a motion for summary judgment, arguing that there was no dispute that the FBARs weren’t filed, and no dispute that the taxpayer’s CPA informed him about the FBAR.
To that end, the CPA did provide Kurotaki an annual tax questionnaire form that included an explanation of the FBAR filing requirement (“FBAR notice”) in both Japanese and English. The English portion of the FBAR notice—which contains identical language for the 2011, 2012, and 2013 tax years—states, in part, that:
U.S. taxpayers are required to report their worldwide income; that is, income from both U.S. and foreign sources. In addition, taxpayers who have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account are required to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of all such financial accounts exceeds $10,000 at any time during the calendar year.
But Kurotaki only read the Japanese version of the FBAR notice, which when translated into English contains different language. It states in part:
U.S. resident taxpayers are required to report their worldwide income, that is, income from both U.S. and foreign sources. In addition, taxpayers who have an interest in, are signatories of, or have other authorities over financial accounts in a foreign country, such as bank accounts, securities accounts, or other financial accounts, are required to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of all such financial accounts exceeds $10,000 at any time during the calendar year.
As such, Kurotaki read a version of the FBAR notice that required “U.S. resident taxpayers”—not “U.S. taxpayers”—with financial accounts in a foreign country to file an FBAR if the $10,000 threshold was met.
Based on these facts, the Court ruled against the IRS’s motion for summary judgment, concluding that “Kurotaki did obtain help from his accountant, but unfortunately received incorrect advice through an apparent mistranslation. And, applying a summary judgment standard, Kurotaki could reasonably conclude in good faith that he was not required to file any FBARs.” Therefore, “Based on the unique evidence before the court, there is a genuine issue of material fact as to whether Kurotaki knew of a substantial and unjustified risk that he should file FBAR forms or that he took deliberate actions to avoid confirming a high probability of wrongdoing.”
The case overall is far from over, given that the issue of this particular decision was merely whether or not to grant a summary judgment. But this certainly can be added to the growing list of notable FBAR decisions, which explore the scope and parameters of the FBAR regime.