No one likes paying the IRS as it is, let alone being ordered to pay 50% of the assets kept in overseas bank accounts as a penalty for failing to file a Report of Foreign Bank and Financial Account, or FBAR, but that’s exactly what happened to Mindy P. Norman. In October 2013, Ms. Norman was found to have willfully failed to file the appropriate paperwork associated with having an overseas bank account as a U.S. citizen. While being asked to surrender assets is bad enough, Ms. Norman’s case was made all the worse by the sky-high balance in her bank account: she was ordered to pay $803,530.00. She contested the penalty, but the IRS office of appeals refused to back down. After begrudgingly paying up, Ms. Norman proceeded to file a complaint in court that the IRS tried – and failed – to dismiss, eventually leading to the case of Norman v. United States.

The Curious Case of Ms. Norman

Regardless of the fairness of the FBAR penalty or Ms. Norman’s feelings on the subject of regulations surrounding foreign bank account oversight, the fact remains that an FBAR was not filed, and no one is disputing that. Instead, this case revolved around another question: was the failure to file all necessary paperwork a willful effort to defraud the government, or was it a simple act of ignorance?

After Ms. Norman filed her initial complaint in court, the IRS attempted to dismiss the case via summary judgment, but the court determined that a summary judgment was not adequate to decide on the willful nature of the defendant’s FBAR failings. And so, a trial was scheduled for May 10, 2018 in Brooklyn, New York to hear testimony from witnesses on the subject of Ms. Norman’s misadventures in reporting. The sole witness? Ms. Norman.

During the trial, Ms. Norman provided apparent evidence that did not sufficiently make her case. Soon after the trial, the court determined that the IRS was right and Ms. Norman was wrong.

The Requirements in Reporting

You may be reading this synopsis of the case of Norman v. United States and thinking to yourself, “but why did Ms. Norman need to report her bank accounts at all?” For those without a solid legal background or the possession of overseas accounts, this is a fair question. After all, the IRS generally does not solicit the total balance of bank accounts held by taxpayers, choosing instead to ask only about the interest or dividends accrued in those accounts.

That, of course, is at the crux of this issue: while domestic banks are required to file 1099s for the proceeds of a bank account, foreign banks are not, making it very easy to hide said accruals. In 1970, Congress took action, enacting the Bank Secrecy Act as a response to the “serious and widespread use of foreign financial facilities located in secrecy jurisdictions for the purpose of violating American law.” Under this ruling, Americans with foreign accounts must declare any foreign assets held within a particular year by June 30th of the following year in the form of an FBAR, provided account balances are over $10,000. As an order to file isn’t terribly convincing by itself, the FBAR requirement is accompanied by penalties, including a fine of $100,000 or 50% of the account balance, whichever is higher, for those who fail to file willfully.

The nature of these penalties is quite harsh, leading many people to believe that staying silent is the best way to deal with a failure to file. This often results in what is known as a quiet disclosure, in which taxpayers file amended returns and delinquent FBARs without notifying the IRS. To discourage this, the government manages several amnesty programs to minimize the burden of disclosure, including the Offshore Voluntary Disclosure Program, or OVDP. If a taxpayer is eligible for this program, the penalty could drop to 27.5% and all risk of legal penalties will be waived.

Willful or Not Willful: That Is the Question

The trial held in May 2018 was largely intended to determine whether or not Ms. Norman’s actions were willful. In her eyes, the answer was most certainly no.

At the trial, she alleged that she found out about the need to disclose foreign assets in 2009, despite holding foreign accounts since 1999. At this time, she notified her accountant, Stephen Kraft, who she assumed would take the proper procedures to rectify her situation. However, rather than aiming for OVDP, Mr. Kraft instead chose a quiet disclosure. She could not recall whether or not Mr. Kraft informed her of this decision, just as she also claimed to be unable to recall the origin of her foreign accounts – which included traveling to Zurich and meeting with UBS officials – or how much money she had withdrawn, and could not remember her account number, the people she met with in Zurich, her own request to close her account, or Mr. Kraft’s invoice for the quiet disclosure.

Further, Ms. Norman’s behavior prior to the trial raised other questions. For example, she stated on her 2007 tax return that she had no foreign assets and claimed the account in question wasn’t hers during her 2012 audit.

A Frantic Search for Escape

The court, of course, was having none of Ms. Norman’s shady behavior and determined that she willfully violated Section 5314. In true form, Ms. Norman responded with a letter citing United States v. Colliot, a previous decision in 2018 by the U.S. District Court of the Western District of Texas, which found that the original $100,000 cap on FBAR penalties outlined in the initial legislation still applied, despite the passage of The American Jobs Creation Act of 2004 that increased this penalty to the greater of $100,000 or 50% of the account balance. However, as the court pointed out, the language in this Act stated that the maximum penalty “shall be increased,” an imperative turn of phrase that seemingly indicates a definitive conclusion. Thus, the ruling in Colliot was ignored, much to Ms. Norman’s chagrin.

A Potential Resolution

Due to the startling inconsistencies in Ms. Norman’s testimony, the evidence provided by the bank, and Ms. Norman’s convenient memory problems at trial, the court sided with the IRS: the penalty is a correct response in the correct amount.

While this seems like the end of the story – and it very well may be the conclusion – Ms. Norman does have the option to file with the Circuit Court of Appeals to attempt to seek a new ruling. If this happens, it’s possible that things will play out differently, changing the course of how FBAR violations are penalized for both Ms. Norman and failing filers in the future. Whether this comes to pass remains to be seen.

It may also be interesting to note that this case nearly did not happen. As the Court of Federal Claims is rarely the venue for this kind of case, the government initially argued that Ms. Norman’s complaint should be ignored as the Federal District Court was more appropriate, leading to the multi-year waiting game that occurred between the initial complaint filing and the trial. The IRS eventually gave up its jurisdictional defense, but as the results of this case make clear, the point was ostensibly moot. The government still won the war – for now, that is.