Summary
The United States Court of Appeals for the Second Circuit affirmed summary judgment imposing civil penalties on Juan and Catherine Reyes for willfully failing to file FBARs concerning a jointly held foreign bank account. The court held that “willful” under 31 U.S.C. § 5321(a)(5)(C) encompasses reckless conduct and that the undisputed evidence established recklessness. The court also held that a six percent late-payment penalty under 31 U.S.C. § 3717(e)(2) and applicable Treasury regulations was mandatory.
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Practice areas
Questions Presented
- Whether the term "willfully" in 31 U.S.C. § 5321(a)(5)(C) encompasses reckless conduct for purposes of enhanced civil FBAR penalties.
- Whether the undisputed evidence established that the Reyeses acted recklessly, permitting summary judgment for the United States.
- Whether the district court had discretion to impose less than the six-percent late-payment penalty established by Treasury regulations under 31 U.S.C. § 3717(e)(2).
Holdings
- In the civil FBAR-penalty context, "willfully" encompasses both intentional and reckless conduct; a person who recklessly fails to report a foreign account may be subject to enhanced penalties.
- The undisputed evidence established that the Reyeses acted recklessly in failing to file FBARs for 2010, 2011, and 2012, and no genuine dispute of material fact precluded summary judgment.
- The district court correctly imposed the six-percent late-payment penalty because Treasury regulations set the applicable rate at six percent per year within the authority granted by 31 U.S.C. § 3717(e)(2).
Key quotations
“But the Court now holds, in line with the uniform decisions of the circuit courts that have addressed the issue, that “willfully” as used in 31 U.S.C. § 5321(a)(5)(C) encompasses both intentional and reckless conduct.” (14)
“The standard for recklessness in the civil context is an objective one, which imposes civil liability for conduct entailing “an unjustifiably high risk of harm that is either known or so obvious that it should be known.”” (17)
“The Reyeses, unhappy with that result, do not get an opportunity to challenge the Treasury Department’s assessment of the appropriate penalty by the mere contrivance of not paying and waiting for a lawsuit.” (27)
Factual background
Juan and Catherine Reyes jointly held a Swiss foreign bank account that contained more than two million dollars during the relevant years and represented approximately 75% to 90% of their total assets. They used linked foreign credit cards, instructed the bank not to send account correspondence to their United States address, selected an option restricting disclosure concerning U.S. withholding tax, and did not disclose the account to their accountant or on their tax returns. The IRS assessed enhanced civil penalties for willful FBAR violations, and the Reyeses did not pay the assessed amounts.
Procedural history
The IRS assessed civil penalties against Juan and Catherine Reyes for willfully failing to file FBARs for 2010, 2011, and 2012. After the Reyeses failed to pay, the United States sued in the Eastern District of New York to obtain a money judgment. The district court granted summary judgment to the United States, entered judgment for the penalties plus interest, and later rejected the Reyeses' challenge to a six-percent late-payment penalty. The Second Circuit affirmed.