If you live in Florida, Georgia or Alabama and you have a foreign account you never reported, this is your circuit's rule. United States v. Rum came out of the Middle District of Florida, and it settled the willfulness standard for the Eleventh Circuit. It also took on a question the earlier cases did not: how hard a court will look at the IRS's choice of penalty amount.
The Facts
Said Rum became a naturalized U.S. citizen in 1982. He owned and ran several businesses, including a delicatessen, a pet supply store and a convenience store. In 1998 he opened a UBS account in Switzerland with $1.1 million from his personal checking account. He opened it, he admitted, to conceal money from potential judgment creditors. He chose a numbered account and paid UBS a fee to hold his mail rather than send it to the United States.
He was active with the account. He communicated investment strategies to UBS and visited Switzerland several times to meet with bank officers. From 2002 to 2008, UBS statements carried a notice that the information might help him prepare his U.S. federal income tax return. In 2002, UBS told him that earnings from U.S. securities had to be reported to the IRS. He declined to complete a Form W-9 and told UBS not to invest in U.S. securities. In 2004, in Switzerland, he signed a form declaring that he was "liable to tax in the USA as a US person."
His 2007 return, marked "Self-Prepared," answered no to the Schedule B question about foreign accounts, as had his returns for several earlier years. He signed it under penalty of perjury. He later said a preparer helped him but admitted he never told the preparer about the account. He did, however, disclose the account on a mortgage application to show financial strength. He did not disclose it on his children's federal student aid application.
In 2008 he was audited for 2006. He told the agent he had closed the UBS account. He did not mention that he had moved nearly $1.4 million to another Swiss bank. He filed his first FBAR in October 2009, nine days after UBS told him his account appeared to fall within the scope of an IRS treaty request.
A later examination led the IRS to propose a willful FBAR penalty for 2007 of 50 percent of the account balance. The agent had first proposed a nonwillful penalty, then reconsidered after concluding her reasoning rested on an irrelevant factor. The IRS found him ineligible for its mitigation guidelines because it had proposed a civil fraud penalty. Appeals sustained the FBAR penalty. In a separate Tax Court case on his income taxes, the parties settled with accuracy-related penalties instead of the civil fraud penalty. The government then sued to collect the FBAR penalty, and the district court granted summary judgment for the government.
The Issues
Rum argued that willfulness requires knowledge of the legal duty, that the facts presented a genuine dispute, that the 1987 regulation capped the penalty at $100,000, and that the IRS process was so flawed that the court should review the penalty amount from scratch or set it aside as arbitrary and capricious.
The Holding
The per curiam opinion rejected every argument. "Following our precedent interpreting the analogous language in § 6672, we hold that willfulness in § 5321 includes reckless disregard of a known or obvious risk. In so doing, we join with every other circuit court that has interpreted this provision." On the cap, the court held that "the maximum penalty for a willful violation is established by § 5321(a)(5)(C) and (D)," not by the 1987 regulation at 31 C.F.R. § 1010.820(g)(2). And the court held the IRS's actions were not arbitrary and capricious. Affirmed.
The Reasoning
Borrowing from the trust fund penalty
This is the distinctly Eleventh Circuit part. The court relied on its own decision in United States v. Malloy, which held that willfulness for the trust fund recovery penalty under IRC § 6672 is satisfied by "a reckless disregard of a known or obvious risk." It saw no reason to read the same word differently in the FBAR statute, and it cited Safeco, Norman and Horowitz for the same result. It adopted Safeco's objective definition: "action entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known."
No genuine dispute
Rum argued that signing a return is not enough to charge him with knowledge of its contents. The court said it did not need to rely on the signature alone; the signature was "but one among many facts." The account was opened to hide money. It was numbered, with held mail. He refused the W-9. He signed a declaration that he was a U.S. taxpayer. He disclosed the account when it helped him, on a mortgage application, and not when it did not. He misled the auditor in 2008. And he filed no FBAR for 2009 even after filing one for 2008. "In sum, the evidence was overwhelming that Rum sought to hide his overseas accounts from the United States government."
The regulation
The court quoted Horowitz: the statute's language "is hardly consistent with an intent by Congress to allow the Secretary to impose a lower maximum penalty by regulation." It joined its sister circuits.
Reviewing the IRS's penalty decision
Rum's process arguments all relied on the Internal Revenue Manual, which the court noted "does not have the force of law." It rejected each argument. The examiner did not have unfettered discretion, because the IRM required manager approval and area counsel review. The mitigation guidelines were publicly available, and Rum argued mitigation in Appeals anyway. The explanation form the IRS gave him "amply explains both the factual and legal basis for imposing the penalty." And the agent's offer of a reduced 20 percent penalty as part of a global settlement was "an authorized settlement offer, not a threat of unwarranted penalties as a bargaining point." The court applied arbitrary and capricious review and found nothing arbitrary.
A note on the Tax Court
In a footnote, the court cited the Tax Court's own holding that challenges to FBAR penalties do not fall within its jurisdiction. FBAR disputes go to district court or the Court of Federal Claims.
What It Means for Taxpayers Today
For anyone in the Eleventh Circuit, the standard is now settled: reckless disregard of a known or obvious risk is willful. That is the same standard the Eleventh Circuit uses for the trust fund recovery penalty against business owners and officers, so if you have dealt with a § 6672 case, the analysis will feel familiar.
Rum also shows that challenging the size of a willful penalty is hard. The court gave the IRS deferential review and rejected arguments based on IRM procedures. If you think the IRS should have mitigated, make that case fully and early at the examination and Appeals levels, with facts. Once the case reaches court, the record is mostly what was built at the IRS.
And the fact that hurt most was selective disclosure. Reporting an account to a lender and hiding it from the IRS tells a judge exactly what you understood.
Practical Takeaways
Do not answer the Schedule B foreign account question wrong. Do not mislead an auditor about where money went. If you have filed one late FBAR, keep filing them. If your conduct was genuinely nonwillful, Bittner limits the penalty to $10,000 per report, so the willful line is the line that matters. Our article on foreign bank account reporting explains the filing requirement.
The Bottom Line
Rum brought the Eleventh Circuit in line with every other circuit to decide the issue: reckless disregard is willful, the statute sets the maximum, and the IRS's penalty choice gets deference. In Florida, the rule is now clear. Hiding the account from the IRS while showing it to your banker is not a gray area.