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Thursday, December 15, 2016

RECKLESS INDIFFERENCE IS ENOUGH FOR WILFULLNESS FINDING FOR PURPOSES OF FBAR NONFILING PENALTIES

A husband and wife had an accounting in Switzerland at UBS AG, into which they deposited commissions from camera sales and also directed some of their international customers to make deposits. In 2007, the tax year at issue, the taxpayers did not file the required Form TD F 90-22.1 (FBAR) form with the Department of Treasury which they should have filed to disclose their interest in the UBS account (such FBAR reporting now occurs on FinCen Form 114). They also did not file FBARs, nor U.S. income tax returns, for other tax years. In 2010, the taxpayers applied to participate in the Offshore Voluntary Disclosure Program (OVDP), and filed delinquent income tax returns and FBARs. The FBARs failed to report other non-U.S. accounts of the taxpayers, and the income tax returns failed to report certain commission income. The taxpayers were ultimately rejected from the OVDP program.

At issue was whether the 2007 failure to timely file an FBAR was “willful,” and the meaning of willfulness in this context. The civil penalties for failure to file an FBAR are substantially higher for a willful failure than a nonwillful failure. The willful failure penalty can be as high as the greater of $100,000 or 50% of the balance of the unreported account for each year.

31 USC §5321(a)(5), which imposes the willful penalty, does not provide a definition of willfulness. The taxpayers argued that willfulness means only intentional violations of known legal duties. The Government sought to expand the definition to include reckless disregard of statutory duties. The U.S. District Court noted that the position of the taxpayers was based on case law involving criminal liability, not civil liability. Regarding civil liability, it is true that that the IRS Chief Counsel, in Chief Counsel Advice 200603026, opined that the willfulness standard for purposes of 31 USC §5321 is the same as the criminal standard. But the U.S. District Court noted that IRS Chief Counsel Advice may not be cited as precedent. Noting that other cases have found reckless disregard to be enough to constitute willfulness under 31 USC §5321, the court joined the chorus and reached the same conclusion.

Upon analysis of the facts, the court went on to find that the taxpayers’ failure to file was willful per their reckless disregard of their statutory duties.

Note that the court also addressed the issue whether the government’s burden of proof on willfulness was a mere preponderance of evidence standard, or a higher clear and convincing burden of proof. The court determined that a mere preponderance of evidence was all that the government needed to meet.

The lack of a definition of willfulness has been problematic in this area. The District Court’s expansive reading to include reckless disregard is not favorable for taxpayers. A review of the facts leading to the finding of reckless disregard will be instructive to taxpayers and advisors looking for guidance in this area. No single fact was determinative here – a conglomeration of the following was enough to tip the scale in the government’s favor:

  1. The taxpayers were found to be reasonably sophisticated business people.
  2. The taxpayers failed to provide a home address to UBS, and kept the UBS account hidden from everyone (including their tax preparers) except their children.
  3. The taxpayers made no inquiries of any lawyer, accountant, or banker about their reporting requirements as to the account.
  4. On the Form 1040, there is a question that asks if taxpayers have an interest in or signatory authority over a financial account in a foreign country, and that question directs them to see instructions for the exceptions and filing requirements for Form TD F 90-22.1. In the opinion of the court, this provision rendered the taxpayers’ statements that they were unaware of, or did not understand, their reporting obligations as not credible. Other statements by the taxpayers that they believed no reporting was required because they intended to use the accounts for retirement were similarly held to be not credible.
  5. The taxpayers’ bad behavior regarding their OVDP application was problematic, including misrepresenting that all the funds in the UBS account were after-tax proceeds from their camera business, their failure to disclose other foreign accounts, and their filing of false income tax returns that excluded taxable income earned by them.

Thus, there were a number of bad facts here. Whether the court would have found reckless indifference if less than these facts were present is unknown. Nonetheless, the listed items are useful as examples of facts that the government and the courts will take notice of in making the willfulness determination.

U.S. v. Bohanec, 118 AFTR 2d 2016-XXXX (DC CA 12/8/16)

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