Article Abstract: Government Wins Fourth Straight FBAR Penalty Case: Analyzing Bohanec and the Evolution of 'Willfulness'

I wrote about the Bohanec case here in December 2016. Hale E. Sheppard recently published an article analyzing this case, along with the other 3 key cases and other authority dealing with willfulness in context of civil FBAR penalties. It is a detailed article, and also somewhat long, so I have provided some of the highlights here:

A. United States v. Williams, 489 Fed. Appx. 655 110 AFTR2d 2012-5298 (CA-4, 2012)

1. Key Facts

a) Used an accountant - did not discuss foreign accounts with accountant - indicated he did not have reportable interest in a foreign account on accountant's questionnaire.

b) Accounts received funds from foreign sources.

c) Did not report substantial interest income from the accounts.

d) When pleading guilty to criminal violations, he admitted he knew he had the obligation to report, but chose not to so as to hide income.

e) Taxpayer did not check off on his income tax returns the existence of the foreign accounts.

2. Key holdings

a) Willfulness can be inferred from taxpayer conduct designed to conceal financial information.

b) Willfulness can also be inferred from a taxpayer's conscious effort to avoid learning about reporting requirements, i.e., “willful blindness” exists where a taxpayer knew of a high probability of a tax liability yet intentionally avoided the pertinent facts. When willfulness is a condition for civil liability, the Fourth Circuit indicated that this covers both knowing violations and reckless violations of a standard.

c) Failure to make the foreign account check off on the Form 1040, with its reference to the FBAR, constitutes a conscious effort to avoid learning about reporting requirements and constitutes willfulblindness.

d) Burden of proof is on the U.S. government with a preponderance of the evidence standard (Williams II).

3. Misc.

a) Limited precedential appeal as an unpublished decision.

B. CCA 200603026

1. Civil and criminal definitions of willfulness for FBAR violations are the same.

2. "[I]n order for there to be a voluntary intentional violation of a known legal duty, the accountholder would just have to have knowledge that he had a duty to file an FBAR, since knowledge of the duty to file an FBAR would entail knowledge that it is illegal not to file the FBAR. A corollary of this principle is that there is no willfulness if the accountholder has no knowledge of the duty to file the FBAR."

C. IRM section 4.26.16.4.5.3 (7/1/08); IRM section 4.26.16.6.5.1 (11/6/15).

1. The test is whether “there was a voluntary, intentional violation of a known legal duty” and “willfulness is shown by the person's knowledge of the [FBAR] reporting requirements and the person's conscious choice not to comply with the requirements.”

D. McBride, 908 F. Supp. 2d 1186 110 AFTR2d 2012-6600 (DC Utah, 2012)

1. Key Facts

a) Taxpayer received information from planning organization about general reporting requirements for foreign company interests, trusts, and bank accounts.

b) Taxpayer did not check off on his income tax returns the existence of the foreign accounts

2. Key Holdings

a) Burden of proof is on the U.S. government with a preponderance of the evidence standard.

b) "Willfulness" in this context includes not only knowing FBAR violations, but also recklessness. Wwillful blindness" satisfies the willfulness standard in both criminal and civil contexts.

c) Willful intent can be proven by circumstantial evidence, and reasonable inferences can be drawn from the facts because direct proof of a taxpayer's intent is rarely available.

d) As to knowledge of the law, the taxpayer was deemed to have knowledge of the FBAR requirements per his signature on his Form1040 and the reference to FBAR requirements therein (although the taxpayer was also found to have actual knowledge of the requirements based on materials he received and his admissions and evasive conduct.

e) Interest on the penalty was allowed from the date of assessment pursuant to 31 U.S.C. section 3717(e)(2)31 U.S.C. section 3717(e)(2).

f) Reasonable reliance on a professional defense is not workable when professional is not given all relevant facts.

g) There are whiffs of strict liability in this case - i.e., that a taxpayer is responsible if they know of the FBAR filing requirements even if they reasonably believed they were not subject to them.

E. Bussell, 117 AFTR 2d 2016-439 (DC Calif., 2015)

1. Key Holdings

a) Willfulness encompasses "reckless disregard of a statutory duty."

F. Bohanec, 118 AFTR2d 2016-5537 (DC Calif., 2016)

1. Key Facts

a) Taxpayers did not provide their U.S. address to the foreign bank, did not tell anyone about the foreign account (other than their two children), did not keep any records or use a bookkeeper, did not discuss the potential implications of the non-U.S. account with an accountant, attorney, or banker, and did not file Forms 1040.

b) Taxpayers submitted erroneous OVDP application, along with inaccurate Forms 1040 and inaccurate FBARs.

2. Key Holdings

a) The concept of "willfulness" for civil FBAR penalty purposes extends to reckless disregard of a statutory duty (notwithstanding CCA 200603026 and the Internal Revenue Manual), including reckless indiference.

b) Burden of proof is on the U.S. government with a preponderance of the evidence standard.

c) Part III of Schedule B of their Form 1040 from 1998 put them on notice that they needed to file an FBAR

Applicable Federal Rates - April 2016

Receiver Put in the Same Shoes as Underlying Taxpayer under Claim of Right Claim

At times, a taxpayer may receive and report income, and then in a later year have to return the income item. Depending on the circumstances, this could give rise to a deduction in the later year under Code §§162 or 165 under the Claim of Right Doctrine.

If the taxpayer does not have significant income in the year of repayment (or in the NOL carryback or carryforward periods if the deduction is under Code §162), the taxpayer not get much mileage from the deduction due to a lack of income to offset by the deduction. To remedy this situation, Code §1341, when operable, will allow the taxpayer a refund in the year of repayment equal to the tax savings that would have resulted if the initial income reporting was not required, regardless of the amount of income arising in the year of repayment.

A requirement to use Code §1341 is that at the time of the original receipt of money, the taxpayer must have subjectively believed it had an unrestricted right to the money in that year. This is problematic for taxpayers who received the money fraudulently or as the result of criminal activity, since they would lack this subjective belief - thus, they cannot use Code §1341. As an aside, note that repayments as the result of fines or forfeitures may be denied deductibility anyway under Code §§162 and 165.

In a recent appellate decision, the taxpayer had obtained funds through fraud, and through the actions of a receiver, had to disgorge some of those funds. Because those funds were obtained through fraud, Code §1341 cannot apply. Nonetheless, the receiver, on behalf of the taxpayer, made a Code §1341 refund claim so as to increase funds available to the victims of the taxpayer. When challenged by the IRS, the receiver was able to convince the trial court that this Code §1341 limitation regarding subjective belief of an unrestricted right to the money was not applicable when the refund claim was made by the receiver and not the taxpayer, based on the equitable purposes of Code §1341 and the equitable actions of the receiver.

The federal First District Court of Appeals recently acted to reverse the trial court, and to deny the refund claim to the receiver. The attempted use of Code §1341 by the receiver was not an equitable purpose that Congress intended to remedy under Code §1341, and thus receiver could not escape its intent limitations.

Robb Evans & Associations, LLC v. U.S., 119 AFTR 2d 2017-XXXX, (CA1), 03/03/2017

IRS Limiting GST Private Letter Rulings and Presubmission Conferences

At a recent Federal Bar Association Tax Law Conference, an IRS Chief Counsel branch chief advised that due to budget cuts:

a. The IRS has temporarily suspended issuing private letter rulings regarding modifications to generation-skipping transfer exempt trusts, and

b. The IRS has temporarily suspended pre-submission conferences in regard to estate, gift and generation-skipping transfer tax issues before the submission of a private letter ruling. This procedure allowed taxpayers to have a preliminary, nonbinding discussion with IRS personnel before submitting a private letter ruling request.

Strict Charitable Contribution Substantiation Requirements Trip Up Another Taxpayer

Taxpayers making contributions to charities that seek a charitable deduction have a myriad of reporting and receipt requirements to comply with. Code §170(f)(12) imposes additional requirements as to contributions of motor vehicles, boats, and airplanes. These various requirements are a major trap for taxpayers, as the IRS will often assert the most harmless errors or omissions in compliance as grounds for denying the deduction.

In a recent Tax Court case, a taxpayer lost a $338,080 charitable deduction for the contribution of an aircraft. One of the failures of the taxpayer was the failure to obtain a required contemporaneous written acknowledgment (CWA) from the donee that included all of the following required information:

(1) the name and taxpayer identification number of the donor;

(2) the vehicle identification number or similar number;

(3) a certification of the intended use or material improvement of the vehicle and the intended duration of such use;

(4) a certification that the item would not be transferred in exchange for money, property, or services before completion of such use or improvement;

(5) whether the donee organization provided any goods or services in exchange for the vehicle; and, if so,

(6) a description and good-faith estimate of the value of such goods or services.

The taxpayer also failed to meet the requirement of submitting a copy of the CWA to the IRS with his tax return. Note that the donee organization is also required to submit the CWA to the IRS (using Form1098-C).

The Tax Court declined to allow the taxpayer to apply the substantial compliance doctrine in regard to the CWA failure, based on case law that such doctrine does not apply to Code §170(f)(8) requirements, quoting other case law to the effect “The doctrine of substantial compliance does not apply to excuse the failure to obtain a CWA meeting the statutory requirements. . .The deterrence value of section 170(f)(8)'s total denial of a deduction comports with the effective administration of a self-assessment and self-reporting system.” It similarly did not allow the use of an Aircraft Donation Agreement to meet the CWA requirements when that agreement did not have all the required disclosures listed above and was unsigned.

A big problem with CWAs for vehicles is that the taxpayer must receive the CWA from the donee organization within 30 days of the contribution. So, if the taxpayer makes the contribution, and then his accountant advises him of the need for a CWA when preparing the income tax return for the contribution year, it will most likely be TOO LATE to obtain the CWA in a timely manner. This is a big trap, and an unfair one - taxpayers should be allowed time to obtain the CWA at least through the return due date.

Joe A. Izen, Jr. v. Commissioner, 148 T.C. No. 5, 03/1/2017