Friday, March 24, 2017

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a) Limited precedential appeal as an unpublished decision.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

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