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Sunday, December 30, 2018

Another Court Finds Failure to Check Off Foreign Account on Income Tax Return Is Enough to Find Willfulness For FBAR Penalty

As discussed on numerous occasions in this blog, a substantial penalty applies if a foreign account is not reported on an annual FBAR filing and the failure to report was willful. As more attention has been focused on FBAR filing failures over the last 10 years or so, more courts are addressing when a failure to file is willful.

Problematic for taxpayers who claim a lack of knowledge of the FBAR filing requirement is the question on Schedule B of their federal income tax return that asks if they have an interest in or authority over an account in a foreign country, such as a bank account, securities account, or other financial account. The question, along with the instructions as to that question, is interpreted by the government as cluing in the taxpayer to the FBAR filing requirement. Whether the taxpayer answers ‘yes’ or ‘no’ to the question, since a taxpayer is deemed to know what is in a tax return that the taxpayer signs, they are deemed to have knowledge of the filing requirement. Thus, absent other contrary facts, the lack of filing is treated as willful. This is the case even if the taxpayer did not read the return - especially with the trend to treat the term ‘willful’ in a civil penalty context as including either reckless disregard of a filing requirement or willful blindness to the filing requirement.

While not completely clear, a recent Claims Court case accepted this approach and held on summary judgment that a taxpayer who had checked ‘no’ to the foreign account question on her income tax return and who knew she had a foreign account was subject to the willfulness penalty for failing to report the account on an FBAR regardless of actual knowledge of the FBAR filing requirement. While there were other bad facts for the taxpayer, the Court appears to hold that it would have ruled the same way without those other bad facts.

This trend risks most FBAR failures to report as being automatically willful when the taxpayer otherwise filed an income tax report, absent special facts such as lack of knowledge of the account itself or perhaps contrary tax advice - a highly unfavorable trend for taxpayers.

Kimble v. U.S., U.S. Court of Federal Claims, No. 17-421 (December 27, 2018).

Monday, December 24, 2018

FBAR “Willfulness” Decision

A substantial penalty applies for those who willfully fail to report a foreign account on an FBAR. A recent 2nd Circuit Court of Appeals opinion weighed in on two uncertainties regarding willfulness in context of FBAR violations.

First, the Court held that the definition of willfulness is not particular to FBAR violations but should involve the definition applied in other civil contexts. Particularly, the Court said:

In assessing the inquiry performed by the District Court, we first consider its holding that the proper standard for willfulness is“the one used in other civil contexts—that is, a defendant has willfully violated [31 U.S.C. §5314] when he either knowingly or recklessly fails to file [a]FBAR.” (Op. at 7.) We agree. Though “willfulness” may have many meanings, general consensus among courts is that, in the civil context, the term “often denotes that which is intentional, or knowing, or voluntary, as distinguished from accidental, and that it is employed to characterize conduct marked by careless disregard whether or not one has the right so to act.” Wehr v. Burroughs Corp., 619 F.2d 276, 281 (3d Cir. 1980) (quoting United States v. Illinois Central R.R., 303 U.S. 239, 242–43 (1938)) (internal quotation marks omitted).  In particular, where “willfulness” is an element of civil liability, “we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Fuges v. Sw. Fin. Servs., Ltd., 707 F.3d 241, 248 (3d Cir. 2012) (quoting Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007)). We thus join our District  Court colleague in  holding  that  the  usual  civil standard of willfulness applies for civil penalties under the FBAR statute.

Then, the Court held that knowledge of the filing requirement is not a necessary element - recklessness (i.e., reckless disregard) is enough. Here, the Court said:

This holds true as well for recklessness in the context of a civil FBAR penalty. That is, a person commits a reckless violation of the FBAR statute by engaging in conduct that violates “an objective standard:  action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’” Safeco, 551 U.S. at 68 (quoting Farmer v. Brennan, 511 U.S. 825, 836 (1994)). This holding is in line with other courts that have addressed civil FBAR penalties, see, e.g., United States v. Williams, 489 F.App’x 655, 658 (4th Cir. 2012), as well as our prior cases addressing civil penalties assessed by the IRS under the tax laws, see, e.g., United States v. Carrigan, 31 F.3d 130, 134 (3d Cir. 1994). 

The Court then gave a definition for recklessness with respect to IRS filings, providing that:

[A] person “recklessly” fails to comply  with  an  IRS  filing requirement when he or she “(1) clearly ought to have known that (2)there was a grave risk that [the filing requirement was not being met] and if (3) he [or she] was in a position to find out for certain very easily.” Id. (quoting United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989) (internal quotation omitted)).

Bedrosian v. U.S., 3rd Cir., Case No. 17-3525, December 21, 2018

Sunday, December 16, 2018

Interesting Modifications in FATCA Proposed Regulations

New Proposed Regulations modify withholding and other misc. requirements under FATCA and chapter 3. Some of the more interesting changes include:

  1. No Withholding on Gross Proceeds. Under Code §§471(a) and 1472, withholdable payments made to certain FFIs and certain NFFEs are subject to withholding under chapter 4. Under Code §1473(1)  the term “withholdable payment” means: (i) any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the U.S.; and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the U.S. Because of the extensive network of agreements that have developed, the IRS has determined that the current chapter 4 withholding requirements already serve as a significant incentive for FFIs investing in U.S. securities to avoid status as nonparticipating FFIs. Therefore, withholding under (ii) above on gross proceeds will no longer be required.
  2. Extension of Implementation of Withholding on Foreign Passthru Payments. The Proposed Regulations will further extend the time for withholding on foreign passthru payments. Thus, a participating FFI will not be required to withhold tax on a foreign passthru payment made to a recalcitrant account holder or nonparticipating FFI before the date that is two years after the date of publication in the Federal Register of final regulations defining the term “foreign passthru payment.”
  3. Insurance Premiums. Premiums for insurance contracts that do not have cash value will be excluded nonfinancial payments and, therefore, not withholdable payments.
  4. “Investment Entity” Definition. An entity is an investment entity (and therefore a financial institution) if the entity’s gross income is primarily attributable to investing, reinvesting, or trading in financial assets and the entity is “managed by” another entity that is a depository institution, custodial institution, insurance company, or an investment entity described in Reg. §1.1471-5(e)(4)(i)(A). The preamble to the proposed regulations clarify that an entity would not be “managed by” another entity solely because the first-mentioned entity invests all or a portion of its assets in such other entity, and such other entity is a mutual fund, an exchange traded fund, or a collective investment entity that is widely held and is subject to investor-protection regulation. However, in an investor in a “discretionary mandate” will be considered as managed by the financial institution. A “discretionary mandate” is an investment product or solution offered by a financial institution to certain clients where the financial institution manages and invests the client’s funds directly (rather than the client investing in a separate entity) in accordance with the client’s investment goals.

Generally, taxpayers may rely on the Proposed Regulations until final regulations are issued.

Preamble to Prop Reg REG-132881-17; Proposed Regulations §1.1441-1, Proposed Regulations §1.1441-6, Proposed Regulations §1.1461-1, Proposed Regulations §1.1461-2, Proposed Regulations §1.1471-1, Proposed Regulations §1.1471-2, Proposed Regulations 1.1471-3, Proposed Regulations §1.1471-4, Proposed Regulations §1.1471-5, Proposed Regulations §1.1473-1, Proposed Regulations §1.1474-1, Proposed Regulations 1.1474-2

Sunday, December 02, 2018

A Chart to Help You in Planning Homestead Dispositions

I’ve been giving some recent seminars on Florida homestead law. One of the topics I discussed are the limitations on devise of homestead, and some of the obvious and/or hidden planning problems that result when the limitations apply (and how to deal with them when they do arise).

I thought a table that can be used as a quick reference of these problems would be useful. I think this is especially so for attorneys during client discussions or drafting to make sure there is not a hidden problem that was not or is not being considered in planning.

I’ll be inserting this as a new practice aid in new editions of my treatise, Rubin on Florida Homestead. The treatise has an extended discussion of the principal planning that can be done to avoid most of these problems.

I developed some other charts and checklists in these seminars, which I will be rolling out here and in the treatise in the coming weeks.

You can download a PDF of the new table from Dropbox here. Since this is newly developed, if anyone sees any errors or omissions or has other comments, please send me an email at