FBAR Penalty for Willful Failure: A new meaning
A willful violation of the FBAR requirements is a felony, punishable by five years in prison, a fine of $250,000, or both. Willfully failing to file an FBAR is a violation that is subject to criminal penalty under 31 U.S.C. § 5322.
In all cases, the IRS has the burden of proving willfulness. To be convicted of a felony for failing to file an FBAR, the government must prove willfulness beyond a reasonable doubt, a higher standard of proof than is needed to impose the civil penalty. In the civil context, the standard of proof is clear and convincing evidence, not merely a preponderance of the evidence.
Although the FBAR statute (Title 31) is not part of the Internal Revenue Code (Title 26), both the courts and the Internal Revenue Service have relied on interpretations of the willfulness standard under the Internal Revenue Code when bringing an FBAR prosecution.
In D.A. Sturman, a criminal FBAR case, the Sixth Circuit applied the tax law definition of willfulness in determining whether a defendant violated the FBAR reporting requirements, holding that the “test for statutory willfulness is voluntary, intentional violation of a known legal duty”.
Likewise, the Internal Revenue Service has adopted the definition of “willful” used in criminal tax cases for FBAR prosecutions.
In the civil context, “willful failure” was addressed in 2010 in J. Brian. William. In that case, the Government brought an action in the US District Court seeking to enforce the civil FBAR penalties assessed against Williams for his failure to report his interest in two foreign bank accounts. The Taxpayer had previously plead guilty to Conspiracy to Defraud the IRS and Criminal Tax Evasion. Further, the Taxpayer’s checked “no” in response to the question on Schedule B Form 1040, regarding the existence of any foreign financial account, despite having transferred $7M to a Swiss bank account. The Taxpayer also completed a tax organizer, where he answered: “no” in response to a question as to whether he had a financial interest in or was a signatory over any foreign financial account.
Notwithstanding the foregoing, the Court held that the Taxpayer’s eventual filing of the delinquent FBARs, “negated” willfulness. Unfortunately, the U.S. Court of Appeals for the Fourth Circuit in an unpublished decision held that the District Court clearly erred in finding that the Government failed to prove that Williams willfully violated 31 USC § 5314. The Court of Appeals, citing authorities stated that ‘willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information, and it ‘can be inferred from a conscious effort to avoid learning about reporting requirements.’
In the wake of the Fourth Circuit decision the IRS may feel emboldened in pursuing both Civil and Criminal willful FBAR violations simply based upon the Taxpayer’s answering : “No” to Question 7(a), Section III of Schedule B.
The impact of the ruling is that US persons with offshore accounts could be considered to have constructive notice of the FBAR requirement simply by signing their US tax returns. Instead of having to prove a specific intent to “violate a known legal duty,” which other tax cases have upheld as the standard of willfulness, the opinion suggests that a taxpayer’s assumed understanding of the FBAR requirement may be enough to make them liable for penalties for willful violations.
Whether the Fourth Circuit decision will have an impact of FBAR prosecutions remains to be seen. It would appear that the Fourth Circuit has opened the door to a relaxed standard.