Tag Archive for: Undeclared Foreign Bank Accounts

Assessment of the “willful” FBAR penalty

Courts have sustained FBAR penalties by reference to case law which is inconsistent with standards and principals applied in penalty cases under Title 26, despite the punitive nature of the willful FBAR penalty.

In order for the Government to successfully assess an FBAR Penalty, they must prove the following:

1. The Taxpayer was either a citizen or a resident or a person doing business in the United States during the relevant tax period(s);
2. The Taxpayer had a financial interest in, or signatory authority over the foreign financial account;
3. The foreign financial account had a balance that exceeded $10,000 during the relevant tax year(s);
4. The Taxpayer failed to disclose the foreign financial account.
5. The amount of penalties was proper.

Proving Willfulness in FBAR context

In the FBAR context, 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.” (Williams, 489 Fed. App’x at 658). In addition, in Norman v. United States, 138 Fed. Cl. 189, 194 (Fed. Cl. 2018), the Court of Claims held that a taxpayer is put on inquiry notice of the FBAR requirement when signing a return. As such, a Taxpayer who signs a return will not be able to claim innocence for not actually having read the return, since the taxpayer is charged with constructive knowledge of its contents (Jarnagin v United States, 134 Fed. Cl. at 378 (Fed. Cl 2017).

The departure from the willful standard in the Title 26 context as it relates to civil tax penalties is also found in the May 23, 2018 Office of Chief Counsel, Internal Revenue Service Memorandum. This Memorandum provides that the standard for willfulness under 31 U.S.C § 5321(a) (5) (C) is:

“the civil willfulness standard and includes not only knowing violations of the FBAR requirements, but willful blindness to the FBAR requirements as well as reckless violations of the FBAR requirements.”

The civil fraud penalty under 26 U.S.C § 6663 provides that in order to sustain the standard of proof, the civil fraud penalty has to be “clear and convincing.” Closely tied to the civil fraud penalty is the criminal tax evasion penalty under 26 U.S.C § 7201 which requires a proof beyond a reasonable doubt. While the willful FBAR penalty has it criminal counterpart in 31 U.S.C. § 5322(a), the Courts have illogically used the lower preponderance of evidence standard in willful FBAR cases despite the punitive effects of the Penalty.

While reliance upon professional advice is a valid defense in tax crimes and the civil fraud penalty, a question remains as to whether relying on a professional is a valid defense to the imposition of a willful FBAR Penalty. The viability of such a defense would require the following:

1. The taxpayer subject to the penalty has provided all the relevant facts to the professional;
2. After providing the relevant facts, the Taxpayer must have relied upon the advice of the professional; and
3. The reliance must be reasonable under the circumstances.

DOJ position on using a professional advice as a defense for “Willfulness” in FBAR penalty

Given the string of government victories in the assessment of the willful FBAR penalties and current litigation, the Department of Justice is now pushing the envelope suggesting that reliance on a professional as a defense to the assessment of a willful FBAR penalty is not a valid defense. DOJ’s position is inconsistent with judicial precedent as well as administrative pronouncements.

In light of DOJ’s position, it is hard to imagine circumstances where, an argument that a professional (accountant or tax preparer) didn’t give a client advice concerning disclosure of their foreign financial accounts would be successful, especially if the client withheld all the relevant facts, for example; a case where a taxpayer answers “no” in response to question 7(a) on Schedule B as to whether the taxpayer had an interest in or was a signatory to a foreign financial account and fails to tell his accountant or fails to seek advice on whether to report a foreign financial account, Courts have generally held that such conduct constitutes “reckless” behavior, thereby meeting the “willfulness” standard (Kimble v. United States, No. 1:17-cv-00421 (Fed. Cl. 2018).

Similarly, in United States v. Dadurian, No. 9:18-cv-81276, the U.S. District Court denied the Taxpayer’s motion for summary judgment and the case was scheduled for trial for August 19, 2019. The Taxpayer had a financial interest over signatory authority over a number of foreign accounts, some of which had maximum balances over $2 million in certain years. Prior to 2007, the Taxpayer had filed FBARs in connection with her Swiss and German Accounts. According to the Taxpayer, her Tax Attorney advised her that she did not have to disclose her accounts. For the years 2007- 2010, and based upon the Attorney’s advice, Dadurian  failed to tell her new tax return preparer about the foreign assets and further declared on Schedule B, Part III, in response to question 7(a) that she did not have an interest or signatory authority over the foreign financial accounts. In arriving at its decision, the Court raised the issue as to whether reliance on a professional may constitutes reasonable cause in light of 31 U.S.C § 5321 (a) (5) (C) (ii), which provides that, “reasonable cause” is not a defense to willful FBAR violations. In its proposed jury instructions, the DOJ asked that the jury be instructed that: “If the United States Proves that Daniela Dadurian acted willfully, Dadurian may not claim as a defense that she relied upon the advice she received from accountants, lawyers or other professionals.”

Other cases that suggest that the DOJ is ratcheting up the pressure include:

1. In United States v. Francis Burga , the Government filed suit in the United States District Court for the Northern District of California in its attempt to reduce the government’s willful FBAR Assessments approximating $120m to Judgment. In its complaint against Francis Burga and the estate of her late husband, Margelus Burga, the Government alleges that the defendants had financial interests in at least 294 Foreign Financial Accounts between 2004 and 2009 in a number of jurisdictions (including  Lichtenstein, the British Virgin Island, Switzerland, Singapore, Panama, China and Vietnam) and that she willfully failed to file FBARs.
2. In United States v. Isac Scwarzbaum, Case No. 18-CV-81147, a U.S. District Court for the Southern District of Florida, was faced with deciding a Motion for Summary Judgment brought by the Taxpayer. The case involved a suit by the Government to collect outstanding civil FBAR penalties against the Defendant, Isac Scwarzbaum for his alleged failure to timely report his interest in foreign bank accounts in violation of 31 U.S.C. § for the years 2006-2009. The Taxpayer was born in Germany and retained his German Citizenship. but he became a U.S. Citizen in 2000. The Taxpayer’s father, a German Citizen, was a successful businessman. As a result of his father’s financial prosperity, the Taxpayer received various gifts as well as an inheritance, which together with investments; he used to support himself and his children.

Between the years 1993/94 to 2009, the Taxpayer engaged three separate certified public accountants. The defendant’s CPA who prepared the Taxpayer’s 2006 return, also completed an FBAR reporting a foreign account in Costa Rica. For the Tax Years 2007 and 2009, the Taxpayer elected to file FBARs without the assistance of a CPA.  However, the Taxpayer failed to file an FBAR for 2008 until 2011.

After receiving a letter from 2009 from one of his banks in Switzerland indicating that the IRS had submitted a treaty request in order to obtain information about accounts of certain individuals maintained at UBS and that his account seem to fit the scope of the request. The taxpayer claimed that he sought the advice of a Swiss Tax Lawyer and was told the request did not pertain to him. This claim was disputed by the Government.

In 2011 the Taxpayer entered the Offshore Voluntary Disclosure Initiative (“OVDI”). The taxpayer paid the outstanding income tax, interest and accuracy related penalties due as a result of the taxpayer’s failure to report the interest on foreign financial accounts. The defendant then elected to opt out of the OVDI and was subject to full IRS examination. The examining agent initially recommended that the IRS should assert a non-willful FBAR penalty against the taxpayer, but that recommendation was rejected and the willful FBAR penalties were assessed in 2016 in excess of $15m. Following this, the government filed a suit in order to reduce the assessments to Judgment. In response, the taxpayer filed a Motion for Summary Judgment arguing, among other things, that the facts in the case demonstrate that he was not willful since he did not have actual knowledge of the extent of the FBAR requirements. In denying the defendant’s Motion, the Court discussed the standards for “willfulness” pointing out that the Bank Secrecy Act identifies the FBAR penalty as a civil money payment and as such includes both knowing and reckless violations of a standard.

What is the way forward?

With the announcements of the closure of the OVDP in September of 2018 and the implementation of the new Voluntary Disclosure Practice rules in November of 2018, taxpayers with unfiled FBARs are left with the making a disclosure using the streamline procedures or proceeding under the new Voluntary Disclosure Practice Rules, which are quite onerous.

If you have failed to report your Foreign Financial Accounts, or opted out of the OVDP or considering opting out, it still may be possible to make a disclosure and avoid the willful FBAR penalty. But time is not on your side. Based upon legal precedent, the lines between the assessment of a willful vs a non-willful FBAR penalty will invariably rest upon the facts of the case, including but not limited to the account balances, number of years the account has been in existence, whether tax returns were filed and if so, whether the returns were self-prepared or prepared by a third party professional, whether the taxpayer has been absent from the United States for an extended period of time, as well as other factors.