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Courts Split on FBAR non-willful Penalty

Should FBAR non-willful penalty be charged per form or per account?

FBAR non willful penalty dilemmaThe Courts have recently addressed the issue of whether the FBAR Non-Willful penalty should be assessed per form rather than per account with conflicting results.  InUnited States v. Bittner, the U.S. District Court for the Eastern District Court held that the non-willful FBAR penalty should be assessed per form rather than per account.  The Bittner decision is in direct conflict with the holdings in United States v. Gardner, and United States v. Boyd.In two separate decisions, the District Court for the Central District of California held that the non-willful FBAR penalty should be assessed per account.

Logic dictates that because non-willful penalty provisionrelates to the failure to file an FBAR and not the failure to report a foreign financial account, the non-willful penalty should be limited per FBAR report rather than applying the penalty to each account. However, the Government does not interpret the statute in the same way.

In Bittner, the IRS argued that because the reasonable cause exception to the non-willful FBAR penalty references the “balance in the account” language, the reasonable cause exception should be applied on an account by account basis.

The Government further maintained in Bittner that the same reasoning should be applied in the assessment of the non-willful penalty. The Government further argued that, because the penalty for willful violations is assessed with reference to each account, the non-willful penalty should also be assessed with reference to each account.

The Court rejected both arguments. Bittner is on appeal and scheduled to be heard in September of 2020.  

Depending upon the appellate court’s decision, taxpayers could be subject to significant penalties. For example, a taxpayer who has ten accounts and failed to file FBARS for the past three years could be subject to a $300,000 or a $30,000 penalty.

Taxpayers, who have yet to come forward, should seriously consider using the Streamlined Procedures as the process for coming into compliance and limiting financial risk. In more serious cases, Taxpayers need to consider making a disclosure using the Voluntary Disclosure Practice Rules. In both cases, Taxpayers should consult with a knowledgeable and experienced tax attorney.

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Willful FBAR Penalty Moving Towards a Strict Liability Standard

Assessment of the “willful” FBAR penalty

GSA US Tax Court bldg 450x450Courts 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.

 

 

 

 

 

 

 

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DOJ Announces Indictment of Taxpayer for Filing False Non-Willful Certification Under the Federal Streamlined Procedures

Streamline

Case Background

On August 27, 2019 the Department of Justice (DOJ) announced a superseding indictment of a Florida business man and former Texas CPA for allegedly filing a false document. This was because he made an offshore disclosure using streamlined filing procedures.

The supplemental indictment alleges that, Brain Nelson Booker, a Florida resident, who was in the cocoa trading business in Venezuela, Panama and Florida, filed false Foreign Bank Account Reports (FBARs) for the years 2011-2013. The new indictment also included charges from the original indictment which was brought because Booker filed false income tax returns (under 26 USC § 7206(1) ) for the tax years 2010-2012.

In addition to the false FBAR and tax return charges, the Government alleges that Booker filed a false document under 26 U.S.C. § 7206 (1) when he submitted a certification of non-willfulness in October 2015 as part of a submission using the Streamlined Domestic Offshore Procedures. According to the charging document, Booker “falsely certified that he met all the eligibility requirements for treatment under the streamlined procedures, and falsely claimed, among other things, that his failure to report all income, and pay all tax  and submit all required information returns including FBARs was due to non-willful conduct.”

Booker was unavailable for comment, since he fled the United States to a non-extradition jurisdiction.

Government Argument

According to the Government, Booker only reported two foreign financial accounts he maintained in Venezuela on his FBARs and tax returns for 2008-2010, while omitting other accounts in Switzerland, Panama and Singapore.

In 2009 Booker was contacted by the Swiss Bank where he maintained one of his foreign financial accounts. The Bank, who participated in the DOJ’s Swiss Bank Program, notified Booker to either report his account to the IRS or leave the Bank.  Subsequently, Booker moved his account to another Swiss Bank.

In July 2015 Booker filed delinquent FBARs for 2008 through 2015, this time reporting all his foreign financial accounts, including the two Venezuelan accounts as well as his Swiss, Panamanian and Singapore accounts. In October 2015 Booker made an offshore disclosure using the streamline procedures. As part of the streamlined procedures, Booker submitted a certification of non-willfulness claiming that his failure to file FBARs identifying all of his accounts was due to the fact he first learned about FBARs in 2008 and was under the mistaken belief that he was only required to report personal foreign financial account and not the accounts held by his business.

 

How does Booker’s indictment affect tax payers in a similar situation?

This indictment represents the first prosecution for filing a false document in connection with a submission under the streamlined procedures and clearly signals that the IRS is making good on their earlier pledge that they intend to closely scrutinize taxpayer certifications submitted in connection with the streamlined procedures, and further, that they will pursue persons who make false statements in their certifications.

Taxpayers with undeclared foreign financial accounts are afforded an opportunity to come into compliance. The Offshore Voluntary Disclosure Program  (OVDP) and the Streamlined Offshore Procedures represent  two alternatives for coming into compliance, depending upon whether the failure to file was willful or simply due to negligence. Closely tied to the issue of willfulness is the criminal risk associated with using the streamline procedures to make an offshore disclosure.

Prior to the closure of the OVDP in September of 2018, taxpayers who willfully failed to disclose their offshore assets and/or were at risk of criminal prosecution, could make application to participate in the OVDP.

Once the taxpayer was cleared to make the offshore disclosure, he or she would file eight years of amended income tax returns, as well as eight years of FBARs. The individual would also submit a Miscellaneous Offshore Penalty Worksheet. The Taxpayer would also be required pay the outstanding amount of tax due, together with interest and a 20% accuracy related penalty. Depending upon the circumstances and when the disclosure was made, the taxpayer would pay a miscellaneous offshore penalty equal to 20-50% of in the disclosure year with the highest aggregate balance.

In exchange for the taxpayer coming into compliance, payment of all amounts due, and assuming there were no material misstatements in the taxpayer’s submissions, the IRS would generate a Closing Agreement (Form 906). The Closing Agreement would generally include a representation that the IRS would not refer the case for criminal prosecution. Furthermore, the Closing Agreement would foreclose the possibility of any further income tax or FBAR penalty assessment by the IRS for any year in the disclosure period. The Agreement would also preclude the taxpayer from making any claim for a refund at a later date.

In November of 2018, the IRS the announced the updated Voluntary Disclosure Practice Rules which now include both domestic and offshore disclosures. The penalties under the new regimen are quite onerous when compared to the penalties under prior iterations of the OVDP.

Recognizing that one size doesn’t fit all, the IRS permits taxpayers, whose offshore disclosures present little risk to no risk of criminal prosecution or the assessment of the civil willful FBAR Penalty, to use the streamline offshore procedures. There are two scenarios. One for persons residing outside of the U.S and the other for persons residing in the US

In both cases, the taxpayer will file three years of amended returns and six years of FBARs. In addition, the taxpayer must submit a certification of non-willfulness, wherein he or she must set forth in detail the reasons why the failure to file FBARs was non-willful.

Those residing outside of the U.S. who meets the physical presence requirements are not subject to any FBAR penalty, while those residing in the U.S. pay a 5% penalty in the disclosure year with the highest aggregate balance.  In addition, the taxpayer must pay any additional income tax due related to the unreported income associated with his or he offshore accounts.

The key difference between the OVDP and the streamlined procedures is that the OVDP provides a taxpayer with closure, whereas a submission using streamlined procedures does not. As such, those using the streamlined procedures are at risk that the IRS may determine that the taxpayer’s representations, as contained in the certification of non-willfulness were false or unsubstantiated. If such a determination is made, the taxpayer could be subject to the assessment of civil willful FBAR penalties, as well as the possibility of a referral to IRS Criminal Investigation.

The indictment of Booker serves as a cautionary tale for those taxpayers who elect to use the streamlined procedures rather than the new voluntary disclosure practice rules in order to avoid paying higher legal fees and FBAR penalties associated with the later protocol.  In this regard, some taxpayers may be tempted to stretch the truth in an effort save on the FBAR penalties and legal fees, only to later find themselves in serious trouble.

The instant indictment should also serve as a wake up call that undertaking an offshore disclosure requires a careful review of the facts with an experienced tax attorney to assess whether a person’s failure to file an FBAR and his “no” response to the Schedule B FBAR disclosure was the result of negligence or a willful attempt to prevent the Government from discovering the taxpayer’s foreign assets and the income derived therefrom.

Ultimately, whenever a criminal risk is present, streamline procedures should be avoided. Likewise, streamline procedures should be avoided where there is a possibility that the facts otherwise support the assessment of the civil willful FBAR penalty, rather than a finding of mere negligence. Taxpayers who struggle with the truth and particularly those with prior dealings with the IRS that have resulted in the taxpayer’s integrity coming into question, should think long and hard before making a false statement in a certification when making a streamlined disclosure. Such actions are shorted sighted and almost always meet with financial disaster.

 

 

 

 

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The Willful FBAR Penalty: Is it Limited to $100,000? Not so Fast.

 Assessment of FBAR penalty

FBAR

Some practitioners have applauded the decision in United States v. Colliot, 2018 U.S. Dist. LEXIS 83159 (W.D. Tex. 2018) and have even suggested that the assessment of the willful FBAR penalty is limited to the “greater of the amount (Not to Exceed $100,000) equal to the balance in the account at the time of the violation or $25,000.”  The Court in Colliot, ruled in favor of the Taxpayer, relying upon 31 C.F.R. § 1010.820 (Previously cited as 31 C.F.R. § 103.57), a regulation promulgated under a prior version of the Bank Secrecy Act. The U.S. District Court held that the earlier regulation was still valid, notwithstanding the changes to the FBAR penalty structure under the American Jobs Creation Act of 2004 (AJCA), which increased the maximum FBAR penalty for willful violations to the greater of $100,000 or 50% of the Balance of the Account. The Court reached its conclusion citing the absence of any new regulation adopting the higher penalty amount provided for under § 5321(a)(5).

Reliance upon Colliot is inaccurate, misplaced and inconsistent with Congressional intent. The limitation articulated by the Court in Colliot with respect to the willful FBAR penalty is in direct conflict with § 5321(a) (5) (C) (i) of the AJCA. Furthermore, the decision in Norman v United States case (Ct. Fed. Cl. Dkt 15-872T, Order dated 7/31/18) and the legislative history related to § 5321(a) (5) (C)(i) of the AJCA make clear that taxpayers who argue for the lower penalty provided for under 31 C.F.R. § 1010.820 will in all likelihood be unsuccessful. The question of whether the willful FBAR penalty is limited to the greater of $100,000 or 25% of the account balance at the time of the violation, requires a detailed discussion of Colliot and Norman, The Bank Secrecy Act and the relevant statutes and regulations as well as an examination of the legislative history and case law addressing statutory and regulatory conflicts.

Bank Secrecy Act (BSA)

On October 26, 1970 Congress enacted the Bank Secrecy Act (BSA) also known as the “Currency and Foreign Transaction Reports” to the address the legal and economic impact of foreign banking in the United States. The BSA was enacted, in part, based upon the findings by the House Committee on Banking and Currency (the “Committee”). Following a one day investigative hearing held on December 9, 1968, the Committee concluded that Americans were using secret foreign bank accounts and foreign financial institutions for nefarious purposes including income tax evasion, money laundering and other crimes.

As part of the BSA, Congress tasked the Treasury Secretary with the responsibility of promulgating regulations designed to facilitate the implementation of the BSA. As part of the implementation of the BSA, 31 C.F.R.§103.27, a U.S. Citizen with an interest in or control over one or more foreign financial accounts with a value exceeding $10,000 at any time during that calendar year is required to file FinCen Form 114 (previously TDF 90-22.1) with the Commissioner of Internal Revenue on or before June 30 of the following year. Although the power to assess a civil monetary penalty for FBAR violations was initially vested with the Treasury Secretary, it was later delegated to the Financial Crimes Enforcement Network (FinCEN). Treasury Order 180-01, 67 Fed. Reg. 64697 (2002). Authority was once again delegated to the Internal Revenue Service. 31 C.F.R. § 103.57.

Prior to 2004, The BSA permitted the imposition of an FBAR penalty only for willful violations of §5314. The penalty for willful violations prior to 2004 was capped at the greater of $25,000 or $100,000 under § 5321(a) (5) (B). Enforcement of § 5321(a)(5)(B) is mirrored in the regulations under 31 CFR §103.57(g)(2). Although §5314 is silent on the assessment of a negligence penalty, the regulations permit the assessment of a negligence penalty not to exceed $500.00. 31 CFR §103.57(h).

Civil FBAR penalty Amendment and willful failure

The civil FBAR penalty structure was amended in 2004 as part of the AJCA to include a maximum penalty of $10,000 for any violation of the provisions of §5314. In addition, the penalty for willful FBAR violations previously provided for in § 5321(a) (5) (B) was increased under §5321(a)(5)(C)(i), a newly created provision, to the greater of $100,000 or 50% of the of the account balance. The legislative history related to the changes to the willful FBAR penalty and the addition of the non-willful civil FBAR penalty chronicles Congressional concern over the lack of compliance in financial reporting related to offshore accounts. Congress made clear that improved compliance was the impetus behind raising the maximum penalty for willful FBAR violations:

“The Congress understood that the number of individuals using offshore bank accounts to engage in abusive tax scams has grown significantly in recent years. For one scheme alone, the IRS estimates that there may be hundreds of thousands of taxpayers with offshore bank accounts attempting to conceal income from the IRS. The Congress was concerned about this activity and believed that improving compliance with this reporting requirement is vitally important to sound tax administration, to combating terrorism, and to preventing the use of abusive tax schemes and scams. The Congress believed that increasing the prior-law penalty for willful noncompliance with this requirement and imposing a new civil penalty that applies without regard to willfulness in such noncompliance will improve the reporting of foreign financial accounts.” Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, JCS-5-05 at 387 (2005).

 Congress also created a separate provision for a civil penalty for Non-Willful violations, making a clear distinction between willful and non-willful violations. H.R. Rep 108-755 at 615 (2004) (Conf. Rep.).

 In Colliot, the IRS filed a lawsuit against Dominque G. Colliot to reduce the assessed penalties to a money judgment. The action filed in the United States District Court for Western Texas related to penalties that were assessed for willful failure to file FBAR’s for 2007-2010. The IRS assessed a $544,773 penalty for the tax year 2007 and $196,082 for the tax year 2008. Smaller penalties were also assessed for the tax years 2009 and 2010. In assessing the penalties, the IRS relied upon the authority contained in § 5321(a)(5) and 31 C.F.R. § 1010.820(g)(2). In response, Colliot filed a motion for summary judgment asserting that IRS incorrectly applied the law in calculating the civil willful FBAR penalties.

In its analysis, the Court discussed the 2004 amendment to § 5321 which increased the maximum civil penalties that could be assessed for the willful failure to file an FBAR, and in doing so, acknowledged the increase in the willful FBAR penalty to a minimum of $100,000 and a maximum of 50% of the balance in the unreported account at the time of the violations. The Court also noted the absence of any change to 31 C.F.R. §1010.820(g)(2), which caps the maximum willful FBAR penalty at $100,000. In granting Colliot’s motion for summary judgement, the Court wholly ignored United States v. Larionoff, 431 U.S. 864, 873 (1977) and instead focused on the powers delegated by Congress to the Treasury Secretary under § 5321(a)(5) to determine the amount of penalty so long as it did not exceed the ceiling set by § 5321 (a)(5)(C).

In Larionoff, the Supreme Court, citing Bowles v.Seminole Rock Co, 325 U.S. 410,414 (1945) and quoting language from the Bowles decision stated:

“In construing administrative regulations, ‘the ultimate criterion is the administrative interpretation, which becomes of controlling weight, unless it is plainly erroneous or inconsistent with the regulation”. Id. at 873.

The Court, citing Manhattan General Equip Co. v Commissioner, 297 U.S. 129,134(1936) further stated:

“For regulations, in order to be valid, must be consistent with the statute under which they are promulgated.” Id at 873.

In Manhattan General Equip Co., the Supreme Court held that:

“A regulation which does not do this, but operates to create a rule out of harmony with a statute, is a mere nullity” Id at 134.

In the Norman decision, the IRS assessed a penalty against Mindy P. Norman in the amount of $803,530 for the willful failure to file an FBAR in connection with a Swiss bank account she maintained during the tax year 2007. The taxpayer appealed the assessment with the IRS Office of Appeals, who affirmed the IRS assessment, concluding that Ms. Norman willfully failed to file an FBAR. The Taxpayer then paid the penalty in full and instituted an action In the United States Court of Federal Claims. Following a one day trial and in response to a letter sent by the Norman citing the Colliot decision, the Court of Claims, Ordered the IRS to respond and comment on Colliot. The IRS filed a timely response. However, the Court did not permit the Taxpayer to file a reply. After considering the IRS response and the trial testimony and other documents, the Court ruled in favor of the IRS and concluded that Ms. Norman willfully failed to file an FBAR in 2007 and that the assessed penalty in the amount of 50 percent of the balance of the unreported account was proper.

In arriving at its decision, the Norman Court painstakingly dissected the Colliot decision and properly pointed out the defects in the District Court’s logic in ruling in favor of the Ms. Colliot. The Court of Claims traced the legislative history of the BSA, the relevant statutory and regulatory provisions and the impact of the changes to the FBAR penalty structure as a result of the AJCA. The Court concluded that the District Court in Colliot ignored the mandate created by the amendment in 2004 and instead elected to focus on the language in §5321(a)(5) that vests the Secretary of the Treasury with the discretion to determine the amount of the penalty.

The Court of Claims cited the following language used by Congress in amending the statute as a basis for invalidating C.F.R. § 1010.820:

“Congress used the imperative ‘shall’ rather than the permissive, ‘may,’ thereby raising the ceiling for the penalty, and in doing so, removed the Treasury Secretary’s discretion to regulation any other maximum.” Norman at Pg. 8.

The Norman Court cited Larionoff for the proposition that Congress has the power to supersede regulations by amending a statute. The Court stated that “in order to be valid [,] [regulations] must be consistent with the statute under which they are promulgated.” The Norman Court concluded that § 5321 (a) (5) (C) (i) which sets the maximum penalty to the greater of $100,000 or 50% of the balance of the account, is inconsistent with 31C.F.R. § 1010.820 rendering 31 C.F.R. § 1010.820 invalid.

The foregoing has particular relevance for those who have failed to take advantage of the Offshore Voluntary Disclosure Program, which is now closed, or otherwise failed to utilize the streamlined procedures and those who have made quiet disclosure and now found themselves the subject of a grand jury subpoena.  The IRS has consistently maintained that offshore financial crimes are a top priority and continues to work with its global partners in unmasking those with unreported foreign financial accounts. FATCA is also producing a steady stream of taxpayer information from which the IRS develops leads. In addition, current prosecutions of facilitators and taxpayers as well as taxpayers who have elected to come forward have yielded a treasure trove of information which the IRS is using to identify other non-compliant taxpayers.

Those who have failed to come forward and report their foreign financial accounts are more likely than not, going to be subject to the willful civil FBAR penalty consistent with Norman decision. Mitigation of the willful FBAR penalty is only possible where the taxpayer comes forward and makes an honest disclosure.

By: Anthony N. Verni, Attorney at Law, CPA.
© 1/26/2019
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New Developments in The Willful Civil FBAR Penalty

Current Developments May Make It Easier For the IRS To Assess Penalties After Willfully Failing to File FBAR’s

The Foreign Bank Account Report (FBAR) can be submitted with the advice of a tax law attorney.A taxpayer who willfully fails to file a Report of Foreign Bank and Financial Accounts (FBAR) may be subject to both civil and criminal penalties as well as imprisonment.  In both the criminal and civil context, the government has the burden of proof.

In FBAR criminal prosecutions, the standard of proof is well settled and requires the government to prove its case using the beyond a reasonable doubt standard.  However, in cases involving the assessment of the 31 USC § 5321(a) (5(C) willful civil FBAR penalty, the standard of proof  is unsettled and remains the subject of debate among legal scholars, practitioners and the judiciary. Practitioners have argued that the standard of proof in assessing the willful civil FBAR penalty should be the clear and convincing standard, citing Chief Counsel Advice (CCA) memorandum released January 20, 2006, CCM 200603026 (See discussion below) in support of using the higher standard of proof.

The correct standard of proof to be applied for assessing the willful civil FBAR penalty often arises in the context of an assessment of the willful civil FBAR penalty by IRS Examinations, an Appeal by the taxpayer, or in defense of an action by the U.S. government to enforce the 31 USC § 5321(a) (5(C) penalty. The proper standard of proof to apply in the context of the willful failure to file an FBAR has been the subject of a number of lower federal court decisions and is also reflected in jury instructions submitted by U.S. District Court in the Southern District of Florida. The Courts in all three cases have cited the preponderance of evidence standard as the correct standard to apply when assessing the 31 USC § 5321(a) (5(C) penalty.

Based upon two recent cases, the stage may now set for the U.S. Court of Appeals for the Fifth and Ninth Circuits to ultimately decide the correct standard of proof to be applied when assessing the31 USC § 5321(a) (5(C) penalty.

The first case, Gubser v Comm’r, 2016 WL. 3129530 (S.D. Tex. May 4, 2015) comes out of the U.S. District Court for the Southern District of Texas. In Gubser, the taxpayer filed a complaint in the District Court asking for a declaratory judgment that the proper standard to be applied in a willful civil FBAR penalty case is the clear and convincing standard. The District Court dismissed the taxpayer’s suit based upon lack of standing. The taxpayer subsequently filed an appeal.

Although the question currently before the Fifth Circuit is limited to standing, some observers believe that if the taxpayer prevails and the matter is remanded back to the District Court for further findings, the standard of proof issue to be applied in a willful civil FBAR penalty will find its way back to the Fifth Circuit.

The second case, U.S. V. August Bohanec and Maria Bohanec (Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16) involves a decision from the United States District Court for the Central District of California. In Bohanec, the Court rejected the taxpayers’ argument that the clear and convincing standard should be applied in a willful civil FBAR penalty case. Instead, the District Court applied the lower preponderance of the evidence standard of proof. The taxpayers’ attorney has indicated the taxpayers will appeal the decision.

The ultimate determination of the standard to be applied when assessing the willful civil FBAR penalty and its importance cannot be overstated; a decision by the Fifth and/or Ninth Circuits citing the preponderance of evidence as the correct standard will certainly have a chilling effect on taxpayers, who are considering opting out of the OVDP, and will also pose a greater risk to those taxpayers who have  or will submit a  Certification of Non-Willfulness as part of the Streamlined Procedures.  If the Appeals Court finds that the correct standard is the preponderance of evidence, taxpayers can also expect the IRS to be more aggressive in scrutinizing taxpayers who opt Out of the OVDP or those who proceed using the Streamlined Procedures.

This article outlines the concept of “willfulness” in light of U.S.C. §5321(a) (5) (C), CCM200603026, JB Williams, McBride and Zwerner and in anticipation of the Gubser and Bohanec cases making their way to the U.S. Court of Appeals.

A taxpayer who “willfully” fails to file an FBAR faces a penalty equal to the greater of $100,000 or 50% of the foreign financial account balance as of the June 30 FBAR due date,31 U.S.C. §5321(a) (5) (C). Neither the FBAR statute nor the regulations promulgated there under provide any guidance on the standard of proof to be applied in the assessment of the willful civil FBAR Penalty. In Chief Counsel Advice (CCA) memorandum released January 20, 2006, analyzing the issue of willfulness in the FBAR civil context, the IRS compared the burden of proof for the willful civil FBAR penalty to the burden of proof for the civil fraud penalty under 26 U.S. Code §. 6663, explaining that it expects the standard of proof will be the same—clear and convincing evidence, not merely a preponderance of the evidence. Proponents for applying the higher standard often cite CCM 200603026 in support. Despite CCM 200603026, the U.S. District Court, in three cases has cited the lower preponderance of the evidence standard as the correct standard when assessing the willful civil FBAR penalty.

The United States District Court in JB Williams applied the preponderance of the evidence standard,United States vs. Williams, 2010 U.S. Dist. LEXIS 90794 (ED VA 2010). In JB Williams, the government brought an action in the US District Court for the Eastern District of Virginia seeking to enforce the civil willful FBAR penalties assessed against the taxpayer for his failure to report his interest in two foreign bank accounts for tax year2000, in violation of 31 U.S.C. § 5314.  The taxpayer previously plead guilty to two count superseding information for Conspiracy to Defraud the IRS and Criminal Tax Evasion.  As part of the plea, Williams agreed to allocute to all of the essential elements of the charged crimes, including that he unlawfully, willfully, and knowingly evaded taxes by filing false and fraudulent tax returns on which he failed to disclose his interest in the Swiss accounts.

Furthermore, the taxpayer checked “no” in response to the question on Schedule B Form 1040, regarding the existence of a foreign financial account, despite having transferred $7M to a Swiss bank account.  In addition, the taxpayer completed a tax organizer, wherein he answered: “no” in response to a question as to whether he had a financial interest in or was a signatory over a foreign financial account. The taxpayer provided the following statement as part of his allocution.

“I also knew that I had the obligation to report to the IRS and/or the Department of the Treasury the existence of the Swiss accounts, but for the calendar year tax returns 1993 through 2000, I chose not to in order to assist in hiding my true income from the IRS and evade taxes thereon, until I filed my 2001 tax return.”

. . . .

The District Court, held without discussion, that the government’s burden to establish a willful violation of 31 U.S.C. § 5314only requires proof by a preponderance of the evidence.The District Court further held that the Taxpayer’s eventual filing of the delinquent FBARS, “negated” willfulness.  In reversing the District Court’s decision, the U.S. Court of Appeals for the Fourth Circuit, dodging the standard of proof question, held that the District Court clearly erred  in finding that the Government failed to prove that Williams willfully violated 31 USC § 5314.

In U.S. v. McBride, [908 F. Supp.2d 1186, 1201 (D. Utah 2012)], the District Court for the District of Utah Central District, relying on Williams held that the correct standard for imposition of the willful civil FBAR penalty is the preponderance of the evidence standard. Likewise, in U.S. v Zwerner, a 2014 Florida Case, the Federal District Court for the Southern District of Florida submitted the issue on willfulness to the jury using a preponderance of evidence standard.The U.S. Court of Appeals has yet to weigh in on the correct standard of proof to be applied in a 31 USC § 5321(a) (5(C) willful FBAR penalty case. However,  two recent lower court cases make clear that the higher court will ultimately be called upon to determine the correct standard of proof question.

In Gubser v. Comm’r, 2016 WL, 3129530 (S.D. Tex. May 4, 2016), the taxpayer, a Swiss citizen by birth and later naturalized asa U.S. Citizen maintained a Swiss account, which he opened when he was a young man. The purpose for opening the account was to enable the taxpayer to accumulate savings for his retirement in Switzerland.  Since its opening, the account was always held in Gubser’s name and the funds in the account represented after tax earnings. Grubser retained the services of a CPA, who prepared the taxpayer’s U.S. tax return for over 20 years. During this time, the CPA never raised the question whether the taxpayer had an interest in any foreign financial account. The matter first came to the taxpayer’s attention in 2010 when someone from the CPA’s office raised the question of the existence of foreign financial accounts. Gubser promptly filed an FBAR report for 2009 and subsequent years.  In addition, the taxpayer entered the OVDP, covering the tax years 2003-2010.   Subsequently, Gubser opted out of the OVDP, which resulted in the IRS sending Gubser a  3709 Letter (the FBAR 30 day letter), proposing the50% willful civil FBAR penalty pursuant to 31 USC § 5321(a)(5(C) for the tax year 2008. The penalty in the amount of $1.3M reflected approximately 50% of the taxpayer’s entire life savings.  Grubser filed a timely protest letter with Appeals.  When the taxpayer discussed the matter with the Appeals officer, the Appeals officer told Gubser that the IRS could prove willfulness by using the preponderance of the evidence standard, but not by the clear and convincing standard. The Appeals officer also asked for guidance on the proper standard.

Grubser thereafter filed a declaratory judgment action with the U.S. District Court for the Southern District of Texas, requesting that the Court declare that the IRS must prove willfulness by clear and convincing evidence. In response the government filed a motion to dismiss based upon lack of standing, arguing that the taxpayer’s injury could not be redressed by a declaratory judgment, since such a judgment would be non-binding on the IRS. The government’s motion was granted and Gruber appealed to the Fifth Circuit.

The second case to watch isU.S. V. August Bohanecand Maria Bohanec (Case No. 215-CV-4347 ddp (FFMx) (filed 12/8/16). In Bohanec, the taxpayers had previously applied for and were denied participation in the Offshore Voluntary Disclosure Program (“OVDP”), in part, due to several misrepresentations made during the OVDP process. The U.S. District Court for the Central District of California rejected the taxpayers’ argument that the government had to show willfulness under the clear and convincing standard of proof, and instead applied the preponderance of evidence standard of proof.  The Court found that the taxpayers’ failure to file FBAR’s for three accounts the taxpayers maintained for over a decade was at least “recklessly indifferent to a statutory duty.” The taxpayers’ attorney has indicated that the taxpayers will appeal the District Court’s decision.

Taxpayers currently participating in the OVDP, who are considering opting out of the Program or those who are thinking of making a disclosure using the Streamlined Procedures certainly need to proceed with caution.  The U.S. Court of Appeals for the Fifth and Ninth Circuits will ultimately address the correct standard to be applied in the assessment of the willful civil FBAR penalty. These decision(s) will undoubtedly have a significant impact on both current and future taxpayers who have made or are considering making a voluntary disclosure.

The takeaway here is that any decision  involving making an offshore voluntary disclosure should not be made based upon an internet search. Instead, those faced with the decision of making an offshore voluntary disclosure should consult with a knowledgeable and experienced tax attorney, who can assess the specific facts of each case and assess the risks associated with choosing one method of disclosure over another. At the Law Office of Anthony Verni, we know that there is no one size solution to fit all, contact us today or leave a comment below.

© 2017 Anthony N. Verni, Attorney at Law, CPA

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