Yet another federal court has determined that the government-friendly, preponderance-of-the-evidence standard—rather than the higher, clear-and-convincing-evidence standard—applies in civil “willful” FBAR penalty cases. The district court’s decision in United States v. Garrity, No. 3:15-cv-00243 (D. Conn. April 3, 2018) comes on the heels of a taxpayer victory in Colliet on different grounds. See our prior blog for comments on Colliot: The Colliot Decision. The Garrity court joined a strand of cases that have rejected taxpayer arguments to hold the government to a more stringent evidentiary standard—a standard that would require the government to establish, by clear and convincing evidence, that a taxpayer’s failure to report a foreign account on an FBAR was willful. See How the FBAR’s “Willfulness” Element Has Recently Evolved. Instead, the court adopted a lower burden that makes it easier for the government to impose and collect FBAR penalties.
Importantly, the court also held—again joining a strand of other courts—that “willfulness” can be established by demonstrating that the taxpayer acted “recklessly.” The upshot is that the government can sustain willful FBAR penalties by demonstrating, by a mere preponderance of the evidence, that a taxpayer acted “recklessly” in failing to report a foreign account.
The standard is important because the penalties for a willful violation are draconian. Under the applicable statute, that penalty is equal to the greater of $100,000 or fifty percent of the balance in the account at the time of violation. 31 U.S.C. §§ 5321(a)(5)(C), (D)(ii). Thus, a lot is at stake. Under the standard adopted in Garrity, a taxpayer’s reckless failure to report a foreign account/asset could lead to a penalty equal to half the balance in that account.
Notably, the statute, 31 U.S.C Section 5321(a)(5), doesn’t define “willfulness.” Traditionally, the concept of “willfulness”—as used under Title 31 at least—has been limited to intentional violations of known legal duties, and has not encompassed a mere reckless disregard of a duty. See Ratzlaf v. United States, 510 U.S. 135 (1994) (structuring); United States v. Eisenstein, 731 F.2d 1540 (11th Cir. 1984) (failure to file currency transaction reports). But several courts previously edged away from that traditional understanding, holding that “willfulness” under 31 U.S.C. § 5321 can be satisfied by mere reckless disregard. See Bedrosian v. United States, No. CV 15-5853, 2017 U.S. Dist. LEXIS 142793, 2017 WL 3887520, at *1 (E.D. Pa. Sept. 5, 2017); United States v. Bohanec, 263 F. Supp. 3d 881, 889 (C.D. Cal. 2016); United States v Williams, 489 Fed.Appx. 655, 658 (4th Cir. 2012); United States v. Bussell, No. CV 15-02034 SJO(VBKx), 2015 WL 9957826 at *5 (C.D. Cal. Dec. 8, 2015); see also United States v. McBride, 908 F.Supp. 2d 1186, 1204, 1209 (D. Utah 2012). Garrity joins those courts.
Interestingly, these courts have rejected the IRS’s own 2006 Chief Counsel Advice 200603026 and the Internal Revenue Manual’s interpretation of “willfulness” under 31 U.S.C. Section 5321, in which the IRS previously took the position that the clear-and-convincing-evidence standard applied. There, the IRS defined willfulness as “a voluntary, intentional violation of a known legal duty.” I.R.M. 22.214.171.124.5.1. Even though the IRS previously adopted that definition and standard, it has argued (successfully so far) that courts should not hold it to that higher standard.
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