United States v. McBride (FBAR Series)

United States v. McBride, U.S. District Court, D. Utah | November 8, 2012 | Nuffer , J. | No. 2:09-cv-378

Short Summary: Government brought action to enforce civil penalty assessed against taxpayer based on his failure to report his interest in four foreign bank accounts during two tax years.

Key Issue: First, whether taxpayer had financial interests in the accounts at issue. Second, whether taxpayer’s failure to comply with FBAR reporting requirements was willful. Third, whether the amounts of civil penalties assessed were proper.

Primary Holdings:

taxpayer had financial interests in four foreign financial accounts in foreign countries;
taxpayer’s failure to comply with FBAR (Report of Foreign Bank and Financial Accounts) reporting requirements was willful; and
amounts of civil penalties assessed were proper.

Key Points of Law:

Taxpayer had financial interests in four foreign financial accounts in foreign countries, as required to trigger FBAR (Report of Foreign Bank and Financial Accounts) reporting requirements; documentation and communication regarding the accounts showed that an agency relationship existed by means of which the accounts were treated as taxpayer’s accounts, and he maintained substantial control over them.
Taxpayer’s failure to comply with FBAR (Report of Foreign Bank and Financial Accounts) reporting requirements for four foreign financial accounts was willful; taxpayer’s signature on his returns demonstrated he knew of his duty to comply with FBAR requirements, he admitted he had read the marketing and promotional materials sent to him by the financial management firm that set up the accounts for him, which informed him of that duty, and in any case his conduct was reckless and willfully blind to the obvious risk of failing to comply with the reporting requirements, in that having notice of the potential risks of failing to report, and having evidenced concern about whether the management firm was employing illegal strategies, he nonetheless did not attempt to obtain a legal opinion that would identify whether the scheme had any consequences with respect to his filing obligations;

Taxpayer, not the preparer, has the ultimate responsibility to file his or her return and pay the tax due, and this duty cannot generally be avoided by relying on an agent.

Amounts of civil penalties assessed on basis of taxpayer’s failure to comply with FBAR (Report of Foreign Bank and Financial Accounts) reporting requirements for four foreign financial accounts were proper; statements issued for the accounts demonstrated that they each had balances of at least $10,000 in the two tax years at issue.

Insight:

This decision differs from those of other prominent FBAR cases due to the obviousness of the defendant’s conduct to conceal his activity from the IRS.[1] In other cases, where the defendant’s misrepresentation or misunderstanding of FBAR reporting requirements was less obvious, courts have allowed for a finding of willful ignorance or recklessness to suffice for willful FBAR penalties.[2] In this case, however, McBride’s conduct included active concealment of the offshore accounts and financial fraud in addition to his several statements that misrepresented the truth to the IRS.[3] What is even more surprising is that the court did not hold that McBride’s conduct was traditionally “willful.”[4] Instead, the court held that McBride’s conduct was reckless and willfully blind because he acted in disregard of known or obvious risks.[5] This seems to be the safer determination, because it does not require actual intent or knowledge, but still satisfied the willfulness requirement and allows for heightened penalties under 31 U.S.C. § 5314.[6]

[1] See above.

[2] See above.

[3] United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012).

[4] Id. at 1209.

[5] Id. at 1209-1210.

[6] Id. at 1201.