United States v. Ott (FBAR Series)

United States v. Ott, U.S. District Court, E.D. Michigan | February 26, 2020 | Drain, J. | No. 18-cv-12174

Short Summary: On July 12, 2018, Plaintiff United States of America filed the instant action against Defendant Dennis Ott (“Ott”). ECF No. 1. The United States seeks to collect civil penalties for Ott’s failure to file a Report of Foreign Bank and Financial Accounts (“FBAR”) for the years 2007, 2008, and 2009. Specifically, the United States alleges that Defendant’s failure to file an FBAR was willful for the years in question. While Defendant concedes that he did not file an FBAR during these years, he argues that his failure was merely negligent and did not rise to the level of willfulness. This Court conducted a bench trial on October 29 and October 30, 2019.

Key Issue: Whether defendant’s failure to timely file FBAR was merely negligent or rose to the level of willfulness.

Primary Holdings:

Defendant acted recklessly and with willful blindness by failing to report his foreign accounts. This court therefore finds that Ott willfully failed to timely file FBARs for 2007, 2008, and 2009 under 31 U.S.C. § 5321.

Key Points of Law:

In civil cases involving failure to file an FBAR, courts define willful conduct to include either recklessness or willful blindness. Willful action includes “conduct marked by careless disregard whether or not one has the right so to act.” United States v. Murdock, 290 U.S. 389, 395, 54 S.Ct. 223, 78 L.Ed. 381 (1933). Given the present legal landscape, this Court finds that willful blindness may be proven by objective recklessness in the civil FBAR context.
In the objective willfulness inquiry, a court may consider “circumstantial evidence and reasonable inferences drawn from the facts because direct proof of the taxpayer’s intent is rarely available.” McBride, 908 F. Supp. 2d at 1205.
Defendant signed a return each year, under penalty of perjury—regardless of whether he actually read the return—certifying that he did not have an interest in foreign accounts. Accordingly, constructive knowledge of the requirement to file the FBAR is imputed to Ott, supporting a finding of willfulness here.
The Defendant’s failure to discuss his foreign investments with his long-time accountant indicates “a conscious effort to avoid learning about reporting requirements.” Defendant’s lack of experience in tax accounting suggests that he knew, or should have known, that relying solely on advice he received as a young adult, without consulting his accountant, was reckless conduct in disregard of potential reporting requirements.
A lack of sophisticated business dealings or specialized tax knowledge does not preclude a finding of willfulness when acts of concealment are present. Using an address that matched the country of the foreign bank accounts suggests that defendant sought to avoid the detection of his account ownership. Further, sending everything to his sister allowed defendant to avoid seeing any statements concerning reporting responsibilities. Failure to review mail constitutes an act of concealment and conduct marked by careless disregard.
Defendant’s active knowledge of almost—or more than—a million dollars in account balances for the years in question indicates that the Defendant acted with reckless disregard to his reporting requirements.

Insight:

One interesting aspect of this opinion is the discussion of Ott’s financial sophistication and income level apart from the foreign accounts. The court mentions that Ott had not completed college, did not have any training in tax or finance, and did not regularly deal in sophisticated transactions.[1] From this, they make conclusions as to Ott’s intent in the case.[2] First, they hold that just because the defendant had no experience in sophisticated transactions does not mean that a finding of willfulness or concealment can be precluded.[3] The court focused on the findings of fact which showed that Ott made attempts to conceal or shroud his foreign investment account activity.[4]

Another conclusion that the court makes with regard to Ott’s education and business sophistication is that his multiple withdrawals of thousands of dollars from his account would be unlikely to be forgotten with someone at his income level.[5] The court accepted the government’s argument that Ott’s claiming he could not remember the details of these withdrawals is not credible, because someone with an income near the poverty line would unlikely forget making withdrawals of that amount.[6] This holding begs the question that if Ott were a defendant like Schwarzbaum, who had assets in the tens of millions, he may have a more plausible excuse of not remembering withdrawing large amounts from these foreign accounts.[7]

[1] United States v. Ott, No. 18-cv-12174, 2020 WL 913814, at *1 (E.D. Mich. Feb 26, 2020).

[2] Id. at *7.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Id.