The FBAR (FinCEN Form 114) requires United States persons to report any foreign financial accounts in which the person has signatory authority or a financial interest if the total value of such accounts exceeds $10,000.[1] In 2004, the IRS obtained the ability to impose non-willful civil penalties against those persons that fail to report such foreign accounts. Prior to that, penalties could only be asserted against those that willfully violated the FBAR rules. When a non-willful violation occurs, the IRS may assert a penalty up to $10,000.[2] However, when there is a willful violation, the IRS may assert a penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation.[3]
An important series of cases has helped develop the meaning of the willfulness element in this context. One early case in that series involved a taxpayer that attempted to enter into the Offshore Voluntary Compliance Initiative in 2003 after the U.S. had begun conducting a criminal investigation. The matter was initially brought before the Tax Court, which ruled that it did not have jurisdiction to address an FBAR penalty pre-assessment issue because there was no Notice of Determination issued by the IRS.[4]
The case landed in district court, and on appeal the Fourth Circuit held that the taxpayer’s signing of Form 1040 and lack of acknowledgment of the foreign accounts on Schedule B of the Form 1040 constituted reckless disregard or willfulness by the taxpayer.[5] On the Form 1040, a box on Schedule B was provided for the taxpayer to check if he had any foreign accounts during the tax year and provided instructions on determining whether a taxpayer had foreign accounts.[6] The taxpayer failed to acknowledge his foreign accounts, and the Fourth Circuit found that the Form 1040 put the taxpayer on inquiry notice.[7] Based on that inquiry notice, the taxpayer was on notice that he was required to file the FBAR, so the Fourth Circuit held the taxpayer acted recklessly because of his failure to check the box on the Form 1040 and file the FBAR.[8] This, the court found, was sufficient to constitute willfulness. This was interesting because, in a 2006 Chief Counsel Advice (CCA), the IRS had not intended the willfulness bar to be set so low. The IRS had previously stated that: “there is no willfulness if the accountholder has no knowledge of the duty to file the FBAR.”[9] Since the holding in Williams, however, the IRS has adopted the standard from the Fourth Circuit’s holding and largely ignored its 2006 CCA.
Several months after Williams was decided, a district court in Utah decided another case concerning FBAR civil penalties.[10] The taxpayer was a business owner that was worried about future taxes on his growing business, prompting him to consult a financial management firm that advised him to invest his money in offshore accounts.[11] At one point, the taxpayer described the plan as essentially tax evasion; nevertheless, the taxpayer followed through with the plan and invested his money in offshore entities and accounts where he would receive the funds as a “loan” to his company.[12] The taxpayer received a legal opinion stating that no legal issues existed such as tax evasion with the financial management firm’s plan.[13] The law firm, though, was a subsidiary of the financial management firm. During the tax years at issue, the taxpayer never acknowledged his foreign accounts on his Form 1040s nor did he file the required FBARs.[14] Nevertheless, the district court found that the taxpayer acted with “willful blindness,” which the court held satisfied the “willfulness” standard.[15] Under this precedent, if a taxpayer executes and files his Form 1040 without filing a required FBAR, the taxpayer is potentially deemed to have acted willfully and is potentially liable for maximum sanctions. In McBride, the district court enforced the willful FBAR penalty.
In a third case, a district court in California granted summary judgment for the U.S. when it was stipulated by the taxpayer that she willfully failed to file and FBAR and willfully failed to report the existence of the foreign account on her 1040 for that tax year.[16] In its opinion, the court went on to hold that a taxpayer acts willfully where it is shown that the taxpayer acted with a reckless disregard of a statutory duty; thus, the district court continued the extension of the definition of willfulness.[17]
A district court in December 2016 also held that the reckless disregard of a statutory duty satisfies the willfulness requirements for civil FBAR penalty purposes.[18] In addition, the court held that the appropriate burden of proof for civil FBAR penalties is the preponderance of the evidence standard rather than the clear and convincing standard.[19]
As this brief canvassing of the growing body of FBAR case law demonstrates, the courts have interpreted the willfulness element quite broadly in favor of the government. Courts have found it to be significant where a taxpayer does not acknowledge his foreign accounts on Schedule B of his Form 1040 and does not file a FBAR. Courts have further extended the definition of willfulness to include a reckless disregard of the obligation to file an FBAR. In other words, the evolution of FBAR case law has significantly lowered the standard necessary to prove “willfulness” in the FBAR context.
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[1] 31 U.S.C. § 5314.
[2] 31 U.S.C. § 5321(a)(5)(b)(i).
[3] 31 U.S.C. § 5321(a)(5)(C)(i).
[4] U.S. v. Williams, 131 T.C. 54 (2008).
[5] U.S. v. Williams, 489 Fed. Appx. 655 (4th Cir. 2012).
[6] Id.
[7] Id.
[8] Id.
[9] C.C.A. 2006-03-026 (March 26, 2006).
[10] U.S. v. McBride, 908 F.Supp. 2d 1186 (D.C. Utah 2012).
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id.
[16] U.S. v. Bussell, 117 AFTR2d 2016-439 (C.D.Ca. 2015).
[17] Id.
[18] U.S. v. Bohanec, 2016 U.S. Dist. LEXIS 170149 (C.D.Ca. December 8, 2016).
[19] Id.
