United States v. Hughes: FBAR Penalties and a Willfulness Roadmap

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United States v. Hughes: FBAR Penalties and a Willfulness Roadmap

In the recent case of United States v. Hughes, a federal district court upheld willful FBAR penalties against a taxpayer for failing to report foreign accounts.  The court, siding with the government in two out of four years at issue, found that the violations were “willful”—in part basing its conclusion on the fact that the taxpayer checked “yes” on Schedule B, failed to read the Form 1040 instructions, and failed to report interest income earned in the foreign account.

The Hughes decision provides a bit of a roadmap of the evidence that the government will look at in building a case against a taxpayer for willful conduct. The case originated when the government filed a lawsuit seeking to enforce civil FBAR penalties against the taxpayer, Hughes, for failing to report several foreign bank accounts by filing a “FBAR.”

After weighing the evidence, the Court found that Hughes’s failure to file FBARs in two of the years at issue was “willful,” but also found that the government did not demonstrate willfulness as to the two earlier years.

The FBAR

The Bank Secrecy Act requires that all U.S. persons file a report—known as a FBAR—annually listing their foreign financial accounts if those accounts exceed $10,000 in the aggregate. The penalty for failing to file the report varies depending on whether the violation was willful or non-willful.

The penalty for a non-willful violation is $10,000 (adjusted for inflation). The penalty for a “willful” violation is more significant: generally the greater of $100,000 or half of the balance of the account at the time of the violation.

To assess penalties for a “willful” violation of the requirement to file an FBAR, the government must demonstrate that:

(1) the defendant was a ‘U.S. Person,’

(2) who had an interest in or authority over the subject foreign accounts,

(3) that had an aggregate value of $10,000.00 or more, and

(4) that he willfully failed to file an FBAR Form for the accounts.”

In a civil action, the United States has the burden of proof.  Most courts have held that the standard to show a willful violation is the preponderance-of-the-evidence standard, although this is not a settled issue.  That standard requires that the government “provide evidence establishing that it is ‘more likely than not’” that the elements are satisfied.

Most courts to consider the issue have held that, for the purpose of civil FBAR penalties, either recklessness or willful blindness can suffice to show a willful violation.

The Court’s Holding

The Court found that Hughes’s failures to file FBARs for 2012 and 2013 were “reckless,” and thus constituted “willful” violations of the filing requirement for those years.  It did not, however, find the violations with respect to 2010 and 2011 to be fillful.  The court’s analysis, in part, follows:

With respect to her 2012 and 2013 returns, there is no doubt that Hughes saw the questions about filing an FBAR, because she answered them (and in 2012, stated that she was required to file one). In 2010 and 2011, Hughes’s returns did not include Schedule B, so the certification that she “examined this return and accompanying schedules and statements” does not encompass that schedule and its admonitions about the FBAR. \The United States has identified nothing in Hughes’s 2010 or 2011 returns as actually filed that, if “examined” as she certified, would have put her on notice of the FBAR requirement.

The circumstances of Hughes’s2010 and 2011 tax returns differ from 2012 and 2013. Unlike those later years, there is no indication that Hughesreviewed Schedule B, with its instructions regarding the FBAR requirement, in preparing her 2010 and 2011 returns or any time before she did so. In the absence of any evidence that Hughes was aware of the FBAR filing requirement when she completed her returns for those years, or that she was presented with any information that should have put her on notice of that requirement, the United States has not met its burden to show that her failure to file FBARs in those years was anything more than negligent. The United States therefore cannot assess penalties for “willful” violations for those years.

Hughes’s paid New Zealand taxes on her interest income, but apparently testified that she did not take any steps to determine whether that gave rise to an exception to the FBAR requirement.  The court focused on the Schedule B instruction to “[s]ee Form TD F 90-22.1 and its instructions for filing requirements and exceptions,” which it concluded gave rise to an “unjustifiably high risk of harm that is … so obvious that it should be known.”

During her testimony, Hughes acknowledged that if she had read the instructions—as, the court emphasized, Schedule B instructed her to do—she “would have filed the FBARs.” The court found that the need to file FBARs was “obvious.”

Conclusion

Hughes is yet another case upholding willful FBAR penalties.  As we have discussed previously, the Hughes decision provides some additional clarity on the distinction between willful and non-willful conduct. But, perhaps more importantly, it provides a roadmap of the evidence that the government will look at in building a case against a taxpayer for willful conduct.