I blogged recently about the fact that mounting court cases have given the stamp of approval for the Government to meet a lower “burden of proof” in demonstrating that a taxpayer “willfully” failed to file an FBAR. The “burden of proof” refers to which party is responsible for putting forth evidence and, the level of evidence that party must provide in order to win the case. Many tax practitioners had previously believed that the burden of proof required for sustaining a “willful” FBAR penalty was the “clear and convincing evidence” standard. However, the recent trend of court cases have shown this is not so and indicate that the burden of proof for the government is the lower “preponderance of the evidence” standard. My blog post also posits that the courts are whittling away at the meaning of “willful”, making it easier for the Internal Revenue Service (IRS) to prove an FBAR violation was “willful”.
Now armed with this “ammunition” of judicial acceptance of its positions, the IRS is flexing its muscles even more in the courthouse! It’s a classic case of “Give them an inch and they will take a mile”. The spin doctors over at the IRS have sure been busy. The Kimble case discussed below illustrates the point.
Kimble v. United States – FBAR Willful Penalty
By way of background, Ms. Kimble failed to file FBARs for many years with regard to a Swiss “numbered” account at UBS and an account with HSBC in Paris. Mrs. Kimble was made a joint owner of the Swiss account with her father during his life and the account had been inherited from her father at his death. The father (who was, by the way, an attorney) had failed to report it at any time during his life. Mrs. Kimble admitted that the account was to be kept highly secret and only certain family members knew about it. Further, she admitted to wanting to hide it from the US Government! She never reported the existence of either foreign account to her accountant who prepared her returns; the returns always had the “no” box checked with regard to foreign accounts. When UBS was under pressure by the Department of Justice for assisting Americans in tax evasion, Ms. Kimble entered the OVDP. Upon learning of the penalty amount she would be assessed in OVDP, she “opted out” and decided to take her chances.
Willful? Can these facts get any worse?
The Kimble case was brought as a refund suit for FBAR penalty amounts paid by Ms. Kimble after the post opt-out IRS audit.
The Government’s motion and brief for summary judgment in Kimble v. United States (CFC Dkt. no. 17-421 T) can be found here. In its brief, the Government takes an aggressive stance, clearly pushing all boundaries, about what it must prove to establish a taxpayer’s liability for the FBAR “willful” civil penalty. Let’s see how far the IRS will get in taking FBAR violations to the next level.
First, along with a significant line of cases now holding that the lower “preponderance of the evidence” standard applies for determining a “willful” FBAR violation, the Government in Kimble unsurprisingly also makes this assertion. It’s doubtful that the court will disagree and buck the growing trend. I think we can firmly kiss the “clear and convincing evidence” standard goodbye when it comes to the “willful” civil FBAR penalty. Unfortunately for taxpayers, the lower standard will be applied.
“Willfulness” – Fifty Shades of Gray and All Shades Favor the IRS
Now, to the Government’s position in defining “willfulness” for FBAR civil penalty purposes. Below are some excerpts from its brief in Kimble (underscoring, mine):
“The text of the [FBAR] statute does not define the term “willful” or “willfully.” 31 U.S.C. § 5321(a)(5). When interpreting the term in other contexts, the Supreme Court has held that ‘willfully’ is a word of many meanings whose construction is often dependent on the context in which it appears.” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007). Courts have outlined three standards for willfulness in the FBAR context. These standards are in the alternative, that is, if the taxpayer’s situation meets even one of them, willfulness would be established. The standards are: (1) failing to comply with a legal duty voluntarily rather than accidentally; (2) willful blindness to a legal duty and the attendant facts; and (3) reckless disregard of a legal duty. Under any of the three standards, the government can show willfulness “through inference from conduct meant to conceal or mislead sources of income or financial information.”
With regard to 1) the Government brief seems to be a somewhat sloppy referral to the test for willfulness being whether there was a “voluntary, intentional violation of a known legal duty.” Here is where the Government starts flexing its muscle and pushing the FBAR penalty boundary. The brief at page 19 focuses on the fact that “By virtue of her having signed her federal income tax return, Mrs. Kimble is charged with knowledge of the FBAR reporting requirement.” The brief does not assert that she knew of her legal duty to file FBAR and voluntarily chose not to comply. Rather, the Government brief posits that Mrs. Kimble had “constructive knowledge” of the FBAR filing requirement since she was charged with knowledge of the contents of the tax return by virtue of having signed it and on the return at Schedule B there is the foreign account question and reference to the FBAR filing requirement. The next building block in the Government’s construction of its house of cards is that once Mrs. Kimble had such constructive knowledge (note, not actual knowledge), when the return answered “no” to the FBAR question, then it must necessarily follow that Mrs. Kimble made a voluntary choice to disregard her duty to file the FBAR.
In reading the Government brief (see pages 20-21), you can see the IRS spin doctors spinning in all their glory.
“Willful blindness” is the second theory under which the IRS posits that a taxpayer acted “willfully” in violating the FBAR statute. For the Government, “willful blindness” is a clear substitute for specific intent, and not merely a factor to be considered in the case to making a determination that a taxpayer “willfully” violated the statute. The concept of “willful blindness” has been around for awhile and rests on the notion that the person subjectively believes that there is a high probability that a fact exists, yet he deliberately avoids learning of that fact. In the tax return context, a taxpayer’s decision to sign his return without understanding its contents constitutes willful blindness. Another example of a taxpayer making himself willfully blind is by his failure to disclose all relevant information to the accountant that prepared his tax return. Mrs. Kimble appeared to have had done both.
And Now, “Recklessness” Means “Willfulness” Too
Here, IRS maintains that the government can prove willfulness when it can show the taxpayer acted “recklessly” in his obligation to file an FBAR, effectively expanding the definition of “willful” conduct when it comes to FBAR penalties. “Reckless disregard” does not rise to the level of specific intent to violate a known legal duty, but the IRS position is gaining traction in the courts.
What does it mean to say that a “reckless disregard of a statutory duty” is sufficient to be “willful”? Defining what constitutes a “reckless disregard of a statutory duty” is no simple feat. It will depend on the facts presented in the case. So far, the facts of cases using the “reckless” equals “willful” definition have exhibited what I call “bad facts”. Mrs. Kimble’s facts are also “bad” facts.
The Courts are Buying In
In reviewing the case law, the courts are buying the IRS’ interpretations. IRS is laying the groundwork re-defining “willfulness” in these cases for two reasons: First, IRS is setting itself up for an easier “willful” FBAR penalty win in court on less egregious facts. Second, once these cases are on the books with the courts accepting the IRS position, the agency can garner stronger bargaining power in negotiating penalties with noncompliant taxpayers who get caught. These cases are mere stepping stones for the IRS, leading to a big pot of gold FBAR penalties at the end of the rainbow.
With the courts more easily upholding a finding of “willfulness” when it comes to offshore holdings there is little doubt in my mind where this trend will next lead. More “mild” facts might be treated as “nonwillful” today, but they are on the way to becoming tomorrow’s “bad” facts supporting a finding of “willfullness” under the IRS broad view of “willful”.
With the imminent closure of OVDP and the courts making it easier and easier for the IRS to succeed on a “willful” argument, taxpayers who have remained tax noncompliant need to take the appropriate action. What such action may be for different taxpayers will depend entirely on his or her specific facts. Taxpayers should not feel pressured to jump into OVDP, but equally (if not more) dangerous is doing absolutely nothing. Getting good tax advice from an experienced international US tax advisor is the best place to start; let me know if you need help email@example.com
Published July 18, 2018
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8 thoughts on “FBAR “Willful” Penalty: New Case, Taxpayer “Charged With Knowledge””
Great post! You are truly the leading “FBAR Reporter” in the industry.
What strikes me about this is …
The person is being punished for having entered OVDI (which carries a presumption of willfulness) and then opting out. This is similar to the Kentara case which you previously wrote about here:
During the 2011 OVDI era a number of advisers seemed to treat “OVDI” as a sort of “administrative mechanism to solve compliance problems. They also viewed the “opt out” as part of the administrative process. This raises the question of: “How could this have happened?” Why did so many people enter OVDI? The reason it happened was because many practitioners viewed OVDI as a “mandatory” way of solving compliance problems. The perspective of time has shown that OVDI was always optional and that other options continued to exist … But, if one thought that OVDI was the ONLY way to solve compliance problems, then I suppose the idea was to: “Enter OVDI and then do an opt out”. That was the view of many practitioners.
The IRS. on the other hand, seemed to view OVDI as an admission of willfulness (even though the FAQs in 2011 did not make that clear). An OVDI “opt out” subjected one to normal audit and normal (whatever that means) penalties. I suspect that in this case, the IRS viewed this taxpayer as willful and therefore wanted to assert penalties based on willfulness.
This leads to the question you address: What is willfulness anyway? The answer is unclear. But, the lack of clarity is what allows Government lawyers to assert “willfulness on demand”. That said, it is rather damaging (as this person did) to acknowledge that one didn’t want the IRS to know about the “foreign” account.
A final thought on the FBAR problem …
People faced with FBAR problems should NOT view this as a “tax problem”. Therefore, they should NOT be looking to traditional “tax professionals” for assistance. Once there is a suggestion of “willfulness” one needs the services of a criminal lawyer with experience in Title 31 issues.
Thanks for a great post!
Dear John – thank you very much. I am glad you liked the post. I think you nailed it with your phrase concerning the definition of “willfulness”. The lack of clarity means the IRS can assert “willfulness on demand”.
I would point out that this truth poses a real danger for persons entering Streamlined. How many clients have come to you and said they did not read their returns, just signed them?
In addition, the Streamlined procedures have been around initially since 2012 and the current versions, since 2014 (with some tweaks here and there). The IRS agents reading the Statements of Fact for “nonwillfulness” most certainly are looking at them now with a different eye than they did 4 or 6 years ago. The times, they are a changin’!!
Title 31 issues are very nuanced and people need to be very careful. Get a second opinion on that Statement of Fact if you are entering Streamlined and make sure your advisor has the appropriate experience.
Indeed, re streamlined and the question of willfulness:
The IRS says:
“Taxpayers must certify that conduct was not willful. Taxpayers using either the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures, will be required to certify, in accordance with the specific instructions set forth below, that the failure to report all income, pay all tax and submit all required information returns, including FBARs (FinCEN Form 114, previously Form TD F 90-22,1) was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law”
Significantly, the definition of “non-willful” (including FBAR) includes:
“Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law””
This is a rather broad definition. It suggests that if one files the FBAR as part of the Streamlined program that the “willfulness” issue with respect to FBAR should be based on this broad definition.
Put it another way: If one attempts to correct the problem through “Streamlined”, then this “broad” definition of “non-willfulness” should apply. But, context matters. Streamlined offshore is different from Streamlined domestic.