Mr. FBAR Gets Bolder in Toth – “Deemed Willfulness” for FBAR Violation

Today’s blog post looks again at the Report of Foreign Financial Accounts (Form 114), the well-known “FBAR”.  It examines a case of first impression when it comes to finding a “willful” FBAR violation.

Before delving into the case, I provide readers with a quick introduction to Mr. FBAR.

The FBAR has its genesis in the Bank Secrecy Act (BSA) and relevant Regulations. The FBAR must be filed by “US persons” if  (i) the person has a financial interest in, or signatory authority over, (ii) a foreign (non-US) financial account, and (iii) the aggregate value of all those foreign accounts exceeds US$10,000 at any time during the calendar year. Penalties are applied if a taxpayer forgets about Mr. FBAR or otherwise misses out on what he requires. The civil FBAR penalty varies, depending on if it is imposed for a “willful” or “nonwilllful” violation of the BSA.  Willful FBAR penalties can be the greater of USD100,000 or half the value of the foreign financial account at the time of the violation.

Neither the BSA nor governing regulations, however, define the term “willful”.   My various blog posts about FBAR over the years have followed the trend in the cases examining “willfulness” in the FBAR context.  In the early days of the FBAR crackdown, tax professionals hopefully believed that the applicable standard was a “voluntary, intentional violation of a known legal duty” (commonly referred to as the Cheek standard, based on the US Supreme Court case United Sates v. Cheek, 498 U.S. 192 (1991)).  This hope was soon put to rest as professionals saw that the trend of the courts was to give the government much wider berth in the meaning of civil “willfulness” for FBAR purposes.

We know from case law that a “willful” FBAR violation occurs not only when there is a “knowing” violation of the FBAR duty. Violations caused by “willful blindness”, and by a “reckless” disregard are sufficient as well.  In a nutshell, “willfulness” in the FBAR context does not require actual knowledge of the duty to report an interest in a foreign account. If a person knew, or reasonably should have known, about the FBAR reporting requirement, a “willful” FBAR penalty is justified even if the taxpayer unintentionally failed to file it or report an account on the FBAR.

United States v. Toth – A New Frontier

So – what makes the case of United States v. Toth, No. 21-1009 (1st Cir. 2022) so different? In Toth, we see for the first time a taxpayer’s FBAR violation is found to have been “willful” based solely on a so-called sanctions order, which is an order of the court.  Under this sanctions order, Ms. Toth was deemed “as a matter of law” to have been in willful violation of the BSA, without any examination of the taxpayer’s actual conduct.   This case certainly pushes the FBAR “willful” penalty boundary in an unexpected and perhaps dangerous direction.

Background

Monica Toth is a US citizen, 82 years old. She emigrated to the United States from South America. Her father had gifted her funds before he died, and Ms. Toth held the funds in a foreign bank account with the Union Bank of Switzerland (“UBS”) since 1999. Toth first filed an FBAR disclosing her Swiss UBS account to the IRS in 2010. The next year, the IRS audited her and concluded that Toth’s failure to file an FBAR had been willful for the 2007 calendar year. The IRS assessed a civil willful FBAR penalty against Toth, in the amount of US$2,173,703, being half the value of her Swiss UBS account.

Toth did not pay the FBAR penalty and the government filed a civil suit against her in 2015.  A series of negative occurrences painted Ms. Toth in an unfavorable light, including the fact that process servers were unsuccessful to serve Toth personally because she deliberately avoided them. They were forced to leave a copy of the complaint at her residence.  She did not respond to the complaint and the court issued a notice of default in February 2016. Shortly thereafter, Toth, representing herself, began to respond to the government’s filings.  The case moved on to discovery, but Toth was repeatedly not responsive to the government’s discovery request. When she did respond, her responses were inadequate.  She continued representing herself despite court admonishment to get an attorney.

The lower court characterized Ms. Toth’s discovery violations as “persistent”, a description with which the First Circuit agreed.   The record showed that Toth’s discovery violations continued despite the district court’s imposition of lesser sanctions against her as well as warnings that if Toth continued to fail to comply with its discovery orders, she could be sanctioned severely through Rule 37. She was warned that its application would include it to be taken as an established fact that she willfully failed to file her 2007 FBAR.  (Rule 37 “[may direct] that the matters embraced in the order or other designated facts be taken as established for purposes of the action, as the prevailing party claims”). At various times, up through 2018, the government moved for sanctions under Rule 37 against Toth for “stonewalling” the litigation process.

Deemed “Willful”

Ultimately the district court granted the sanctions under Rule 37 and summary judgment against Ms. Toth. The court especially noted “the gravity of the proposed sanctions,” which would take as established fact four findings, including a finding that Toth had violated the BSA reporting requirements “willfully” in 2007. On appeal, the First Circuit court of appeals affirmed the lower court’s imposition of the sanction and ultimate summary judgment against Toth for the “willful” FBAR penalty.

The important point to note is that there was no actual examination of the facts concerning Ms. Toth’s violation of the FBAR rules to determine whether her non-filing was “willful”.  There was no finding of a “knowing” violation of the rules, no finding of “willful blindness” or “reckless disregard”.  Instead, because of the court-imposed sanction, Ms. Toth’s failure to file the FBAR due for 2007 was deemed to have been “willful” and essentially precluded her from denying that she willfully failed to file.

The issue was never raised whether a court-imposed sanction that resulted in “deemed” willfulness is a permissible “substitute” for an actual finding of “willfulness” in the FBAR context.  This is surprising to me. I would think it could have possibly been fruitful grounds for attacking the lower court decision.  In any event, based on my reading of the facts in Toth,  I think the court could have found the taxpayer in “reckless disregard” of her duty to file and granted summary judgment to the government.  I wish the court had taken this route.  It did not, and it seems to me the IRS now has another path with which to establish “willfulness” in civil FBAR cases.  We have seen over time how the IRS’ internal position on “willfulness” has morphed and so, one never knows where this new path can lead.

What Happens Next?

The Toth case was on appeal to the US Supreme Court.  Sadly, just this Monday, January 23, the Court denied Monica Toth’s petition for certiorari.  Justice Gorsuch dissented. I provide some brief detail on the dissent here.

The focus of the appeal was that the FBAR penalty was in constitutional violation of the Eighth Amendment’s Excessive Fines Clause. The First Circuit denied Toth’s appeal on that issue. It held that the Excessive Fines Clause does not apply to civil FBAR penalties because the IRS’ assessment against her was “not tied to any criminal sanction” and served a “remedial” purpose (as opposed to a “punitive” purpose. 33 F. 4th 1, 16, 17–19 (2022).

Now that the US Supreme Court has denied review, I believe the IRS will be emboldened to keep on hitting taxpayers with the highest fines possible.

This issue will be the subject of another blog post. Stay tuned.

Posted January 26, 2023

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2 thoughts on “Mr. FBAR Gets Bolder in Toth – “Deemed Willfulness” for FBAR Violation

  1. Hi Virginia,

    My name is Otto and I am a subscriber to your insightful newsletter. I also lead the International/Cross-Border Knowledge Circle for the Financial Planners Association. We have a 1 hour video call with Guest-Speakers every 2 months to talk about all kinds of cross-border issues for US Citizens. I would like to have you for our next meeting in March. Would you consider it?

    Many thanks,

    Otto Rivera

    White Lighthouse Investment Management

    CFP® Professional | Financial Planner, Investment Manager

    Like

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