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District court finds failure to file FBARs sufficiently willful to uphold penalties

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Taxpayers have another reason to think twice before trying to avoid taxation by not reporting their foreign accounts. A federal district court recently upheld the IRS’s imposition of two $100,000 penalties on a taxpayer who willfully failed to disclose foreign financial accounts on Form TD F 90-22.1, Report of Foreign Bank and Foreign Accounts (FBAR) for two years. The court found that a taxpayer’s “reckless disregard of a known risk” that he should file an FBAR was enough to make the taxpayer was liable for penalties. The government proved the taxpayer had willfully failed to file his FBAR forms, even though his return preparer had failed to properly advise him to report his interests in the foreign accounts.

The court found that the taxpayer, not the preparer, has the ultimate responsibility to file his return and pay the tax due. On several occasions the facts indicated the taxpayer had been presented with information that told him there were filing obligations for taxpayers with foreign accounts. The court ruled that, “reckless disregard of a known or obvious risk” or a “failure to investigate … after being notified [of the violation]” also satisfies the civil standard for willfulness in such contexts.

This is the second case addressing the definition of “willfulness” as it relates to penalties for failing to file an FBAR form. The Court of Appeals for the Fourth Circuit reached a similar conclusion in United States v. Williams, 2012-2 ustc ¶50,475. Reversing the trial court, the Fourth Circuit found that the taxpayer’s conduct (he signed a federal tax return without disclosing the existence of foreign accounts) evidenced his willful blindness to the FBAR filing requirement.

Background

The taxpayer was a co-owner of a limited liability company (LLC) and oversaw the LLC’s finances. The LLC retained the services of a financial management firm which was promoting a tax strategy plan that would utilize various IBCs, foreign financial accounts, foreign variable annuities, all for the benefit of the taxpayer and his company. While following this plan, the taxpayer engaged in a number of transactions which were later determined to be motivated by tax evasion. Large sums generated from these transactions were deposited into accounts at foreign banks. However, the taxpayer did not share knowledge of these foreign accounts with his personal accountant who prepared his company’s tax returns. The taxpayer did not disclose the existence of the accounts on his Form 1040 for the 2000 or 2001 tax years. Likewise, the taxpayer did not file FBARs for those years.

The IRS subsequently investigated the LLC and requested that the taxpayer file FBARs for 2000 and 2001. The taxpayer did not. The IRS imposed two $100,000 penalties (one for failing to file an FBAR for 2000 and another for failing to file an FBAR for 2001).

Court’s analysis

The court first noted that the Tax Code does not define how to assess whether an individual acted willfully in his or her failure to comply with the FBAR reporting requirements. Where willfulness is a condition of civil liability, it covers not only knowing violations of a standard, but reckless ones as well.

Here, the court found that the taxpayer knew of his obligation to file an FBAR. Furthermore, his income tax returns, which he had signed, plainly informed him that he had the duty to report an interest in any foreign financial or bank accounts. The simple yes-or-no format of the checkbox question on Form 1040, Schedule B, made it inconceivable that he could have misinterpreted the question. The taxpayer’s behavior in ignoring his reporting requirement was reckless.

The court further found that the taxpayer repeatedly lied to the IRS about the existence of the foreign accounts and withheld certain documents from the agency. They amounted to circumstantial evidence of willfulness.