Let's Talk About: US Tax
Court’s Finding of “Willfulness” in FBAR Violation – A Very Disturbing Development
Court’s Finding of “Willfulness” in FBAR Violation – A Very Disturbing Development
On July 20, 2012, the Fourth Circuit reversed the lower court opinion concerning a “willful” failure to file an FBAR. See United States v. Williams, (4th Cir. 2012), here or here.
The lower court had held that Williams had not acted “willfully” in failing to file his FBAR. For those unfamiliar with the Williams case, it must be emphasized that the facts are quite distinctive and involve a taxpayer who ultimately pled guilty to tax evasion. The facts of the Williams case are set out below.
Commentators had referred to the lower court case as an example of how difficult it might be for the IRS to prove “willfulness” in the context of a failure to file an FBAR. Now, the case has been reversed. This throws open the possibility that the IRS will feel it has some additional strength in asserting “willfulness” in FBAR “failure-to-file” cases.
I do not necessarily believe this will be so. First, the Fourth Circuit has specifically made the opinion “Unpublished” along with the standard caveat: ”Unpublished opinions are not binding precedent in this circuit.” If the very circuit that issued the opinion does not view it as precedent to be followed, then should any other court be willing to accept it as binding precedent?
Second, the IRS has been put under ever increasing pressure by the general public, various interest groups (including American Citizens Abroad; Isaac Brock Society) the press, and its own Taxpayer Advocate Service (http://www.irs.gov/irs/article/0,,id=101099,00.html) to act more reasonably with regard to delinquent FBAR filings and income tax returns by overseas Americans. It has recently issued guidance for Americans living and working overseas as to how they can get back into compliance with the US tax system without onerous penalties if certain conditions are met. Thus, we have been witnessing attempts by the IRS to be more rational in its approach to tax compliance for Americans overseas.
Far Reaching Effect?
Regardless of the latest IRS efforts to take a more reasonable stance, the question still arises whether the Fourth Circuit opinion in Williams puts a taxpayer at possible criminal risk as to anything that is not correctly reported on his tax return or something that is missing from the return but of which taxpayer “should have been aware” by reading forms, instructions, schedules? It seems this can possibly be so and clearly puts taxpayers in dangerous territory. At a minimum, one lesson from Williams is that taxpayers are very well advised to carefully read their tax returns before signing them (a practice many do not follow). While the taxpayer’s activity in Williams involved serious criminal tax activity, I believe this latest development presents a danger in that the language and rationale in the Fourth Circuit opinion can possibly be used by the IRS as leverage in cases where taxpayers are far more innocent. Might the case be used as a “stick” in an OVDP opt-out scenario? Hopefully the IRS will continue to follow the path on which it seems to have been recently embarking — that is — exhibiting attempts that it will be acting more reasonably with respect to Americans overseas who were truly not aware of the various complex filing requirements.
Facts of the Williams Case — District Court Opinion
Williams had opened two accounts at a Swiss bank in the name of a foreign corporation. Over a period of seven years he had deposited over $7 million into these accounts, and earned income on the deposits to the tune of $800,000. For the 2000 tax year, on the tax organizer supplied by his accountant and similarly on the Form 1040 federal income tax return, at Schedule B, Part III, Williams checked “No” to the question asking whether the taxpayer had an interest in or signature authority over any financial accounts in a foreign country.
The IRS argued that Williams’ failure to file an FBAR for 2000 was done “willfully” and it sought to assert the higher civil penalty of $100,000 for each unreported account for this violation. The IRS typically argues that checking “no” to the question posed at Schedule B, Part III, is evidence of “willfulness”.
The lower court disagreed with the IRS providing various reasons including that Williams’ signature on the tax return, standing alone, did not prove that he knew its contents; the court also pointed out that Williams had little or no motive to conceal the accounts since the US government already knew about them without the FBAR (the Swiss government had already frozen the bank accounts at the request of the United States before the FBAR was due for filing). The court noted that his pleading guilty to tax evasion was not sufficient to evidence “willfulness” in failing to file the FBAR. In other words, even though Williams intentionally failed to report income in an effort to evade income taxes, the court viewed this as a completely separate matter from whether Williams willfully failed to comply with the FBAR disclosure requirements. In summary, the court concluded that Williams did not act “willfully” in failing to file the 2000 FBAR.
Reversal by Fourth Circuit
The Fourth Circuit majority opinion in the Williams case appears to state that the district court erroneously looked to Mr. Williams’ “motivation” for not filing an FBAR rather than to his “intent”. The Fourth Circuit also believed that to the extent the district court focused on “motivation” as proof of Williams’ lack of intent, the lower court drew an “unreasonable inference from the record” and thus, reasoned that its holding could be overturned. In reversing the lower court, the majority stated “the evidence as a whole leaves us with a definite and firm conviction that the district court clearly erred in finding that Williams did not willfully violate [the FBAR reporting statute].
“Willful” Failure to File an FBAR
It is important for all taxpayers to understand the factors the majority opinion looked to in establishing “willfulness”. The IRS can, of course, point to these factors in other cases with facts that are not as egregious as those in Williams. The majority opinion seems to adopt the concept of “willful blindness” and seems to accept the notion that this can supply the required intent of “willfully” not filing an FBAR. “Willful blindness” is essentially a conscious effort to avoid learning about reporting requirements. “Willful blindness” may be inferred where “a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts….”
The real crux of the Fourth Circuit holding is worthy of careful attention. The court emphasized that Williams’ signature on his tax return means he knew the contents of the return, including any directions or instructions that would put him on notice of FBAR filing duties and he could not plead innocence for not having actually read it.
The court stated:
Williams signed his 2000 federal tax return, thereby declaring under penalty of perjury that he had “examined this return and accompanying schedules and statements” and that, to the best of his knowledge, the return was “true, accurate, and complete.” “A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.”
The court further determined that Williams had made a “conscious effort” to avoid learning about the FBAR reporting requirements. The court states that Williams’ signing of his tax return was “prima facie evidence” that he knew the contents of that return, and at a minimum the Form 1040 line 7a’s directions to see the instructions for exceptions and filing requirements for FBAR. All of these things put Williams on some kind of notice to inquire further about the FBAR reporting requirements. The fact that Williams said he never read the line 7a directions or paid attention to what was put on his tax return was evidence of “willful blindness” and this could give rise to the required intent for a “willful” failure to file.