Tuesday, January 22, 2019

IRS Clarifies "Willfulness" Under FBAR Rules

In Program Manager Technical Advice 2018-013, the IRS has set out the definition of "willfulness," and the standard of proof for establishing willfulness, for purposes of the penalty for willful violation of the requirements of the Report of Foreign Bank and Financial Accounts (FBAR). 
Under 31 USC 5314(a) and 31 C.F.R. 1010.350, every U.S. person that has a financial interest in, or signature or other authority over, a financial account in a foreign country must report the account to IRS annually on an FBAR. 

The penalty for violating the FBAR requirement is set forth in 31 USC 5321(a)(5). The maximum amount of the penalty depends on whether the violation was non-willful or willful.  
  • The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. (31 USC 5321(a)(5)(B)(i))
  • The maximum penalty amount for a willful violation is the greater of $100,000 or 50% of the balance in the account at the time of the violation. (31 USC 5321(a)(5)(C), 31 USC 5321(a)(5)(D))
    The Statute and the Regs. Do Not Define Willfulness! 
The IRS has concluded that the standard for willfulness under 31 USC 5321(a)(5)(C) is the civil willfulness standard and that it includes not only knowing violations of the FBAR requirements, but willful blindness to, as well as reckless violations of, the FBAR requirements. THE 2nd Circuit Court of Appeals' recently agreedwith this conclusion in its opinion in Bedrosian v. U.S., 3rd Cir., Case No. 17-3525, December 21, 2018 .  
 
IRS noted that the Supreme Court has made a delineation between the term willful for criminal purposes versus willful for civil purposes. It noted that in Safeco Ins. Co. of America. v. Burr, (S Ct 2007) 551 U.S. 47, a criminal case, the Supreme Court interpreted the term “willful” or “willfully” narrowly, limiting liability to "knowing violations." The Safeco court also noted that where “willfulness” is a statutory condition of civil liability, the Supreme Court has generally interpreted “willfulness” to not only include knowing violations of a standard, but reckless ones as well.  
And the district court in Bedrosian, (DC PA 2017) 120 AFTR 2d 2017-5832, noted that every federal court to have considered the willfulness standard for civil FBAR violations has concluded that the civil standard applies and that the standard includes “willful blindness” and “recklessness.”
 
IRS said that "willful blindness  is established when an individual takes deliberate actions to avoid confirming a high probability of wrongdoing and when he can almost be said to have actually known the critical facts.” The government can show willful blindness by evidence that the taxpayer made a conscious effort to avoid learning about reporting requirements.
 
And, it said, citing Vespe, (CA 3 1989) 63 AFTR 2d 89-837, that the recklessness standard is met “if the taxpayer: 
  1. Clearly ought to have known that,
  2. There was a grave risk that withholding taxes were not being paid and if
  3. He was in a position to find out for certain very easily.” 

IRS also said that the courts are uniform with regard to the standard of proof for civil FBAR penalties; the government bears the burden of proving liability for the civil FBAR penalty by a preponderance of the evidence.
 
As the court in Bohanec, (DC CA 2016) 118 AFTR 2d 2016-6757, noted, the Supreme Court has held that a heightened, clear and convincing burden of proof applies in civil matters “where particularly important individual interests or rights are at stake.” Important individual interests or rights include parental rights, involuntary commitment, and deportation.
 
However, the preponderance of the evidence standard applies where “even severe civil sanctions that do not implicate such interests” are contemplated. The court in Bohanec held that civil FBAR penalties do not rise to the level of “particularly important individual interests or rights,” and accordingly, the preponderance of the evidence standard applies.
 
IRS noted that Chief Counsel Advice 200603026 suggested that the clear and convincing standard should apply, but subsequent cases have not sustained that position.

Have Undeclared Income from an Offshore Bank Account?
 
 
Been Assessed a 50% Willful FBAR Penalty?
 
 
Contact the Tax Lawyers at 
Marini& Associates, P.A. 
 
 
for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888) 882-9243
 
 

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