Tuesday, July 26, 2022

DC Found That A Taxpayer Who Failed To File An FBAR Did so Willfully

In Ott, (DC MI 2/26/2020, 125 AFTR 2d ¶2020-492, a district court has held that a taxpayer who failed to file an FBAR did so willfully. It came to this conclusion because, among other reasons, the taxpayer signed his tax return under penalty of perjury, told the foreign bank not to send correspondence to his address, and failed to consult with a tax expert regarding whether to report the foreign account.

Mr. Ott, a US person, had a Canadian bank account with more than $10,000 in it during 2007. And he failed to file an FBAR that year.

Many years prior, a friend had told him that he did not need to report foreign bank accounts or income. Besides that, Ott claimed to have no tax or financial expertise.
Ott opened an account in Canada because his sister lived there and he had all the bank's correspondence sent to his sister's address. He deposited over $1 million. His sister rarely forwarded bank statements or other correspondence to Ott.
For 2007, Ott hired a CPA, Mr. Weide, to prepare his tax return. It is not clear from the record whether Weide asked Ott if he had a foreign account. When Weide was using tax preparation software to prepare the return, he did not answer the question "Does the taxpayer have a foreign account?", and the software defaulted to "No." Ott's stated income on the return for the year was $20,000. Ott signed the return under penalty of perjury.
Ott never asked Weide about whether he needed to report the Canadian account.
The IRS imposed a penalty on Ott for willfully failing to file the FBAR. The IRS contended that Ott had constructive knowledge of his reporting requirements by signing his tax returns, which included a reference to the FBAR within the Schedule B form. The IRS also argued that Ott putting his sister's Canadian address on the accounts was an act of concealment. Finally, the IRS contended that the foreign account balances were so much more than Ott's annual income, all demonstrating that he recklessly and, therefore, willfully failed to file FBARs for the years in question.
Ott asserted that his signature on his tax returns, along with the absence of any deliberate acts of concealment, did not amount to a willful failure to file the FBARs, and that he was at most negligent.
The district court agreed with the IRS that Ott willfully failed to file his FBARs.
The court said the following facts indicated that Ott acted willfully and/or recklessly:
  • Ott signed a return each year, under penalty of perjury—regardless of whether he actually read the return, certifying that he did not have an interest in foreign accounts. Accordingly, constructive knowledge of the requirement to file the FBAR was imputed to Ott.
  • Ott consistently stated that he was not a tax expert with any financial or legal training in tax accounting. Nevertheless, he chose to rely solely on advice he received decades ago concerning foreign investments. Ott argued that his mistaken reliance on incorrect advice proved that he was at most negligent, not willful. The evidence presented in this case, however, supported an inference of reckless conduct. Ott's failure to discuss his foreign investments with his long-time accountant Weide, for example, indicated a conscious effort to avoid learning about reporting requirements.
  • Using an address that matched the country of the foreign bank accounts suggested that Ott sought to avoid the detection of his account ownership. Further, sending everything to his sister allowed Ott to avoid seeing any statements concerning reporting responsibilities, including the language: "These transactions are to be reported on your annual return of income." The court found that this failure to review any of the mail sent to his sister from the brokerages constituted an act of concealment and was reckless.
  • Ott acted recklessly and, therefore, willfully because he kept continuous contact with his broker regarding the foreign accounts, regularly checked the account balance online, and the account balance was significantly disproportionate to Ott's claimed income.

Have an FBAR Penalty Problem?  

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