Post by Sapphire Capital on May 23, 2014 2:18:06 GMT 4
The US IRS has authority to assert Report of Foreign Bank and Financial Accounts (FBAR) [(Treasury Department Form 90-22.1)] civil penalties. Be aware that:
First, there is no such thing as an FBAR penalty within the Offshore Voluntary Disclosure Program (OVDP). The FBAR penalty exists only outside of the OVDP framework. There is a penalty within the OVDP that is often considered to be the equivalent of the FBAR penalty. That penalty is commonly referred to as the offshore penalty. It is 27.5% of the highest aggregate balance of all foreign accounts during the disclosure period.
Second, an FBAR violation doesn’t automatically mean that a penalty will be asserted. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether a penalty should be asserted at all. For example, the examiner may determine that the facts do not justify asserting a penalty. In that case, the examiner will issue an FBAR warning letter, Letter 3800.
The sole purpose of the FBAR penalty is to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether issuing a warning letter and securing delinquent FBARs, rather than asserting a penalty, will achieve the desired result of improving compliance in the future.
If a penalty is warranted, there are two types:
non-willful and willful.
Both types have varying upper limits, but no floor.
The first type is the nonwillful FBAR penalty. The maximum nonwillful FBAR penalty is $ 10,000.
The second type is the willful FBAR penalty. The maximum willful FBAR penalty is the greater of (a) $ 100,000 or (b) 50% of the total balance of the foreign account.
The IRS has the burden of proving willfulness. Willfulness has been defined by courts as an intentional violation of a known legal duty.
While the standard for proving willfulness in the context of a criminal tax case is relatively clear, just the opposite is true in the context of asserting a civil FBAR penalty. According to the IRS, the only thing that a person need know is that he has a reporting requirement. And if a person has that knowledge, the only intent needed for a willful violation of the requirement is a conscious choice not to file the FBAR (referred to in legal circles as the theory of “willful blindness.”).
That willful blindness can be used to circumvent what is otherwise the “gold standard” for proving intent in the criminal arena – i.e., a specific intent to violate a known legal duty – might be bad enough, however it gets worse. The 4th circuit court of appeals lowered the burden of proof needed to show that the failure to file an FBAR was intentional.
J. Bryan Williams, a US citizen, deposited $ 7 million in Swiss bank accounts from 1993 to 2000 without disclosing the money to the Internal Revenue Service. He was indicted for tax evasion and in 2003, he pleaded guilty. In 2007, Williams filed FBARs for each of the years in which he held the accounts.
In 2009, Williams became the target of a civil suit initiated by the IRS. In that suit, the IRS sought to impose a $200,000 penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (Treasury Department Form 90-22.1), on Williams’ two Swiss accounts, the form commonly known as the FBAR.
The district court ruled in favor of Williams. however the 4th Circuit Court of Appeals reversed. By holding that the IRS lacked evidence to prove Williams’ willful violation of the FBAR filing requirement, the district court ruling gave hope to FBAR non-filers. Specifically, the court rejected the government’s arguments that Williams was liable for FBAR penalties because he failed to list income from his Swiss account on his 2000 tax return and had checked “No” in Schedule B, the section which asks the filer if he has any financial accounts in another country.
The court reasoned that Williams’ failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.” Mr. Williams had admitted to never reviewing his tax return, much less looking at the FBAR. Because it is impossible to intentionally violate a duty that one did not know to exist, Mr. Williams could not have intentionally failed to disclose the accounts on his returns.
This was widely accepted to be the standard for willfulness. In reversing, the Fourth Circuit Court of Appeals reasoned that Williams made a “conscious effort to avoid learning about reporting requirements.”
While the majority could have rested there and concluded that the record established willful blindness and reversed on that basis alone, they went one step further. The majority held that Williams’ signature on his tax return was “prima facie evidence that he knew the contents of the return,” even though Williams denied ever reviewing it.
The majority found that the instructions in Schedule B, which refers to the FBAR, put Williams and every other taxpayer on “inquiry notice” of the filing requirement. What does this mean? Very simply that a taxpayer is presumed to be cognizant of the FBAR requirement simply by signing the tax return.
The practical effect:
First, whether a person actually knew about the FBAR reporting requirements is meaningless.
Second, it is easier for the IRS to prove willfulness in the context of a willful FBAR penalty. They now has enormous leverage to collect the penalties that accompany the willful FBAR penalty ( they may reach $100,000, or 50% of the value of the offshore account, whichever is greater).
However there is some relief in the following:
First, the case was a special example of offshore tax evasion. Mr. Williams failed to disclose his Swiss accounts on his tax returns and also denied having overseas assets to his accountant and attorney.
Second, Williams is an unpublished opinion, as such it is not binding precedent on federal courts in the fourth circuit or other circuits.
Third, if the IRS publications are any indication, it seems to be the official position of the IRS to interpret the meaning of willfulness in accordance with the heightened definition (i.e., an intentional violation of a known legal duty).
However, the IRS would be crazy not to use this ruling to its advantage. There is a lot of money at stake.
Balancing the carrot of voluntary disclosure with the stick of criminal prosecution and willful FBAR penalties requires the IRS to walk a fine line. The more they enforce FBARs, the more the IRS risks driving people away, as opposed to bringing people in under the tent of the voluntary disclosure program. The IRS cares little about the impact that its heavy-handed approach to enforcing FBARs has on the willingness of those with undisclosed foreign accounts to make voluntary disclosures.
The IRS has shown that it will not hesitate to seek maximum willful FBAR penalties.
IRS FBAR circular: www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf
Webinar: www.irsvideos.gov/ReportingForeignFinancialAccountsOnTheFBAR/
First, there is no such thing as an FBAR penalty within the Offshore Voluntary Disclosure Program (OVDP). The FBAR penalty exists only outside of the OVDP framework. There is a penalty within the OVDP that is often considered to be the equivalent of the FBAR penalty. That penalty is commonly referred to as the offshore penalty. It is 27.5% of the highest aggregate balance of all foreign accounts during the disclosure period.
Second, an FBAR violation doesn’t automatically mean that a penalty will be asserted. Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether a penalty should be asserted at all. For example, the examiner may determine that the facts do not justify asserting a penalty. In that case, the examiner will issue an FBAR warning letter, Letter 3800.
The sole purpose of the FBAR penalty is to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising their discretion, examiners should consider whether issuing a warning letter and securing delinquent FBARs, rather than asserting a penalty, will achieve the desired result of improving compliance in the future.
If a penalty is warranted, there are two types:
non-willful and willful.
Both types have varying upper limits, but no floor.
The first type is the nonwillful FBAR penalty. The maximum nonwillful FBAR penalty is $ 10,000.
The second type is the willful FBAR penalty. The maximum willful FBAR penalty is the greater of (a) $ 100,000 or (b) 50% of the total balance of the foreign account.
The IRS has the burden of proving willfulness. Willfulness has been defined by courts as an intentional violation of a known legal duty.
While the standard for proving willfulness in the context of a criminal tax case is relatively clear, just the opposite is true in the context of asserting a civil FBAR penalty. According to the IRS, the only thing that a person need know is that he has a reporting requirement. And if a person has that knowledge, the only intent needed for a willful violation of the requirement is a conscious choice not to file the FBAR (referred to in legal circles as the theory of “willful blindness.”).
That willful blindness can be used to circumvent what is otherwise the “gold standard” for proving intent in the criminal arena – i.e., a specific intent to violate a known legal duty – might be bad enough, however it gets worse. The 4th circuit court of appeals lowered the burden of proof needed to show that the failure to file an FBAR was intentional.
J. Bryan Williams, a US citizen, deposited $ 7 million in Swiss bank accounts from 1993 to 2000 without disclosing the money to the Internal Revenue Service. He was indicted for tax evasion and in 2003, he pleaded guilty. In 2007, Williams filed FBARs for each of the years in which he held the accounts.
In 2009, Williams became the target of a civil suit initiated by the IRS. In that suit, the IRS sought to impose a $200,000 penalty for willfully failing to file a Report of Foreign Bank and Financial Accounts (Treasury Department Form 90-22.1), on Williams’ two Swiss accounts, the form commonly known as the FBAR.
The district court ruled in favor of Williams. however the 4th Circuit Court of Appeals reversed. By holding that the IRS lacked evidence to prove Williams’ willful violation of the FBAR filing requirement, the district court ruling gave hope to FBAR non-filers. Specifically, the court rejected the government’s arguments that Williams was liable for FBAR penalties because he failed to list income from his Swiss account on his 2000 tax return and had checked “No” in Schedule B, the section which asks the filer if he has any financial accounts in another country.
The court reasoned that Williams’ failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.” Mr. Williams had admitted to never reviewing his tax return, much less looking at the FBAR. Because it is impossible to intentionally violate a duty that one did not know to exist, Mr. Williams could not have intentionally failed to disclose the accounts on his returns.
This was widely accepted to be the standard for willfulness. In reversing, the Fourth Circuit Court of Appeals reasoned that Williams made a “conscious effort to avoid learning about reporting requirements.”
While the majority could have rested there and concluded that the record established willful blindness and reversed on that basis alone, they went one step further. The majority held that Williams’ signature on his tax return was “prima facie evidence that he knew the contents of the return,” even though Williams denied ever reviewing it.
The majority found that the instructions in Schedule B, which refers to the FBAR, put Williams and every other taxpayer on “inquiry notice” of the filing requirement. What does this mean? Very simply that a taxpayer is presumed to be cognizant of the FBAR requirement simply by signing the tax return.
The practical effect:
First, whether a person actually knew about the FBAR reporting requirements is meaningless.
Second, it is easier for the IRS to prove willfulness in the context of a willful FBAR penalty. They now has enormous leverage to collect the penalties that accompany the willful FBAR penalty ( they may reach $100,000, or 50% of the value of the offshore account, whichever is greater).
However there is some relief in the following:
First, the case was a special example of offshore tax evasion. Mr. Williams failed to disclose his Swiss accounts on his tax returns and also denied having overseas assets to his accountant and attorney.
Second, Williams is an unpublished opinion, as such it is not binding precedent on federal courts in the fourth circuit or other circuits.
Third, if the IRS publications are any indication, it seems to be the official position of the IRS to interpret the meaning of willfulness in accordance with the heightened definition (i.e., an intentional violation of a known legal duty).
However, the IRS would be crazy not to use this ruling to its advantage. There is a lot of money at stake.
Balancing the carrot of voluntary disclosure with the stick of criminal prosecution and willful FBAR penalties requires the IRS to walk a fine line. The more they enforce FBARs, the more the IRS risks driving people away, as opposed to bringing people in under the tent of the voluntary disclosure program. The IRS cares little about the impact that its heavy-handed approach to enforcing FBARs has on the willingness of those with undisclosed foreign accounts to make voluntary disclosures.
The IRS has shown that it will not hesitate to seek maximum willful FBAR penalties.
IRS FBAR circular: www.irs.gov/pub/irs-utl/IRS_FBAR_Reference_Guide.pdf
Webinar: www.irsvideos.gov/ReportingForeignFinancialAccountsOnTheFBAR/