In my previous blogs about the OVDP, SDOP, and the SFOP, I explained how deciding which disclosure program to enter was dependent upon your exposure to willful FinCen Form 114 (FBAR) penalties. If your actions did not rise to the level of willful behavior, then you should enter one of the streamlined programs. However, the IRS has not provided a bright-line test for willfulness or non-willfulness. Thus, to qualify for the Streamlined programs, you must show that your actions were not intentional nor were they due to an intentional disregard of the laws (willful blindness). I am dividing this discussion into three posts. This post will cover the topic of willful behavior, followed in a few weeks by blogs addressing willful blindness and non-willful actions.
IRS examiners will recommend steep penalties for each year in which the FBAR filing and recordkeeping violation was willful, so understanding this term is very important. Internal Revenue Manual 126.96.36.199.5.1 states that the test for willfulness is “whether there was a voluntary, intentional violation of a known legal duty, which is demonstrated “by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements.” A “conscious choice not to file the FBAR” is sufficient to constitute a willful violation. Examples of willful behavior include filing an FBAR but omitting one of several foreign bank accounts, filing the FBAR in earlier years but failing to file the FBAR in subsequent years when required to do so, and failing to file the FBAR after being sent a warning letter explaining the FBAR filing requirement. Evidence of a willful violation is rarely direct, because willfulness is a state of mind, but is instead established by drawing reasonable inferences from available facts. Various financial documents, such as statements from foreign bank accounts and prior FBAR warning letters, can indicate that a violation was willful. The burden of proof for this determination is on the government (see Ratzlaf v. United States, 510 U.S. 135 (1994), holding that “the Government must prove that the defendant acted with knowledge that his conduct was unlawful”).
Per the recent case of United States v. McBride (DC Utah 2012), a district court in Utah noted that the appropriate evidentiary standard for a determination of willfulness for the purposes of the FBAR was a “mere preponderance of the evidence” rather than the higher bar of “clear and convincing evidence,” reasoning that greater protection was unnecessary since no important individual rights or interests are present in FBAR cases, which “only involve money.” The district court then noted that even individuals such as McBride, who may have believed they were legally justified in withholding FBAR reporting information, were nonetheless guilty of a violation if they failed to disclose required information. This decision seems to indicate that willfulness penalties are a matter of strict liability: the taxpayer is guilty of a violation for non-disclosure even if he believed he did not have to make the disclosure.
Taxpayers facing willful FBAR violations should seek counsel at the earliest stage of an audit so that they can prepare narratives that indicate their violations were not the result of willful behavior. Subsequent posts on this blog will address willful blindness and non-willful actions.
For a free phone consultation regarding this subject or other tax matters, please contact the Law Office of Aaron P Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.