Wednesday, March 16, 2016

Willfulness and FBAR Penalties -- Willful Blindness | Bethesda Tax Lawyer

In my previous blog on FBAR penalties, I discussed willful behavior.  This week, I will be examining what constitutes willful blindness, an important sub-category of willful behavior, followed in a week by an analysis of non-willful actions.  Understanding the distinction between these two categories--willful blindness and non-willful actions--is critical because only non-willful actions would enable you to enter a streamlined program and avail yourself of reduced penalties.

If taxpayers could protect themselves from FBAR penalties through deliberate ignorance of filing requirements, many would undoubtedly do so.  However, the leading cases on this subject demonstrate that ignorance of these complicated tax laws is no excuse.  Taxpayers sophisticated enough to maintain offshore accounts and engage in other complicated transactions are assumed to be reasonably educated and thus aware of the basic rules governing these matters.  To make an analogy to the sporting world, former University of North Carolina men’s football coach Butch Davis, who had remained deliberately ignorant of all recruiting and academic matters in order to protect himself and his team from possible NCAA violations, was fired by his employer for exhibiting the athletic equivalent of willful blindness.

In the 2012 case United States v. Williams, the 4th Circuit held that a taxpayer who signed his tax return was charged with constructive knowledge of its contents.  Williams, the taxpayer, had exhibited willful blindness by going to great lengths to avoid familiarizing himself with FBAR reporting requirements, never reading the forms he signed or the instructions related to those forms.  In the court’s opinion, Williams had made a conscious effort to conceal or mislead his sources of income and other financial information.  

James v. United States, a district court case arising out of Florida in 2012, offered an instance of a taxpayer who had understandably erred when failing to file Form 3520, which applies to foreign trusts and the receipt of certain foreign gifts.  The IRS had not issued regulations related to that form, and the court concluded that the taxpayer had made a good faith effort to comply with the existing law and could not be reasonably expected to know of this particular requirement.  In James, there was no evidence that the taxpayer had gone to the same lengths as the taxpayer in Williams; in fact, the available evidence examined by the court suggested that he had exercised the ordinary care and prudence expected of similarly situated individuals.

However, in United States v. McBride, the Utah District Court articulated a more exacting standard, reasoning that taxpayers had constructive knowledge of all instructions related to the tax forms that they sign:  “‘It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms,’ including the reference on Schedule B to the FBAR.”  McBride goes a step further than either of these cases, seemingly imposing a willful FBAR penalty on anyone who signs a federal tax return with a Schedule B attached and fails to file a required FBAR.  

Individuals who might find themselves in a position to incur FBAR penalties should avail themselves of an experienced tax practitioner’s assistance in filing their taxes.  The chief lesson from all of these cases is that taxpayers should try to stay reasonably informed of all reporting requirements, keep a detailed narrative of their transactions, and, should they face IRS action, seek the aid of a tax attorney as soon as possible.  

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.