There has been debate as to the “burden of proof” that must be met by the Internal Revenue Service (IRS) in asserting that an FBAR violation was “willful”. It appears now that enough legal authority exists giving the IRS a lower burden of proof than taxpayers had hoped. It also appears that the courts are whittling away at the meaning of “willful”, making it easier for the IRS to prove an FBAR violation was “willful”. In the FBAR context, this is very significant because those who willfully fail to file the required FBAR on a timely basis, can be assessed a penalty of up to the greater of $100,000 (as adjusted for inflation) or 50% of the balance in the unreported financial account.
This post will look at two issues of particular significance in an FBAR case – the latest judicial pronouncements on the meaning of “willfulness” and what is the “burden of proof” required to prove it. A deadly cocktail may soon be served to noncompliant taxpayers with unreported offshore accounts or other assets. This deadly cocktail is a result of several ingredients: a lowering of judicial standards on the burden of proof the IRS must meet to prove a taxpayer acted “willfully”; court definitions of what is meant by “willfulness”; and the recent IRS decision to terminate the Offshore Voluntary Disclosure Program (“OVDP”).
Civil Tax Matters: What is the Burden of Proof?
When we speak of the “burden of proof” this refers to which party is responsible for putting forth evidence and, very significantly, the level of evidence they must provide in order to win the case. Generally, the party bringing the claim has the burden of proof (in an FBAR penalty case this party will be the US government, the IRS). The burden of persuasion determines the amount of evidence the IRS must provide in presenting evidence to the judge or jury so that they can reach a decision. In most civil cases, the applicable burden of persuasion is called “a preponderance of the evidence.” This means generally that, in order for the IRS to win, at least 51 percent of the evidence must favor the IRS.
In some civil cases (for example, civil tax fraud cases brought under IRC Section 7454(a)), the burden of proof is elevated to a standard that sets a higher threshold than that applicable to the “preponderance of the evidence” standard. This higher burden of proof is called the “clear and convincing evidence” standard. When required to meet this burden of proof, the IRS would be required to prove that something is substantially more likely than not, to be true. Judicial precedent indicates that this standard requires the party carrying the burden to show there is a high probability that a particular fact is true. The “clear and convincing evidence” standard does not rise to the widely recognized burden of proof enunciated in criminal cases, referred to as proof “beyond a reasonable doubt.”
Many tax practitioners believed that the burden of proof required for sustaining a “willful” FBAR penalty was the “clear and convincing evidence” standard. However, the court cases have shown this is not so.
Burden of Proof is Lower Standard
The most recent case (April 3 2018) permitting the IRS the lower “preponderance of the evidence” standard for determining a “willful” FBAR violation is United States v. Garrity, 2018 U.S. Dist. LEXIS 56888 (D. Conn. 2018). Garrity continues a trend making it easier and easier for the government to establish a willful FBAR failure, and thus to assert the higher penalties up to half of the balance of unreported accounts at the time of the violation. The Garrity court is certainly not alone in this view. Unfortunately, the Garrity court appears to blindly be following earlier precedent that lacked any substantial basis for determining that this lower standard should apply in FBAR cases. See, United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311 (E.D. Va. Sept. 1, 2010), rev’d, United States v. Williams, 489 F. App’x 655 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012); United States v. Bohanec, 2016 U.S. Dist. LEXIS 170149 (D. Cal. 2016). Bedrosian v. United States (E.D. Pa. Sept. 5 2017). With a significant line of cases now holding that the lower “preponderance of the evidence” standard applies for determining a “willful” FBAR violation, it’s doubtful that courts considering FBAR cases in the future will buck the trend and require the higher “clear and convincing evidence” standard.
And, “Recklessness” Means “Willfulness”
In addition to applying the lower “preponderance of the evidence” standard for determining a “willful” FBAR violation, the Garrity court parroted other cases holding that the government can prove willfulness when it can show the taxpayer acted “recklessly” in his obligation to file an FBAR. Garrity merely continues a trend of cases that have effectively expanded the definition of “willful” conduct when it comes to FBAR penalties.
What does it mean to say that a “reckless disregard of a statutory duty” is sufficient to be “willful”? Defining what constitutes a “reckless disregard of a statutory duty” is no simple feat. It will depend on the facts presented in the case. So far, the facts of cases using the “reckless” equals “willful” definition have exhibited what I call “bad facts”.* However, with courts more easily upholding a finding of “willfulness” when it comes to offshore holdings I must wonder where this trend will next lead. The more “mild” facts that might be treated as nonwillful today, might become tomorrow’s “bad” facts supporting a finding of “reckless disregard”.
In March, the IRS announced that the Offshore Voluntary Disclosure Program (“OVDP”) will be closing on September 28, 2018. Taxpayers who wish to join the OVDP need to make complete offshore voluntary disclosures received or postmarked by September 28, 2018. The submissions may not be partial, incomplete, or “placeholder submissions”. The OVDP, designed for taxpayers whose failure to comply with US tax laws was “willful”, has been in effect in various iterations since 2009.
While being “willful” may sound straightforward, I hope that today’s post demonstrates that it is not. What it means to be “willful” versus “nonwillful” (and all the shades in between), is a difficult and very fact-specific analysis. For those wishing to learn more, my earlier blog post looks at the element of “willfulness” and all of its nuances in greater detail for those considering using an IRS Streamlined Offshore Procedure.
With the closure of OVDP and the courts making it easier and easier for the IRS to succeed on a “willful” argument, taxpayers who have remained tax noncompliant need to take the appropriate action. What such action may be for different taxpayers will depend entirely on his or her specific facts. Taxpayers should not feel pressured to jump into OVDP, but equally (if not more) dangerous is doing absolutely nothing. Getting good tax advice from an experienced international US tax advisor is the best place to start; let me know if you need help firstname.lastname@example.org
Free Webinar Recording Available Now
The recording of my webinar with Esquire Group “Time is Running Out. OVDP Closing. FATCA Enforcement Starting” is here. It covers many of the issues described in today’s post.
*For example, the following facts were enough in Bohanec – taxpayers were reasonably sophisticated business people; they were specifically asked about foreign bank accounts on tax returns but failed to report them; taxpayers did not provide their Swiss bank with their home address; taxpayers never told anyone but their children about the existence of the foreign accounts; significantly, they were rejected from the OVDP for failing to disclose all foreign bank accounts. Clearly, this last is a very bad fact! Similarly, in Garrity, Mr. Garrity Sr. had created the Lion Rock Foundation, a Liechtenstein Shiftung, of which he was the primary beneficiary up until his death in 2008. He opened an account for the foundation with LGT Bank, in Liechtenstein. The account and foundation were never reported on his tax returns, were never revealed to his accountant and various shady actions took place with the foundation and its LGT account. Money passed through the foundation through an offshore entity related to the parties involving bills for services that never took place. Again, very bad facts.
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This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute tax advice or a recommended course of action. Professional tax advice should be sought as the information here is not intended to be, and should not be, relied upon by the recipient in making a decision.