FBAR Civil Penalty Cases

Foreign Nationals & Expats

Houston Tax Attorney

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Willful FBAR Penalty Cases

An willful FBAR penalty under 5321(a)(5)(C) requires not just a failure to timely file but also evidence of willfulness.

(5)Foreign financial agency transaction violation.—

(A)Penalty authorized.—

The Secretary of the Treasury may impose a civil money penalty on any person who violates, or causes any violation of, any provision of section 5314.
(B)Amount of penalty.—

(i)In general.—

Except as provided in subparagraph (C), the amount of any civil penalty imposed under subparagraph (A) shall not exceed $10,000.

(ii)Reasonable cause exception.—No penalty shall be imposed under subparagraph (A) with respect to any violation if—

(I)such violation was due to reasonable cause, and
(II)the amount of the transaction or the balance in the account at the time of the transaction was properly reported.

(C)Willful violations.—In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—

(i)the maximum penalty under subparagraph (B)(i) shall be increased to the greater of—

(I)$100,000, or
(II)50 percent of the amount determined under subparagraph (D), and
(ii)subparagraph (B)(ii) shall not apply.

(D)Amount.—The amount determined under this subparagraph is—

(i)in the case of a violation involving a transaction, the amount of the transaction, or
(ii)in the case of a violation involving a failure to report the existence of an account or any identifying information required to be provided with respect to an account, the balance in the account at the time of the violation.

When willfulness is established, the failure to timely file an FBAR will result in a maximum penalty that is the greater of (1) $100,000 or (2) 50 percent of the maximum balance in the accounts at the time of the violation.

Civil FBAR Penalty Cases

The concept of ‘willfulness’ as it apply to FBAR violations has evolved over time. Below are some of the seminal FBAR civil penalty cases. Caution for lay readers: there are many facts in these cases which are not included below. Most of these cases involve a number “bad facts” such as accounts in tax havens (e.g., Switzerland),

U.S. v. Williams

In U.S. v. Williams, 489 Fed. Appx. 655 (CA-4,2012), the government brought enforcement action to collect civil penalties assessed against Williams for failure to report his interest in two foreign bank accounts by failing to file an FBAR for tax period 2000.

Constructive knowledge

A taxpayer is considered to have constructive knowledge of all the contents of his income tax return by the mere signing of the Form 1040, which is signed under penalties of perjury.

 

Willful blindness

Evidence of acts to conceal income and financial information, combined with a taxpayer’s failure to pursue knowledge of further reporting requirements as suggested on Schedule B, provide a sufficient basis to establish willfulness blindness.

The takeaway from this case is that a “willfulness” in the FBAR context includes not only knowing FBAR violations, but also willful blindness.

U.S. v. McBride

In  U.S. v. McBride, 908 F.Supp. 2d 1186 (D.C. Utah, 2012), the government brought suit to collect a civil penalty assessed against McBride for his willful failure to report his interest in four foreign bank accounts for tax periods 2000 and 2001.

Constructive knowledge

The court found that taxpayer’s signature on a return is sufficient proof of a taxpayer’s knowledge of the instructions contained in the tax return form and in other contexts (e.g. schedule B). Further, knowledge of what instructions are contained within the form is directly inferable from the contents of the form itself, even if it were a blank.

Knowledge of the law, including knowledge of the FBAR requirements, is imputed to McBride. The knowledge of the law regarding the requirement to file an FBAR is sufficient to inform McBride that he had a duty to file a Form TD F 90-22.1 for any foreign account in which he had a financial interest.

McBride signed his federal tax returns for both the tax year 2000 and 2001. Accordingly, McBride is charged with having reviewed his tax return and having understood that the federal income tax return asked if at any time during the tax year, he held any financial interest in any foreign bank or financial account. The federal income tax returns contained a plain instruction informing individuals that they have the duty to report their interest in any foreign financial or bank accounts held during the taxable year. McBride is therefore charged with having had knowledge of the FBAR requirement to disclose his interest in any foreign financial or bank accounts, as evidenced by his statement at the time he signed the returns, under penalty of perjury, that he read, reviewed, and signed his own federal income tax returns for the tax years 2000 and 2001, as indicated by his signature on the federal income tax returns for both 2000 and 2001. As a result, McBride’s willfulness is supported by evidence of his false statements on his tax returns for both the 2000 and the 2001 tax years, and his signature, under penalty of perjury, that those statements were complete and accurate.

Recklessness

An individual’s actions may be deemed willful if the individual recklessly ignores the risk that conduct is illegal by failing to investigate whether the conduct is legal.

Because McBride acted in reckless disregard of the known or obvious risks created by his involvement with Merrill Scott (an offshore promoter) actual, subjective knowledge is not required for him to have willfully failed to comply with the FBAR requirements.

Therefore, even if McBride did not have actual, subjective knowledge of the FBAR requirements when he signed and filed his federal income tax returns for the tax years 2000 and 2001, the risk of failing to comply with the FBAR requirements was known or obvious.

To be continued…

What should non-compliant taxpayers do?

If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:

Why hire Mitchell & Patel?

We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.

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