Is Summary Judgment Appropriate for FBAR Willfulness Finding?

In United States v. Horowitz, an OVDI/OVDP “opt out” case, the Taxpayer appeals a summary judgment decision involving FBAR willfulness penalties.

Facts

Taxpayers are married U.S. citizens who lived and worked in  Saudi Arabia for over fourteen years between 1984 and 2001.

The wages were initially deposited into an account in Saudi Arabia which did not earn interest. In 1988, Taxpayers opened a joint Swiss bank account using their funds from the Saudi Arabian account.

Taxpayers reported and paid U.S. taxes on the wages they earned while in Saudi Arabia. But They did not disclose their foreign bank accounts on their U.S. tax returns or file an annual “Report of Foreign Bank and Financial Account” (“FBAR”).

In 2008, the United States began investigating Swiss banks for facilitating U.S. tax evasion. In November 2009, UBS notified the Taxpayers that their account would be disclosed to U.S. authorities. In January 2010, the Taxpayers disclosed the accounts and participated in the offshore disclosure initiative. They then opted out of the initiative.

Taxpayers were subsequently audited in 2014 and the IRS determined that Taxpayers willfully failed to file FBARs for 2007 and 2008 and imposed civil penalties. The FBAR statute of limitations appears to have expired for 2006 and earlier years.

The IRS assessed $494,060 (representing $247,030 for each year at issue) against each spouse.

Taxpayers later appealed the assessment but failed to reach a settlement. The Government then filed suit in District Court to reduce the FBAR penalties to judgment.

The District Court granted Taxpayer’s motion for summary judgment regarding the 2008 penalty, but otherwise granted the Government’s motion for summary judgment. Taxpayers now appeal.

Facts supporting a finding of willfulness

  • After they moved back to the United States, Taxpayers did not provide an updated U.S. mailing address to UBS.
  • Rather than receiving written correspondence by mail, Taxpayer Husband monitored the UBS account by calling the bank every year or two.
  • In subsequent dealings with the IRS concerning the UBS account, Taxpayer Husband responded affirmatively when asked if “a representative of the foreign financial institution suggest[ed] to you the use of practices such as holding mail at the institution . . . to avoid the disclosure of your ownership of the account or asset?” Taxpayer Husband later claimed that he answered incorrectly because he had not read the entire question.
  • After learning of the Government’s investigation of UBS, Taxpayer Husband traveled to Switzerland to close the UBS account and opened a numbered account at another Swiss bank, Flinter Bank. The account was set up to not send any written correspondence to Taxpayers. Taxpayer Husband claimed that he did not read the entirety of the account opening forms and thus was not “on alert” about the Finter account features.
  • On their 2007 and 2008 tax returns, Taxpayers checked ‘no’ on Schedule B to the questions pertaining to foreign accounts.

District Court’s findings

  • The court held that Taxpayers willfully failed to report the UBS account in 2007 and that Taxpayer Husband willfully failed to report the Finter account in 2008.
  • Reviewing the caselaw, the court observed that the civil willfulness standard may be satisfied not only through evidence of actual knowledge, but also through recklessness and willful blindness.
  • Constructive knowledge – It also observed that a taxpayer who signs a tax return is charged with constructive knowledge of its contents and that the questions on Schedule B regarding foreign accounts were “simple” and “clear.”
  • Recklessness and willful blindness –  The court also argued that Taxpayers discussed their tax liabilities for their foreign accounts with their friends, which demonstrates their awareness that the income could be taxable. And that their failure to have the same conversation with their accountant shows a conscious effort to avoid learning about reporting requirements.

Was summary judgment appropriate?

A summary judgment is appropriate where there is no genuine dispute of material facts.

Government’s position

Citing Kimble, 141 Fed. Cl. at 385-86; United States v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017), the Government argues that willfulness can be decided on summary judgment.

The Government then presents a bullet list of facts to show recklessness or willful blindness.

It further analogizes payroll tax penalties under § 6672, wherein courts have regularly held that a determination of willfulness was appropriate on summary judgment.

Taxpayer’s position

Taxpayers contend that the District Court erred in granting summary judgment because there is a genuine dispute of material fact as to whether their failure to file FBARs was willful.

Even if mere recklessness were sufficient for a willful violation of the FBAR requirement, the undisputed facts here do not establish “recklessness” or “willful blindness” even under the standard set out by the Government. That standard still requires proof that the [Taxpayers’] conduct “entail[ed] ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’”

Therefore, to establish recklessness or willful blindness, the finder of fact would need to find:

  • What Taxpayers “ought to have known” that “there was a grave risk that the filing requirement was not being met” and
  • If Taxpayers were “in a position to find out for certain very easily.”

Under Williams, there must be something more established; something beyond signing an incorrect tax return. At the summary judgment stage that something more must be established through undisputed evidence, not through inferences against the taxpayer.

Taxpayers argue further that in payroll tax cases, which the Government analogizes to FBAR willful violations, “willfulness was established based on the taxpayer’s actions after learning of past-due tax delinquency, not before.”

Conclusion

Taking a step back and looking at the whole picture, it seems unlikely that a Taxpayer who wishes to engage in tax evasion would report foreign wages but knowingly fail to file an information form (FBAR) that assesses no tax. This is especially the case if the Taxpayers are as sophisticated as the Government paints them to be. Sometimes there are motivations for hiding offshore assets other than tax evasion – such as to conceal assets from bankruptcy trustees or creditors, but no such facts were alleged here. Then again, an improper motive or bad purpose is not required to establish willfulness.

Viewing all facts in the most favorable light to the Taxpayers, it is entirely plausible that Taxpayers did not know or have reason to know of their FBAR filing requirements, especially given that they reported their foreign wages.

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 us?

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