Earlier this month, in United States v. Arvind Ahuja (E.D. Wisc. Dkt. No. 18-cv-01934), the IRS sued a prominent neurosurgeon to reduce to judgment an unpaid FBAR penalty for his failure to report his interest in foreign financial accounts for calendar year 2009.
The penalty previously assessed was for a willful failure to file an FBAR. Of particular interest to clients with unreported foreign accounts are the factors that led to a finding of a willful failure to file the FBAR.
What is a willful failure to file an FBAR?
Actual and constructive knowledge
The most basic definition of willfulness is an intentional violation of a known legal duty. Per IRM 220.127.116.11.5.3:
Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR Situation, the only thing that a person need know is that he has a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.
That a taxpayer knowingly disregarded his FBAR reporting obligation can be proven through their actual or constructive knowledge of those obligations.
Willful blindness and recklessness
The court in United States v. McBride, 908 F. Supp. 2d 1186, 1210 (D. Utah 2012), held that willfulness for civil FBAR violations includes both recklessness and willful blindness.
A taxpayer who understands that there may be a filing requirement, but deliberately avoids learning about FBAR filing requirements can be considered to have acted willfully. The law does not protect deliberate ignorance or conscious avoidance.
The IRM provides an example:
An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to the instructions for Schedule B that provide further guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file Form 90-22.1. These resources indicate that the person could have learned of the filing and record keeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to follow-up on this knowledge and learn of the further reporting requirement as suggested on Schedule B may provide some evidence of willful blindness on the part of the person. For example, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.
The taxpayer’s background and level of education may help establish willful blindness, where a failure to file an FBAR could be construed as willful without a showing of actual or constructive knowledge of filing requirements.
FBAR willfulness factors in U.S. v. Arvind Ahuja
Below are some of the facts in this case:
- Taxpayer was a citizen of the U.S. during the 2009 tax period for which the FBAR was due.
- Taxpayer is a prominent neurosurgeon, specializing in treatments for disorders of the brain, spine, arteries and peripheral nerves.
- In 2008-2009 Taxpayer actively day-traded stocks, foreign currencies, and futures.
- Taxpayer maintained accounts with HSBC India, which held approximately 59 Certificates of Deposit in various sub-accounts and in various foreign currencies.
- Taxpayer transferred funds from his United States bank account to his HSBC India account to buy, and rollover, the CDs.
- In 2009 the highest aggregate balance in Taxpayer’s HSBC India accounts was $9,245,081.
- On his IRS Form 1040 for 2009, Taxpayer checked “no” on that part of Schedule B requiring him to disclose his interest in foreign bank accounts.
- Around October 8, 2009, Taxpayer closed his accounts at HSBC India and directed over $3 million be deposited in a domestic account in his wife’s name.
- In August of 2008 and on subsequent dates, Taxpayer’s accountant informed Taxpayer of his obligation to report his interest in any foreign financial accounts. Taxpayer knew or should have known he had a duty to report his interest in the foreign financial accounts.
- Taxpayer underreported his foreign income by $2.7 million for years 2005 through 2009 on his U.S. tax returns.
- Taxpayer failed to file his 2009 FBAR which was due on June 30, 2010.
Based on these and other facts, on August 22, 2012, Taxpayer was found guilty by a jury in his district for, among other charges, his willful failure to submit a Report of Foreign Bank and Financial Accounts and filing a false income tax return for the year ending December 31, 2009.
The facts supporting a finding of ‘willfulness’ here are that:
- On at least a few occasions, Taxpayer’s accountant informed Taxpayer of his FBAR filing obligations
- Taxpayer checked ‘no’ on Schedule B regarding the FBAR filing obligation
The Government was able to show actual or constructive knowledge based on those two facts. In the absence of that, Taxpayer’s education/profession, efforts to conceal, the number and size of the foreign accounts, day trading activity, and significant underreporting of income may have supported a finding of willful blindness or recklessness.
FBAR willfulness penalty assessment
On July 12, 2017, a delegate of the Secretary of the Treasury timely made an assessment in the amount of $4,622,540.50, under 31 U.S.C. § 5321, against the defendant, Arvind Ahuja, for his willful failure to submit a FBAR for the year ending December 31, 2009, and assessed both a late-payment penalty of $63,069.19, under 31 U.S.C. § 3717(e)(2) and 31 C.F.R. § 5.5(a), plus interest. The amount assessed under 31 U.S.C. § 5321 is commonly known as a “FBAR Penalty.” The FBAR Penalty assessed is 50% of the account balance on the day of the FBAR violation.
With interest and other statutory accruals, the amount due with respect to the assessment described above is, as of September 19, 2018, $5,007,288.38. The United States is entitled to judgment in its favor and against Ahuja in this amount, plus statutory additions including interest according to law.
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:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR Submission Procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.