How Does the IRS Determine “Willfulness”?

Foreign Nationals & Expats

Houston Tax Attorney

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How Does the IRS Determine “Willfulness” for FBAR Penalty Assessments?

For most tax crimes, the respective statutes require an element of “willfulness.”

Penalties for willful failure to file an FBAR

IRC § 5321(a)(5) provides for the imposition of civil penalties for a willful failure to comply with the reporting requirements of IRC 5314 – i.e, when the person maintaining a foreign account fails to timely file an FBAR reporting that account despite having an obligation to do so.

For violations involving the willful failure to report the existence of an account, the maximum amount of the penalty that may be assessed is 50% of the balance of the account at the time of the violation or $100,000, whichever is greater.

According to the court in United States v. McBride, 908 F. Supp. 2d 1186, 1201 (D. Utah 2012), a claim by the government to enforce penalties for a willful violation of section 5314 has
seven elements:

  1. the defendant was a U.S. citizen “or a resident or a person doing business in the United States” during the relevant period;
  2. the defendant “had a financial interest in, or signatory or other authority over, a bank, securities or other financial account” during the relevant period;
  3. the account had a balance that exceeded $10,000 at some point during the relevant period;
  4. the account was in a foreign country;
  5. the defendant failed to disclose the account;
  6. the failure to disclose was willful; and
  7. the amounts of the penalties assessed for failing to disclose the account were proper.

What is a willful failure to file an FBAR?

The most basic definition of willfulness is an intentional violation of a known legal duty.¹ Per IRM 4.26.16.4.5.3:

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.

In United States v. Garrity, 2018 WL 1611387 the court held that willfulness includes “knowingly” violating the FBAR requirements or “recklessly” doing so.

To show a taxpayer knowingly disregarded his FBAR reporting obligation can be proven through their actual or possibly constructive knowledge of those obligations.

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.3

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. For example, an accountant or sophisticated businessman who has financial interests in foreign bank accounts might have reason to know of FBAR filing requirements, and his failure to file an FBAR could be construed as willful without a showing of actual knowledge of filing requirements.4

Not Willful

Ignorance and misunderstanding of the law can be asserted to show that the failure to comply was not willful. Willfulness requires a known legal duty.

How is Willfulness Proven?

Since willfulness is a state of mind, it is nearly impossible to prove directly (the only person that knows your state of mind is you). However, it can be established through reasonable inference from a state of facts. For instance, the following acts may suggest that the taxpayer knew of FBAR filing requirements and intentionally violated the legal duty:

  • Setting up foreign trusts or corporations to conceal sources of income
  • Selectively filing some forms but not others
  • Using different passports
  • Requesting your bank to not send statements
  • Using code words
  • Only making cash deposits and withdrawals, and visiting the bank in person
  • Opening an account in a jurisdiction in which the taxpayer has no other ties
  • Receiving letters from the foreign bank regarding reporting requirements
  • A consistent pattern of underreporting large amounts of income
  • Failure to supply an accountant with accurate and complete information.
  • Keeping a double set of books
  • Hiding, destroying, throwing away, or “losing” books and records.
  • Placing property or a business in the name of another (nominees)
  • Use of bank accounts held under fictitious names

There are a multitude of fact patterns that will vary from case to case.

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:

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


Footnotes

  1. Cheek v. United States, 498 U.S. 192 (1991); United States v. Pomponio, 429 U.S. 10, 12 (1976); United States v. Bishop, 412 U.S. 346, 360 (1973).
  2. United States v. Schafer, 580 F.2d 774, 781 (5th Cir. 1978) (proof of evil motive or bad intent not required); United States v. Moylan, 417 F.2d 1002, 1004 (4th Cir. 1969) (“to require a bad purpose would be to confuse the concept of intent with that of motive”).
  3. See United States v. Ramsey, 785 F.2d 184, 189 (7th Cir. 1986).
  4. In other types of penalty cases general educational background and experience of defendant has been considered as bearing on defendant’s ability to form willful intent. United States v. Guidry, 199 F.3d 1150, 1157–58 (10th Cir. 1999) (willfulness inferred from defendant’s expertise in accounting via her business degree and her work experience as comptroller of a company); United States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996) (defendant’s background as a CPA, and extensive business experience including that as a professional tax preparer); United States v. Smith, 890 F.2d 711, 715 (5th Cir. 1989) (defendant’s background as an entrepreneur probative of willfulness); United States v. Segal, 867 F.2d 1173, 1179 (8th Cir. 1989) (defendant was a successful and sophisticated businessman); United States v. Rischard, 471 F.2d 105, 108 (8th Cir. 1973). See United States v. Diamond, 788 F.2d 1025 (4th Cir. 1986); United States v. MacKenzie, 777 F.2d 811, 818 (2d Cir. 1985) (willfulness inferred from the fact that each defendant had a college degree, one in economics and the other in business).