For many tax crimes, the respective statutes require an element of “willfulness”. Examples of such tax violations include:
- Title 26 USC § 7201 (Evasion) Felony
- Title 26 USC § 7202 (Trust Fund Violation—Willful Failure to Collect or Pay Over Tax) Felony
- Title 26 USC § 7203 (Failure to File or Failure to Pay) Misdemeanor
- Title 26 USC § 6050I in Conjunction with 26 USC Sections 7203 and 7206 (Trade or Business Required to File a Form 8300 for Receiving More Than $10,000 Cash) Felony
- Title 26 USC § 7204 (Employee Wage Statements) Misdemeanor
- Title 26 USC § 7205 (False W–4) Misdemeanor
- Title 26 USC § 7206(1) (False return) Felony
- Title 26 USC § 7206(2) (Assisting in Preparation of False Return) Felony
- Title 26 USC § 7206(5) (Compromises & Closing Agreements) Felony
- Title 26 USC § 7232 (Failure to Register) Felony
- Title 18 USC § 1001 (False Statements) Felony
- Title 31 U.S.C. § 5322 (Willful Failure to File FBAR or Filing of a False FBAR) Felony
For those seeking to voluntarily comply with FBAR reporting requirements, willfulness can mean the difference between a draconian 27.5% penalty (and 20% accuracy-related penalty) under the Offshore Voluntary Disclosure Program (OVDP) and a 5% penalty under the Streamlined Filing Compliance Procedures. Taxpayers who do not voluntarily comply and there is evidence of willfulness can face civil and criminal charges under Title 31 U.S.C. § 5321 and 5322 which include hefty fines and/or imprisonment. When there is evidence of willfulness, penalties under OVDP may seem high, but criminal prosecution is guaranteed to be much worse.
While the basic concept of willfulness is similar under the various statutes, this article will focus on the definition of willfulness for civil and criminal FBAR violations under the Bank Secrecy Act.
What is Willfulness?
The most basic definition of willfulness is an intentional violation of a known legal duty.¹ Per IRM 184.108.40.206.5.3:
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.
The burden of proof is on the Service to establish that the taxpayer (1) had a known legal duty, and (2) intentionally violated the legal duty. For practical purposes, the first element is much more difficult to show. Once the Service can establish a known legal duty by the taxpayer, an intentional violation usually follows by merely showing a conscious disregard of the legal duty (i.e., not filing); no motive or bad intent is required to be shown.² Of course if there is reasonable cause, such as a force of nature or illness that prevents the taxpayer from complying, then there is no intentional violation. But the burden of proof as to reasonable cause shifts to the taxpayer.
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 a tax attorney who has financial interests in foreign bank accounts should 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
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 would 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 a bank 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 other factors that will vary from case to case.
If you’re seeking to voluntary come into compliance with FBAR and FATCA requirements, it’s vital that you speak to an attorney who understands these issues. It is also important to be truthful and complete in your communications to the attorney in order to determine the appropriate course of action. Your communication will be protected under attorney-client privilege from civil and criminal prosecution.
- 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).
- 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”).
- See United States v. Ramsey, 785 F.2d 184, 189 (7th Cir. 1986).
- General educational background and experience of defendant can be 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).