Court Sustains FBAR Civil FBAR Willful Penalties

Court Sustains FBAR Civil FBAR Willful Penalties

Court Sustains Civil FBAR Willful Penalties in Ott: In U.S. vs. Ott, the Court Sustains Civil FBAR Willful Penalties issued by the IRS. There was no dispute that Defendant failed to file the FBAR. The key question was whether the Taxpayer was willful vs. non-willful. This case follows the recent precedent set by the Internal Revenue Service which is to make foreign accounts compliance and unreported foreign income key enforcement priorities.  This is further solidified with the U.S. government’s recent (2020) announcement of J5 Enforcement, and increased visits to U.S. High-Income Earners.

Court Sustains FBAR Civil Willful Penalties

We previously summarized U.S. v. Ott, and FBAR Civil FBAR Willful Penalties.

All references are to the recent Opinion and Order on Findings of Fact and Conclusions of Law.

By way of background:

“The United States seeks to collect civil penalties for Ott’s failure to file a Report of Foreign Bank and Financial Accounts (“FBAR”) for the years 2007, 2008, and 2009.

Specifically, the United States alleges that Defendant’s failure to file an FBAR was willful for the years in question.

While Defendant concedes that he did not file an FBAR during these years, he argues that his failure was merely negligent and did not rise to the level of willfulness.

This Court conducted a bench trial on October 29, 2019 and October 30, 2019.”

Foreign Account History for 2006-Present

The Defendant has foreign accounts in prior years. The accounts were opened and closed.

“On July 1, 2006, Ott opened two financial accounts with Octagon Capital Corporation (“Octagon”) in Toronto, Ontario, with account numbers ending in 589- E and 589-F (the “Canadian Accounts”), and transferred the contents of the accounts with Desjardins to the Octagon accounts.

Ott has a sister with a Canadian home address. Soon after the Octagon accounts were opened, Ott listed his sister’s home address for receipt of mailings and correspondence from the Octagon firm. At all relevant times, the address associated with the Canadian Accounts was Ott’s sister’s Canadian address.”

CPA Prepared Otts’ Tax Returns

“The highest aggregate balance of the Canadian Accounts in 2007 was $1,903,477.

The highest aggregate balance of the Canadian Accounts in 2008 was at least $770,000.

The highest aggregate balance of the Canadian Accounts in 2009 was $1,766,129.

Robert C. Weide (“Weide”), Certified Public Accountant (CPA), has been Ott’s accountant for many years and prepared his tax returns during the years at issue.

Weide prepared Ott’s federal tax returns using software licensed by his firm and then transmitted the returns back to him for review and approval.

Weide prepared Ott’s returns based on the materials provided to him by the Otts.”

Tax Return & Penalty of Perjury

Tax Returns are signed under Penalty of Perjury.

Specifically:

“Prior to causing each federal income tax return to be filed, Ott signed his returns, which included the following language: “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.”

Ott Failed to Report the Accounts on the Tax Return and FBAR

“For each year, Part III of Schedule B to IRS Form 1040, entitled “Foreign Accounts and Trusts,” asked the filer if he had a financial interest in, or signature authority over, a financial account in a foreign country.

The form and instructions also directed the filer to Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (the “FBAR”) and its instructions.

Ott did not file an FBAR reporting the Canadian Accounts for the 2007 calendar year on or before June 30, 2008. Ott did not file an FBAR reporting the Canadian Accounts for the 2008 calendar year on or before June 30, 2009.

Ott did not file an FBAR reporting the Canadian Accounts for the 2009 calendar year on or before June 30, 2010. Ott timely filed FBARs for the 2010 year.”

The CPA’s Tax Software Glitch

“In the preparation of the tax returns for the years at issue, Weide did not affirmatively check the “No” box on the Schedule B regarding Ott’s ownership in  foreign accounts.

Instead, the accounting software Weide used defaulted to check the “No” box on Schedule B.

*This was a common issue with professional and consumer tax software

Pre-Streamlined OVDP/OVDI Opt-Out 

Before the Streamlined Procedures were introduced, Taxpayers were required to submit to OVDP and then opt-out if they were willful, and Ott applied to OVDP (OVDI) in 2011

“Ott followed the procedures outlined in the Miller Memorandum to formally opt out of the 2011 OVDI, which included the preparation of a required statement that outlined Ott’s reasonable cause defenses to the FBAR penalties.

After Ott withdrew from the OVDI, the IRS audited Ott’s income tax returns and FBARs for 2003 through 2009.

At the conclusion of the audit, the IRS issued a Notice of Deficiency with deficiencies to income tax and civil fraud penalties for the years 2007, 2008 and 2009, all related to the voluntary disclosures for the foreign accounts.”

Petition to Tax Court

“Specifically, on August 26, 2016, the IRS assessed a total civil penalty of $988,245 against Ott for willful failure to report the Canadian Accounts on an FBAR for the years in question.

On the same date, a delegate of the Secretary of the Treasury provided Ott with notice of the FBAR assessments against him and demanded payment thereof.”

Civil Tax Fraud vs. Willful FBAR

As we have written about in the past, oftentimes Civil Tax Fraud will accompany Willfulness FBAR penalties. Currently, the FBAR litigation is limited to federal court, and the U.S. government must only prove a preponderance of the evidence – whereas Civil Tax Fraud requires clear and convincing evidence. 

The court in Ott does a great job in summarizing the willfulness issue.

Here are some of the key highlights:

“As an initial matter, courts treat the willfulness analysis for failure to comply with a tax reporting requirement as a question of fact. United States v. Williams, 489 F. App’x 655, 658 (4th Cir. 2012) (citing Rykoff v. United States, 40 F.3d 305, 307 (9th Cir.1994)).

The Supreme Court has distinguished between civil and criminal recklessness, holding that “where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007)….This is distinguishable from criminal recklessness, which “requires subjective knowledge on the part of the offender.” Id. at n.18.

Generally, a taxpayer who signs his or her tax returns “will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.” Greer v. Comm’r, 595 F.3d 338, 347 n.4 (6th Cir. 2010) (internal citations omitted).

Ott further testified that no interest, dividends, or capital gains from the foreign Canadian accounts were reflected in his tax returns during this time. Id. at PageID.554-555.

Here, the Defendant has consistently stated that he is not a tax expert with any financial or legal training in tax accounting. See, e.g., ECF No. 44, PageID.417; ECF No. 47, PageID.712. Nevertheless, he chose to rely solely on advice he received decades ago concerning foreign investments.”

Comparable to the U.S. v Horowitz Case

Here, the court referred to the Horowitz and relying on my friend defense, which we summarized in great detail, in a prior post.

In Ott, the court provided.

“In Horowitz, the husband and wife testified that, based on conversations with friends, they did not believe they had to pay taxes on money earned overseas in Saudi Arabia. F. Supp. 3d at 525.

Importantly, the defendants argued that willful penalties were unwarranted, as their “accountants neither asked about overseas bank accounts nor explained the FBAR or the question about foreign accounts on Form 1040, Schedule B, which they completed on the Horowitzes’ behalf.” Id.

The district court still held, however, that willfulness could be inferred based on their blind reliance on friends’ advice and failure to consult with their accountants. Id. at 529.”

Our Take on the Ruling and Order

This court makes it clear, that if the defendant appears to have committed reckless disregard and/or willful blindness in not reporting foreign accounts and income, the court will be inclined to find willfulness.

A few things to remember in this case:

  • There were nearly $2M in balances
  • There was also unreported income
  • Taxpayer did not update the CPA with foreign account information
  • The CPA with whom the Taxpayer did not update with foreign account information

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