FBAR Willful Blindness – A Friend Said I Didn’t Have to File Defense…
- 1 Meet Peter and Susan Horowitz
- 2 What did they do with the Money?
- 3 Did They Report the Money?
- 4 Is this a Quiet Disclosure?
- 5 What was the Penalty Amount?
- 6 Susan Catches a Small Break
- 7 The Horowitzes Defense
- 8 My Friends Told me to Do it (or Not Do it)
- 9 Safely Get Into IRS Offshore Compliance
- 10 4 Types of IRS Voluntary Disclosure Programs
FBAR Willful Blindness – The Courts rejected “A Friend Said I Didn’t Have to File Defense” as a way to reduce or avoid IRS Penalties.
When I was a little scamp running around with my friends – I would always seem to find trouble.
My Grandma would ask: If your friends told you to jump off a bridge, would you do it?
Here is a perfect example about why Grandma is always right —
Meet Peter and Susan Horowitz
Peter and Susan Horowitz are U.S. Citizens. Peter worked as a Doctor in Saudi Arabia, and they made good money. Over time, their practice thrived, and their pockets swelled.
What did they do with the Money?
Starting in 1988, Defendants held their money in a Swiss Bank Account at UBS, an institution notorious for helping U.S. Citizens and Residents circumvent U.S. tax laws.
The account reached $2,000,000.
Thereafter, when they returned to the United States, Peter transferred his money to another Swiss Bank Account at Finter – which like UBS had a top 20 spot on the U.S. “Bad Bank List.”
Did They Report the Money?
No. They had an accountant, who they neglected to tell about the foreign money…until 2010 when they started disclosing the money to the U.S. Government.
Is this a Quiet Disclosure?
Yes. Since the Horowitzes had an Accountant and they did not tell the Accountant, that is considered willful. And, “filing forward” without first going back to fix the prior problem is considered a Quiet Disclosure – which is illegal.
You can read more about perils of making a Quiet Disclosure.
What was the Penalty Amount?
$247,030 against each of them for two years.
The Horotwitzes had not paid, and, the IRS brought suit to collect penalties.
Since FBAR penalties are a “Title 31” issue and not a “Title 26” issue, the collection process is different.
Susan Catches a Small Break
Since Susan was not listed on the Account in 2008, she was relieved from her portion of the 2008 penalty.
*She was not relieved because she proved “non-willfulness.” She was relieved because technically she had no reporting due in 2008.
The Horowitzes Defense
$100,000 Maximum Penalty
Many have tried this defense, and most have failed. Just because the IRS regulation (limiting maximum penalties to $100,000) was not updated in accordance with the statute increasing potential Willful FBAR Penalties does not limit the Court’s ability to confirm IRS penalties that exceed $100,000 (in accordance with the revised statute).
My Friends Told me to Do it (or Not Do it)
It didn’t work in high school.
It didn’t work when your Grandma caught you sneaking a cookie.
It didn’t work for the Horowitzes in a court of law.
As provided by the court:
The Horowitzes argue that their friends told them they did not need to pay taxes on the interest in their foreign accounts.
Maybe so, but their friends’ credentials are not before the Court, nor is there any information from which I could assess whether it was reasonable for them to have accepted what their friends told them as legally correct.
And, in any event, their friends’ views would not override the clear instructions on Schedule B, which, as noted, requires a “Yes” answer if the taxpayer has an interest in a foreign account, regardless of whether the funds within it constituted taxable income.
Moreover, the fact that the Horowitzes discussed their tax liabilities for their foreign accounts with their friends demonstrates their awareness that the income could be taxable.
Their failure to have the same conversation with the accountants they entrusted with their taxes for years, notwithstanding the requirement that taxpayers with foreign accounts complete Part III of Schedule B, easily shows “a conscious effort to avoid learning about reporting requirements.” Williams II, 489 Fed. App’x at 658 (quoting Sturman, 951 F.2d at 1476).
On these facts, willful blindness may be inferred. See Poole, 640 F.3d at 122 (“[I]n a criminal tax prosecution, when the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability, the trier of fact may find that the defendant exhibited ‘willful blindness’ satisfying the scienter requirement of knowledge.” (quoted in Williams II in the context of civil liability)).
Thus, even without the additional evidence that was present in Williams II, I find based on these undisputed facts that the Horowitzes recklessly disregarded the FBAR filing requirement. See Williams II, 489 Fed App’x at 659. This suffices for a finding of willfulness. See id.; Safeco, 551 U.S. at 57.
Safely Get Into IRS Offshore Compliance
Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.
4 Types of IRS Voluntary Disclosure Programs
There are typically four types of IRS Voluntary Disclosure programs, and they include:
- Traditional (IRM) IRS Voluntary Disclosure Program
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)