Reckless Disregard FBAR Standard  – Willful, But Not Really

Reckless Disregard FBAR Standard  – Willful, But Not Really

Reckless FBAR Explained

2024 is already off to a rocky start for taxpayers who are hoping that courts may disagree with the consensus that a reckless foreign bank and financial account violation is characterized as a willful violation. In general, reckless disregard has always been grouped up with willfulness when it comes to certain types of violations, but due to the extreme level of penalties when it comes to FBAR violations, classifying reckless violations as willful places a heavy burden for Taxpayers to have to overcome. Since multiple-year violations can lead to a 100% penalty, it is unfair that taxpayers who are not intentional to be grouped with other taxpayers who were clearly willful. Let’s look at two recent cases involving recklessness and FBAR and see how courts in different circuits came to the same conclusion that ‘reckless behavior’ is considered to be a willful violation.

How is Reckless FBAR Defined?

Recklessness is essentially a form of ‘risky behavior.’ The Internal Revenue Manual provides a good summary:

      • Reckless violation. Willfulness is also shown when a person recklessly disregarded the FBAR reporting and recordkeeping requirements. Recklessness is evaluated using an objective standard, not by looking at whether a person subjectively believed that he or she was not required to accurately report the account on a timely filed FBAR or keep required records.

      • The objective standard looks at whether conduct entailed an unjustifiably high risk of harm that is either known or so obvious that it should be known. The harm in the FBAR context is that the reporting or recordkeeping requirements are not being met. A person recklessly violates the FBAR reporting or recordkeeping requirements when the person clearly ought to have known that there was a grave risk that the requirements were not being met and the person was in a position to very easily find out for certain whether or not the requirements were being met.”

It is important to note that the key phraseology is that an ‘objective standard’ is used to assess recklessness. It is not based on a person’s subjective intent. And, to determine if someone is reckless, it is based on the specific facts and circumstances of the particular matter. Let’s look at a recent case, U.S. vs Kelly.

United States v Kelly (Court of Appeals)

In the case of US vs. Kelly, the Sixth Circuit Court of Appeals affirmed the lower court ruling that the taxpayer’s reckless non-compliance with FBAR reporting under the BSA amounts to a willful violation. Some of the important facts regarding non-compliance include:

      • The account was opened in Switzerland and designated as a numbered account.

      • Taxpayer intentionally diverted his investments from U.S. Securities which would have required him to submit a form W 9

      • He never inquired as to whether the foreign account needed to be reported.

      • He entered into the OVDP program but did not complete the process.

      • When he submitted a form 433-A under penalty of perjury he did not disclose his foreign asset account at one of the foreign financial institutions with a large balance.

FBAR Reckless Conduct

The court provides the following summary of how it concluded that the Taxpayer was reckless (and willful).

      • Based on the above authorities, we hold that, for purposes of an FBAR civil penalty, a willful violation of the FBAR reporting requirements includes both knowing and reckless violations. In so holding, we join every other circuit to have addressed this issue. See United States v. Rum, 995 F.3d 882, 889 (11th Cir. 2021) (per curiam); Kimble v. United States, 991 F.3d 1237, 1242 (Fed. Cir. 2021); United States v. Horowitz, 978 F.3d 80, 88 (4th Cir. 2020); Bedrosian v. United States, 912 F.3d 144, 153 (3d Cir. 2018).

      • Reckless conduct in the civil context involves conduct that violates “an objective standard: action entailing ‘an unjustifiably high risk of harm that is either known or so obvious that it should be known.’” Safeco, 551 U.S. at 68 (citing Farmer v. Brennan, 511 U.S. 825, 836 (1994)); see also Brawner v. Scott Cnty., 14 F.4th 585, 594 (6th Cir. 2021).

      • As the Fourth Circuit has noted, “civil recklessness contrasts with criminal recklessness and willful blindness” because “both of those concepts incorporate a subjective standard.” Horowitz, 978 F.3d at 89 (citing Farmer, 511 U.S. at 836–37). Still, civil recklessness requires proof of more than negligence. Brawner, 14 F.4th at 596–97 (citations omitted).

      • Thus, in the context of a civil FBAR penalty, the government can establish a willful violation “based on recklessness” by proving that “the defendant (1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and [that] (3) he was in a position to find out for certain very easily.” Horowitz, 978 F.3d at 89 (internal quotation marks omitted); see also Bedrosian, 912 F.3d at 153; Rum, 995 F.3d at 889–90.

U.S. v Reyes (New York District Court)

Similar to the case above, in a recent case in the Eastern District of New York, the District Court came to the same conclusion that an FBAR reckless violation amounts to willfulness. The court summarizes the specific facts as argued by the government on the issue of reckless behavior:

Allegations of Recklessness

      • The government argues that the evidence supports a conclusion that Defendants willfully failed to file an FBAR because recklessness is sufficient to establish willfulness and the undisputed evidence shows that Defendants acted recklessly.5 (Gov’t Mem. 1-2, 16-18). In support, the government argues that the “evidence amassed to date establishes that the Defendants’ conduct is consistent with, and exceeds, the indicia of recklessness established in the FBAR case law,” because:

            • (1) Defendants submitted federal income tax returns that falsely stated they had no foreign financial accounts during the relevant tax years;

            • (2) they failed to ask their accountant about their responsibilities as to the Lloyds Account;

            • (3) they understood that interest income from a domestic bank is taxable under U.S. law;

            • (4) they instructed the foreign bank to hold mail related to the Lloyds Account and not invest in U.S. securities;

            • (5) the Lloyds Account was a significant percentage of their net worth during the years at issue; and

            • (6) Defendants are sophisticated taxpayers, part-owners in real-estate ventures, and individuals surrounded by professionals who “were in positions to either advise them about the implications of the foreign account, or at the very least point them in [the] right direction.” (Gov’t Mem. 1-2, 16-18).

Is Recklessness a Form of Willfulness?

The District Court in Eastern New York concluded that a reckless FBAR violation amounts to willfulness.

      • “Although the Second Circuit has not yet addressed the meaning of “willful” in the context of Section 5321(a)(5), the Supreme Courthas stated that “where willfulness is a statutory condition of civil liability,” it will generally be construed to include “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) (collecting cases).

      • The Second Circuit has also held that, for the purposes of 26 U.S.C. §6672, which provides penalties for willful failure to collect and pay withholding tax, an “individual’s bad purpose or evil motive in failing to collect and pay the taxes ‘properly play[s] no part in the civil definition of willfulness.’” Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997) (alteration in the original) (quoting Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990)).

      • Other courts in this Circuit have thus concluded that willfulness for purposes of Section 5321(a)(5) includes both knowing and reckless violations. See United States v. Katholos, No. 17-CV-531, 2022 WL 3328223, at *8 (W.D.N.Y. Aug. 10, 2022) (“[W]illfulness includes recklessness.”); Schik, 2022 WL 685415, at *5 (“The Court agrees with the decisions of almost every court, including those in this Circuit, that have considered the issue and now holds that a ‘willful violation’ includes reckless violations for purposes of a civil FBAR penalty.”); United States v. Gentges, 531 F. Supp. 3d 731, 743 (S.D.N.Y. 2021) (“[F]or purposes of the civil penalties provision in [Section] 5321(a)(5)(C)(i), a willful violation of the FBAR reporting requirement includes both knowing and reckless violations of the statute.”); United States v. Bernstein, 486 F. Supp. 3d 639, 647 (E.D.N.Y. 2020) (noting that in the context of a failure to file an FBAR, “recklessness is a subset of, or an alternative to, willfulness” (citing Safeco Ins., 551 U.S. at 57)).”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.