201612.23
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FBAR Reckless Disregard Standard for Willfulness | Increased IRS Penalty

FBAR Reckless Disregard Standard for Willfulness | Increased IRS Penalty

FBAR Reckless Disregard Standard for Willfulness | Increased IRS Penalty

FBAR Reckless Disregard Standard for Willfulness | Increased IRS Penalty

A more updated post on this issue can be found here.

While many individuals and Expat websites downplay the importance of reporting foreign bank accounts and other offshore/foreign accounts, it is important to understand that there can be serious penalties in failing to report foreign accounts — especially if a person was willful in their failure to comply with Offshore/Foreign Account reporting.

FBAR Reckless Disregard Standard for Willfulness

Most recently, the Ninth Circuit held that the burden of proving a person was willful is met when a person is found to be in reckless disregard of filing FBAR forms, and the government’s burden is less than the standard of showing clear and convincing evidence (which is the evidence required in a Criminal Matter)

Thus, even though the willful penalty is equivalent to a criminal penalty, the IRS does not need to meet the standard required in a criminal case (Clear and Convincing) to prove i

What is an FBAR?

An FBAR is a report of foreign bank and financial account form. It is a form that is required to be filed by any individual that has more than $10,000 overseas in foreign bank accounts on any day of the year. There are a few important factors to consider, which many people do not realize:

  • It is not $10,000 per account, but more than $10,000 in aggregate for all accounts combined.
  • It does not matter if a person owns the foreign money, is a joint account holder, or was merely a signatory.
  • It does not matter if the account is an individual account, investment account, retirement account, or business account.
  • Once you break the $10,000 total, you have to report all of the accounts.
  • The IRS does issue penalties for failing to report the account information.

9th Circuit – Lower Standard of Proof Makes it Easier to Penalize You

Recently, in the Ninth Circuit, the District Court issued a ruling that held the standard of willfulness is not the same standard that is required in criminal cases — even though the penalty is essentially a criminal penalty — the standard is less than Clear and Convincing evidence.

At the outcome of a criminal case, a person may suffer a loss of the freedom — so the court system wants to do its best to ensure that the defendant is guilty before placing a person in jail or prison and removing their freedoms from them. Therefore, in criminal proceedings the court must meet a Clear and Convincing standard. While there is no numerical amount of evidence proof that needs to be used, the general understanding is that it is pretty high and should hover around 95%.

In the recent Ninth Circuit case of U.S. v. Bohanec, the District Court held that the burden of proving a person was willful for financial penalties is met when a person is found to be in reckless disregard of filing FBAR forms (less than intent or deliberate actions taken), and the government’s burden is less than clear and convincing evidence.

The FACTS of the CASE

The case is U.S. v. Bohanec (United States v. August Bohanec et al, USDC CD Ca., No. 2:15-cv-04347).  The Taxpayers at issue had multiple accounts (three in total) – split between Mexico, Austria, and UBS Switzerland. It should be noted that UBS is considered a “Bad Bank” (aka Foreign Financial Facilitator) but not at the time when Defendants had attempted to enter OVDP (See below).

The accounts were actively being used by Taxpayers in order to move business profits offshore. The following facts were stipulated between Plaintiffs and Defendants:

– Even though Taxpayers were not U.S. born citizens, they did become naturalized citizens many years ago.

– The Bohanecs knew that they had to file tax returns for the camera shop business and that if they earned money, they had to pay taxes.

– In addition to the Leitz Canada commission deposits, the Bohanecs directed their international customers, on at least a few occasions, to deposit money directly into the Swiss UBS account. 34. The Bohanecs did not report the commission income they received from Leitz Canada on their federal income-tax returns.

– The Bohanecs would occasionally withdraw money from their UBS account.

–  In June 2003, the Bohanecs transferred $10,000 from their UBS account in Switzerland to their daughter, Yolanda Reischer-Bohanec. Exhibit 11 is a copy of the UBS notice regarding this transfer.

– In July, 2003, the Bohanecs transferred $25,000 from their UBS account in Switzerland to August Bohanec’s account at Steiermärkische Bank in Austria. Exhibit 12 is a copy of the UBS notice regarding this transfer.

– In December 2003, the Bohanecs transferred $20,000 from their UBS account in Switzerland to their bank account in Austria. Exhibit 13 is a copy of the UBS notice regarding this transfer.

– In February 2006, the Bohanecs opened a bank account in Mexico and transferred $25,000 from their UBS account in Switzerland to Mexico for expenses related to a house they were building in Mexico. Exhibit 14 is a copy of the UBS notice regarding this transfer. (RT 18:18-23.)

–  In November 2006, the Bohanecs transferred $7,500 from their UBS account in Switzerland to their Bank of America account in Pasadena, California. Exhibit 15 is a copy of the UBS notice regarding this transfer.

– In addition, from October 2004 through October 2008, the Bohanecs made several other withdrawals from their UBS account in Switzerland. Exhibits 17 through 22 are copies of statements from UBS with notations reflecting these withdrawals.

– Between the filing of their 1998 federal income-tax return and May 19, 2011, the Bohanecs did not file any federal income-tax returns.

– On May 19, 2011, the Bohanecs executed and filed FBARs for 2003, 2004, 2005, 2006, 2007, and 2008. Exhibits 25 through 30 are copies of these FBARs.

– On May 19, 2011, the Bohanecs executed and filed federal income-tax returns for 2003, 2004, 2005, 2006, 2007, and 2008. Exhibits 31 through 36 are copies of these tax returns.

– While the FBARs filed by the Bohanecs in May 2011 for 2003, 2004, 2005, 2006, 2007, and 2008 included the UBS account, they did not include the Austrian account, which was in existence during 2003 through 2008.

– The FBARs for 2006, 2007, and 2008 filed by the Bohanecs in May 2011 did not include the Mexican account, which was in existence during 2006 through 2008.

– The Bohanecs were ultimately rejected by the IRS for the Voluntary Disclosure Program for Offshore Accounts.

– While the federal income-tax returns for 2003, 2004, 2005, 2006, 2007, and 2008 included the interest earned on the UBS accounts, they did not include the income earned by the Bohanecs from their EBay sales.

– On October 3, 2013, the IRS issued a notice of deficiency for tax year 2003 through 2010. Exhibit 37 is a copy of this notice of deficiency.

OVDP Rejection

Taxpayers had applied for OVDP and were initially approved for preclearance, but were later rejected because they had been untruthful on their OVDP application and subsequent filings. Namely, they had not reported the true nature of the foreign deposits, had not reported all of the accounts in their disclosure (aka they did not make a “Full Disclosure) and overall did not tell the truth in their OVDP application; in other words, they selectively reported the money and accounts they wanted to – which is enough to get an applicant rejected or dismissed from OVDP/OVDI.

Burden of Proof – Reckless Disregard (Without Clear and Convincing Evidence)

The IRS took a firm position against these taxpayers and issued significant willful penalties against them. While the IRS did issue (and court upheld) penalties against these taxpayers for being willful (by finding reckless disregard met the standard of willfulness and that clear and convincing evidence is not required in the noncriminal proceedings), it is important to understand that these facts were very specific. These taxpayers appeared to have intentionally sought to evade paying tax or reporting the accounts.

Nevertheless, it is important to keep in mind that the general proposition is that a person may be held to be Willful even if they did not act deliberately or with intent (aka reckless disregard) and the standard of proof needed to prove Willfulness is less than Clear and Convincing.

Thus, when a person is held to be willful, they will be penalized extensively. In fact, depending on the facts and circumstances of the case, a person could be penalized 100% value of their foreign accounts and situation, which the IRS finds them to be willful over a multiyear audit/examination. Even though a 100% penalty is equivalent to a criminal standard as opposed to a civil standard (the IRS has issued memoranda stating that willfulness should be equivalent to criminal liability – although it is a non-citable document), the government does not need to establish a criminal standard of behavior to issues these penalties.

How the Court Summarized Willfulness

Thus, for the IRS to be able to issue penalties based on an evidentiary standard that is less than clear and convincing evidence makes it very difficult fight the penalties once they are issued.

As cited by the court in the ruling:

– Although Defendants assert that “willfulness” encompasses only intentional violations of known legal duties, and not reckless disregard of statutory duties, no court has adopted that principle in a civil tax matter. The only cases Defendants cite to support their argument that “willful” means that a defendant must have knowledge and specific intent are criminal cases. See Ratzlaf v. United States, 510 U.S. 135 (1994) (structuring); United States v. Eisenstein, 731 F.2d 1540 (11th Cir. 1984) (felonious failure to file currency transaction reports).

– Where willfulness is an element of civil liability, the Supreme Court generally understands the term as covering “not only knowing violations of a standard, but reckless ones as well.” Safeco, 551 U.S. at 57.

– Recklessness” is an objective standard that looks to whether conduct entails “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” Safeco, 551 U.S. at 68 (internal quotation marks and citation omitted).

– Several other courts, citing Safeco, have held that “willfulness” under 31 U.S.C. § 5321 includes reckless disregard of a statutory duty. See United States v Williams, 489 Fed.Appx. 655, 658 (4th Cir. 2012); United States v. Bussell, No. CV15-02034 SJO(VBKx), 2015 WL 9957826 at *5 (C.D. Cal. Dec. 8, 2015); see also United States v. McBride, 908 F.Supp. 2d 1186, 1204, 1209 (D. Utah 2012).

Getting into Compliance

While there is no clear-cut definition of the term willful (the IRS has declined to provide a specific definition), it is safe to say it is a totality of the circumstances test based on the facts and circumstances of an individual’s particular situation. If you have unreported foreign accounts or money, your best option for getting into compliance is to make a full and truthful IRS Voluntary Disclosure of your Foreign Accounts.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our international tax lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70+ different countries. Managing Partner Sean M. Golding is a Board-Certified Tax Law Specialist Attorney (a designation earned by < 1% of attorneys nationwide.). He leads a full-service offshore disclosure & tax law firm. Sean and his team have represented thousands of clients nationwide & worldwide in all aspects of IRS offshore & voluntary disclosure and compliance during his 20-year career as an Attorney.

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. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
International Tax Lawyers - Golding & Golding, A PLC

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