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FBAR Willful Violations – How Do Courts Define FBAR Willfulness?

FBAR Willful Violations – How Do Courts Define FBAR Willfulness? (Golding & Golding)

FBAR Willful Violations – How Do Courts Define FBAR Willfulness? (Golding & Golding)

FBAR Willful Violations – How Do Courts Define FBAR Willfulness?

The FBAR is the Foreign Bank Account Reporting form, otherwise known as the “Report of Foreign Bank and Financial Account Form (FinCEN 114).”

The FBAR is required to be filed by any individual (or entity), who is considered to be a U.S. Person, and has “a combined annual aggregate total of more than $10,000 in all of their accounts (not per account) on any given day of the year.”

FBAR Willful Violations

If a person does not properly and timely file their annual FBAR, they are considered in violation of the IRS and FinCEN (Financial Crimes Enforcement Network) rules and regulations.

Unfortunately, even though the violation may seem minor, since the US government continues to make the enforcement of Offshore and Foreign related matters a key enforcement priority, the penalties can be staggering.

And, FBAR Penalties are some of the most devastating IRS financial penalties available for enforcement — especially Willful FBAR penalties.

*With that said, it still takes a lot to show a person was “willful,” and oftentimes the penalty associated with FBAR violations can be minimized, or even abated.

Avoid Scaremongering, What Willful Is (And Isn’t)

Many tax professionals feel the best way for them to sustain their business is to Freddy Krueger potential clients regarding what these penalties are and how easy it is to become subject to these penalties. These attorneys want the fear of FBAR penalties to be your worst nightmare.

While the IRS has not developed a bright line rule regarding willful versus non-willful, most violations tend to fall in the gray area, and in many instances closer to “non-willful.”

IRS Offshore Disclosure/Foreign Account Amnesty

In reality, most people can avoid or significantly reduce FBAR Penalties by entering one of the approved IRS amnesty programs.   

Even Willful FBAR penalties can be significantly abated for by entering the traditional OVDP (the program ends on September 28, 2018).

*While the penalties can seen severe under OVDP, they pale in comparison to the penalties a person can face they are found to be in willful violation of FBAR reporting.

Understanding FBAR Willfulness with Case Examples

To give you a better idea idea of what FBAR willful is (without putting you to sleep, in case you have already been Freddy Kruegered), we will provide you with some basic context of how Courts have ruled in recent years on FBAR Willfulness.

Important facts about “FBAR Willfulness”

– Even though the penalties can be high, the US government only has to establish the lowest burden, “Preponderance of the Evidence.”

– Although Willful FBAR penalties can be considered criminal in nature, technically they are not criminal penalties (there are separate criminal FBAR Penalties) and therefore the matter does not have to be brought in a criminal court of law.

– To prove willfulness, the IRS does not have to show that a person acted with intent since it is not technically a criminal matter, in which intent is required to prove willfulness (due to potential loss of liberty); all the US government has to do is prove reckless disregard, which requires significantly less proof than would otherwise be required to prove intent.

Even the IRS Believed it Should be Clear and Convincing

The IRS issued a legal memorandum in 2006, CCA 200603026, in connection with two of its international enforcement programs and provided the following (with respect to FBAR Willfulness):

A second question in the November 23 memorandum, with respect to the willfulness issue, is whether the criteria for assertion of the civil FBAR penalty are the same as the burden of proof that the Service has when asserting the civil fraud penalty under IRC section 6663. Although there are no cases that address this issue with respect to the civil FBAR penalty, we expect the answer to be yes. This is because of the inherent difficulty of proving, or disproving, a state of mind (willfulness) at the time of a violation.”


The burden of proof for criminal cases for establishing willfulness is to provide proof “beyond a reasonable doubt.” Although the same definition for willfulness applies [for civil cases] (“a voluntary intentional violation of a known legal duty”), the Service would have a lesser burden of proof to meet with respect to the civil FBAR penalty than the criminal penalty. We expect that a court will find the burden in civil FBAR cases to be that of providing “clear and convincing evidence,” rather than merely a “preponderance of the evidence.”


The clear and convincing evidence standard is the same burden the Service must meet with respect to civil tax fraud cases where the Service also has to show the intent of the taxpayer at the time of the violation.


Courts have traditionally applied the clear and convincing standard with respect to fraud cases in general, not just to tax fraud cases, because just as it is difficult to show intent, it is also difficult to show a lack of intent. The higher standard of clear and convincing evidence offers some protection for an individual who may be wrongly accused of fraud.

Case: Williams (III)

Williams Holding Summary

If a person sign the tax return, marks “No” on Schedule B, Question 7 and the facts otherwise show that the person acted fraudulently regarding their taxes, the court can impute willfulness without any true intent to not report foreign counts.

Why is Williams Important?

The Williams case is one of the most important cases involving FBAR violations, because it essentially establishes that intent is not necessary to prove willfulness. In Williams, the taxpayer has opened up some Swiss bank accounts, deposited $7 million in discounts, which earned significant interest income — but the interest was not included on his tax return.

As with the recent Manafort case, Williams’ CPA has provided him within organizer asking whether he had any individual ownership or signature authority over any foreign accounts, and he put “No”. Later, he disclosed the information to the IRS and indicated that he had foreign accounts.

Williams had some other issues with his taxes (and the apparent inability to tell the truth), and ended up pleading guilty to certain tax crimes. It was not until 2007 that he ended up filing this past FBARs for the prior years (1993-2000).

Initially, the IRS held that Williams should have to pay to civil penalties each in the amount of $100,000.  Williams never paid these penalties and as a result the IRS filed a lawsuit in order to collect the money.

District Court

At the District Court level become the judge found in favor of  Williams. The court held at the IRS did not meet its burden of showing that Williams acted willfully. The court concluded that there was no motivation to intentionally conceal the accounts because the IRS was already aware the account.

Fourth Circuit Reverses

The fourth circuit reversed the District Court’s holding and found that Williams had willfully violated FBAR requirements.  The court concluded that even if Williams’ actions were reckless conduct (and not actual “intent”), recklessness establishes willfulness in accordance with FBAR related violations

Essentially, the court held that Williams signed his return, identified “No” on schedule B and already admitted to various tax crimes – and when looking at the totality of the circumstances — Williams would be hard-pressed to show this conduct was not at least reckless.

The court then concludes that reckless conduct equates to form of willfulness and Willful FBAR Penalties are issued.

Case: Mcbride

McBride Holding Summary

The government does not need to show intent in order to prove willfulness in the context of FBAR Penalties. Rather, the government must only show reckless conduct, and reckless conduct includes willful blindness, even without direct evidence of willfulness.

Why is McBride Important?

McBride is an important case because it further reduces the threshold for the U.S Government to have to show that a person was willful in order for the IRS to enforce willful FBAR Penalties.  In McBride, taxpayer worked for a company that manufactured products overseas. The product became successful, and the company entered into various contracts around the world.

At all relevant times coming McBride had denied having any ownership for signature authority over any foreign accounts (even though he did), and he did not update his accountant regarding the foreign accounts.

Taxpayer found himself under investigation by the IRS for related matters, and instead of cooperating with the IRS, McBride denied all of the governments allegations, failed to cooperate with the IRS, and failed to submit FBARs.

The court referred back to the Williams case and agreed that willfulness in the context of FBAR violations is more than just willfulness; it also includes reckless behavior. Moreover, the Court essentially imputes a level of constructive knowledge to the taxpayer regarding the filing (the duty to file) the FBAR.

Namely, that since McBride sign the tax returns, it would be a constructive knowledge about the contents within the returns – and this would include the content to schedule B, which McBride identified “No,” that he did not have any foreign counts.

*In addition, it should also be noted that the court agreed that the preponderance of the evidence was the proper burden of proof – despite the IRS memo showing that even the IRS believed it should be “clearing convincing evidence” – similar to proving tax fraud.

Case: Bohanec

Bohanec Holding Summary

As with the prior, the court again confirms that reckless disregard this efficient the Government to meet the burden of willfulness, and the Government must only meet the preponderance of the evidence standard, and not clear convincing evidence.

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.

The 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.

As a result, the court concluded that the Taxpayers were willful and subject to willful penalties.

*This case essentially confirms the prior two cases and further illustrates the trend of reducing the U.S. Government’s burden in or to prove FBAR willfulness.

Case: Garrity

Garrity Holding Summary

The Government can provide Reckless Disregard to establish willfulness and the standard of proof is the preponderance of the evidence.

In the current case, Plaintiff filed this suit to reduce to judgment a civil penalty the Internal Revenue Service assessed against Paul G. Garrity, Sr., under 31 U.S.C. § 5321(a)(5), for his alleged willful failure to report his interest in a foreign account he held in 2005, in violation of 31 U.S.C. § 5314.

More specifically, the U.S. Government is seeking collection from Mr. Paul G. Garrity, Sr.’s estate.

The Government filed this action on February 20, 2015 to collect an outstanding civil penalty, known as the Report of Foreign Bank and Financial Accounts (“FBAR”) penalty, from the estate of Mr. Garrity, Sr., who died in 2008.

The Government had assessed the penalty against Mr. Garrity, Sr. for his allegedly willful failure to timely report his financial interest in, and/or his authority over, a foreign bank account for the 2005 calendar year, as required by 31 U.S.C. § 5314
and its implementing regulations. (ECF No. 1.)

An Important Takeaway – Money is Money

Even though the amount of money was possibly more than the taxpayer would be liable if it were Tax Fraud, the court concluded that even a lot of money does not raise the burden of proof.

The court provided: That Defendants may be liable for a substantially larger sum of money for a willful FBAR violation than if the Government had pursued a civil tax fraud action does not warrant a higher standard of proof, but that it is the type of interest or right involved that triggers a higher standard of proof, not the amount in controversy; courts have not viewed cases involving “even severe civil sanctions” to implicate “important individual interests or rights” to warrant a higher standard of proof.

Case: Bussell

Bussell Holding Summary

Despite the fact that in this case the Willful FBAR penalties exceeds $1 million, that in the end FBAR penalties (even willful), are just monetary penalties, and therefore the preponderance of the evidence standard of proof is proper.

Another import aspect of Bussell, is to give you an idea of what arguments are destined to fail on appeal, and that the Supreme Court refuses to hear the matter regarding what constitutes FBAR Penalties.

Background

“In June 2013, the IRS assessed an approximately $1.2 million penalty against Bussell for failing to disclose her financial interests in an overseas account on her 2006 tax return, which she was required to report in 2007. Bussell did not pay the penalty, and the government filed suit. Bussell previously had been criminally charged for concealing financial assets in 2002. On appeal, Bussell admits that she willfully failed to disclose her financial interests in her overseas account on her 2006 tax return.”

To give you an idea of what a legal “Hail Mary” looks like, here are Bussell’s arguments for a penalty waiver (as taken from the court appeals ruling)

1. First, Bussell contends that the IRS’s penalty against her violates the Eighth Amendment Excessive Fines Clause. Bussell bears the burden to prove that the fine against her violates the Constitution. See United States v. $132,245.00 in U.S. Currency, 764 F.3d 1055, 1058 (9th Cir. 2014) (explaining that the claimant has the burden of establishing that the forfeiture is grossly disproportional to the offense)//Bussell has failed to carry her burden to establish that the penalty is grossly disproportional to her offense. 2

2. Bussell also asserts that the government violated the statute of limitations by failing to bring its claim earlier. The applicable statute of limitations is six years. 31 U.S.C. § 5321(b)(1). Because Bussell failed to disclose her financial interests in 2007, the statute of limitations began to run at that time. The IRS assessed a penalty against Bussell within the statutory period in June 2013, and the government’s claim against Bussell is connected to that assessment. Therefore the government did not violate the statute of limitations. 

3. Bussell next asserts the assessment against her violated her due process rights because the government could have brought the claim against her earlier. Because the government’s claim is connected to Bussell’s failure to report assets in 2007, the government could not have brought its claim before 2007, and, as explained above, the government brought its claim within the statute of limitations. Therefore Bussell is not entitled

4. Because the Ex Post Facto clause does not apply to civil statutes unless they have a punitive purpose or effect, see Smith v. Doe, 538 U.S. 84, 92 (2003), it is not applicable here. 

5. Bussell also asserts that she has received “multiple punishments” for the same underlying offense. Even if the funds at issue here were traceable to the funds at issue in her criminal prosecution, the offense here, failing to report her foreign bank account on her 2006 tax return, was unrelated to her criminal conviction.

6. Bussell suggests that the IRS abused its discretion in calculating the penalty amount, and that the district court committed legal error by not engaging in analysis of the reasonableness of the penalty. Because the district court reviewed Bussell’s penalty when it reduced it, and the assessment is consistent with the limits set by Congress, see Mackby, 339 F.3d at 1017–18 (explaining the penalties available under the False Claims Act, 31 U.S.C. §§ 3729–3733), Bussell has not shown that the district court erred in reviewing the assessment against her.

7. Bussell next argues that the government’s claim is barred by laches. Bussell offers no authority for applying laches against the government in this context. Generally, the United States “is not bound by . . . laches in enforcing its rights.” Chevron, U.S.A., Inc. v. United States, 705 F.2d 1487, 1491 (9th Cir. 1983); see Costello v. United States, 365 U.S. 265, 281 (1961) (noting that the 5 Court has “consistently adhered” to the principle that “laches is not a defense against the sovereign”). Therefore, Bussell’s laches defense is inapplicable here.

8. Lastly, Bussell argues that introduction of banking evidence at the district court violated an international treaty between the United States and Switzerland. Because Bussell has not shown that the treaty she relies on creates an enforceable right, see United States v. Mann, 829 F.2d 849, 852 (9th Cir. 1987), Bussell is not entitled to relief under this theory.

On Apr. 30, 2018, the Supreme court refused to review the Ninth Circuit’s decision. Accordingly, that decision is now final.

What Can You Do?

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.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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