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FBAR Willfulness (2018) – Lower Threshold & Standard of Proof Required

FBAR Willfulness (2018) – Lower Threshold & Standard of Proof Required

FBAR Willfulness (2018) - Lower Threshold & Standard of Proof Required by Golding & Golding

FBAR Willfulness (2018) – Lower Threshold & Standard of Proof Required by Golding & Golding

The IRS continues to tighten the noose around anybody caught willfully failing to report or disclose foreign accounts or income.

This is very important for any individual who may have willfully (even recklessly aka Reckless Disregard) failed to report foreign accounts, assets, income, or investments.

This is because the IRS OVDP “Program” ends on September 28, 2018.

Moreover, the IRS also has recently enacted several International Tax Enforcement Groups dedicated to investigating and discovering undisclosed foreign money.

Finally, in reviewing the recent Taxpayer Advocate’s summary about foreign informational return penalties, it is clear that the IRS has no intention of slowing down their international tax enforcement activities – especially in situations in which a person was willful, as the number of people penalized for foreign accounts and business interests continues to grow.

Recent Case: Garrity

Garrity is bad news, because it affirms two major Issues:

  • Willful Penalties applies to Reckless Disregard; and
  • The Standard of Proof is “Preponderance of The Evidence” which is the LOWEST Legal Standard permitted under law.

Garrity – Summary and Excerpts

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.

Procedural Background

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.)

The balance of the penalty as of February 20, 2015 was $1,061,181.09. Jury selection is currently scheduled for June 6, 2018.

Willfulness Includes Reckless Conduct

The court noted that: “Defendants point to no other authority that would warrant deviating from the Supreme Court’s holdings that statutory willfulness in the civil context covers reckless conduct.”

“Defendants concede that numerous courts have found that willfulness in the civil FBAR context includes reckless conduct. (ECF No. 106 at 11.) See United States v. Williams, 489 F. App’x 655, 658 (4th Cir. 2012) (reversing the district court’s ruling, as “at a minimum, Williams’s undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314”);

United States v. Kelley-Hunter, 281 F. Supp. 3d 121, 124 (D.D.C. 2017)
United States v. Katwyk, No. CV 17-3314-GW, 2017 WL 6021420, at *4 (C.D. Cal. Oct. 23, 2017)
• Bedrosian v. United States, Civ. No. 15-5853, 2017 WL 4946433, at *3 (E.D. Pa. Sept. 20, 2017);
United States v. Bohanec, 263 F. Supp. 3d 881, 888-89 (C.D. Cal. 2016)
United States v. Bussell, No. CV 15- 02034 SJO, 2015 WL 9957826, at *5 (C.D. Cal. Dec. 8, 2015)
United States v. McBride, 908 F. Supp. 2d 1186, 1204 (D. Utah 2012)
United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311, at *4 (E.D. Va. Sept. 1, 2010), rev’d on other grounds

Defendants cite no case in which a court has held to the contrary. Rather, despite the clear distinction the Supreme Court has drawn between willfulness in the civil and criminal contexts, the cases Defendants principally rely on are criminal cases.

See Ratzlaf v. United States, 510 U.S. 135 (1994) (holding that the government had to prove defendant acted with knowledge that hisconduct was unlawful to sustain a criminal conviction for a willful violation of an antistructuring provision)

United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (applying the standard for willfulness articulated in Cheek v. United States, 498 U.S. 192 (1991), “voluntary, intentional violation of a known legal duty,” to criminal violations of 31 U.S.C. § 5314).

Criminal-Like Penalty Means Higher Standard of Proof, Right?

Wrong…The Court states that based on these facts, the mere fact that the monetary penalties are higher does not necessitate an increased penalty. Rather, the standard of proof that applies is the lowest penalty, which is called “Preponderance of the Evidence.”

Standard of Proof – Preponderance of the Evidence

Preponderance of the Evidence is the lowest standard of proof, and typically is considered just more than 50%. This standard of proof is significantly less than the Clear and Convincing Evidence (~75%) or Beyond a Reasonable Doubt (~95%) standards.

As provided by the court: The starting point for this inquiry is the well-established principle that “[i]n a typical civil suit for money damages, plaintiffs must prove their case by a preponderance of the evidence.”

Herman & MacLean v. Huddleston, 459 U.S. 375, 387 (1983). See also United States v. Regan, 232 U.S. 37,46-47 (1914) (holding that a civil action by the government to collect a monetary penalty “is to be conducted and determined according to the same rules and with the same incidents as are other civil actions”).

Shouldn’t It At Least Be Clear and Convincing Evidence?

Nope. As further provided by the court: The Supreme Court noted in Huddleston that where Congress has not specified a standard of proof, the Court has applied the clear and convincing evidence standard in civil matters only “where particularly important individual interests or rights are at stake,” such as in cases involving termination of parental rights, involuntary commitment, and deportation. 459 U.S. at 389.

Observing that “imposition of even severe civil sanctions that do not implicate such interests has been permitted after proof by a preponderance of the evidence,” the Court held that the preponderance of the evidence standard applied to an action involving an alleged fraud in the sale or purchase of securities. Id. at 389-90. In doing so, the Court described the preponderance of the evidence standard as the one “generally applicable in civil actions.” Id.

Using these principles, every court that has answered the question before me has held that the preponderance of the evidence standard governs suits by the government to recover civil FBAR penalties.

  • See Bedrosian v. United States, No. CV 15-5853, 2017 WL 3887520, at *1 (E.D. Pa. Sept. 5, 2017)
  • United States v. Bohanec, 263 F. Supp. 3d 881, 889 (C.D. Cal. 2016)
  • United States v. McBride, 908 F. Supp. 2d 1186, 1201-02 (D. Utah 2012)
  • United States v. Williams, No. 1:09- cv-437, 2010 WL 3473311, at *1, 5 (E.D. Va. Sept. 1, 2010) (

IRS Chief Counsel Believes it Should be Clear & Convincing

In the Chief Counsel Memorandum 200603026 (January 20, 2006), it provides the following guidance on the standard of proof applicable to the section 5321(a)(5) penalty for willful violations:

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 taxypayer 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.

The Court’s Rationale re: Memo

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.

As Huddleston and Grogan indicate, 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.

See also Halo v. Electronics, Inc. v. Pulse Electronics, Inc., — U.S. —, 136 S. Ct. 1923, 1934 (2016) (rejecting requirement that willful patent infringement behavior warranting enhanced damages be proved by clear and
convincing evidence)

Ramirez v. T&H Lemont, Inc., 845 F.3d 772, 777-81 (7th Cir. 2016) (holding that preponderance of the evidence standard applies to dismissal of a civil suit as a discovery sanction)

Fishman Transducers, Inc. v. Paul, 684 F.3d 187, 193 (1st Cir. 2012) (holding that preponderance of the evidence standard applies to proof of willfulness for the purpose of obtaining more than single damages or profit disgorgement in trademark action).

Moreover, the Chief Counsel’s statement that “[c]ourts have traditionally applied the clear and convincing standard with respect to fraud cases in general” (ECF No. 106-1 at 3) does not account for differences in how courts treat fraud under federal statutes and the common law, respectively.

See Master-Halco, Inc. v. Scillia Dowling & Natarelli, LLC, 739 F. Supp. 2d 109,122-23 (D. Conn. 2010) (discussing differences between standards of proof for statutory fraud and common law fraud, and holding that clear and convincing evidence was the appropriate standard of proof for civil conspiracy to commit fraud and aiding and abetting fraud under state

No Precedence re: FBAR and Clear/Convincing Evidence

The court noted that Defendants do not point to case law holding that the clear and convincing evidence standard applies to civil FBAR penalty cases.

What This FBAR Decision Means To You?

It means most circuit courts are coming to the conclusion that Willful FBAR penalties should be issued when the conduct is merely Reckless, and the Government only has to show Preponderance of the Evidence…despite the IRS’ own Chief Counsel acknowledging that Clear and Convincing Evidence should presumably be the standard.

If I was Only Willful for a Few Years, Do I Need OVDP?

The IRS is clearIf you were willful at all, then you cannot qualify for the IRS Streamlined Program. There are no exceptions for people who were only willful for a year or two, and no exceptions for people who only failed to report “small” amounts of income. We find it abhorrent that there are other attorneys putting potential clients in serious financial risk, as well as harm’s way for a potential IRS Criminal Investigation, by pushing them into Streamlined when they know the client was willful.

On multiple occasions, we have had clients come to us after retaining one of these dreadful firms, who were now terrified because they realized that they paid an inexperienced Offshore Disclosure Attorney a “small fee” to go streamlined, when they admitted to the Attorney they were willful. Click Here for a Case Study Example of what can occur when you go Streamlined when you were willful.

Once you submit to the Streamlined Program, you can not thereafter submit to OVDP.

If a person is willful, they do not qualify for Streamlined or Reasonable Cause. It doesn’t matter whether it was 1-year, 5-years or 10-years worth of non-compliance.

**While the extent of the willfulness penalties might be mitigated through an OVDP Opt-Out, you should never submit a reasonable cause letter or streamlined submission if you were willful. This is especially true, since the IRS has begun auditing Streamlined Submissions.

Tip: The reason these firms push you into Streamlined when they know you were willful is to make a quick buck from you. Obviously a person would prefer to go Streamlined and pay a reduced penalty, and these Attorneys prey upon that feeling — at a time when you may be vulnerable. They need your business and need your money, and will throw ethics out the window to get it. Remember, you only get one bite at the Apple.

It is not their money or their freedom on the line – it is yours, so be careful…

Ending OVDP

The IRS Offshore Voluntary Disclosure Program is coming to an end, and set to terminate on September 28, 2018. Technically, that means you must have submitted your “Phase 1” documents before the September date (See FAQ 24).

What Happened to OVDP?

The IRS is taking the position that OVDP is just not as popular as it used to be. And that is probably true. Many individuals think they can enter into the streamlined program even if they are willful because the chance of getting caught is relatively low (which is also true).

In reality, the main behind the IRS terminating the OVDP Program is because there is a good chance the IRS already has your information, thanks to the more than 300,000 Foreign Financial Institutions already reporting your information to the IRS in accordance with FATCA.

So, while the IRS is doing away with the OVDP, the chance of getting caught and penalized by the IRS has increased significantly.

OVDP Attorney 

There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure. 

You will want to make sure you use an OVDP Attorney who has:

  • Litigation Experience
  • IRS Audit Experience
  • At Least 15-20 years of Attorney Experience
  • An advanced Master’s of Tax Law Degree (LL.M.); and
  • Either a CPA or Enrolled Agent (EA) license.

Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.

Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experience mentioned above) flubbed their submission and made numerous mistakes in the submission process.

Alternatively, once you are in OVDP, you may want to:

  • Make an MTM Election
  • Opt-Out
  • Argue a FAQ 55 Penalty Reduction

As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.

Ready to Hire an OVDP Attorney?

Once you are ready to hire an OVDP Attorney, it is very important to separate fact from fiction. Here is a recent article involving the different pitfalls, scams and sales pitches you need to watch out for: Attorney Fees for OVDP – Separating Fact From Fiction.