Taxpayer was Held Both Willful & Non-Willful in Hughes
Typically, when a US Taxpayer wants to challenge FBAR penalties (and especially on the issue of willful vs non-willful), the court will come to the conclusion that either the government is entitled to willful FBAR penalties, non-willful FBAR penalties, or no FBAR penalties at all. This is why the case of US vs. Hughes was so peculiar — the court held that Taxpayer was willful in some years and non-willful in other years. The court in Hughes provided a very detailed analysis on how it reached its conclusion (a more detailed version is available on our website). Due to the numerous inquiries we received from other tax attorneys, it appears there is still a lot of confusion and misunderstanding regarding this court case, so here is another article to provide some additional clarity as to what happened.
Several Years of FBAR Penalties
The Taxpayer had several years of FBAR penalties — they were not limited to just a single year. In general, the US government cannot just determine that since one FBAR violation amounted to a willful violation, that all year FBAR violations were willful as well. Each FBAR penalty has to be evaluated in light of the facts relevant to the specific violation, using a Totality of the Circumstance analysis.
Staggered FBAR Violations
It is important to note that the Court did not determine that defendant had violated foreign account reporting as both willful and non-willful in the same year. Rather, the court had concluded that the Taxpayer was willful in the later years — and non-willful in the earlier years. This distinction was boiled down to the knowledge involving Schedule B (see below).
For most Taxpayers, the tax form Schedule B is primarily used to disclose interest and dividends on a US tax return when the aggregate total value exceeds $1,500. What can make it confusing is that for Taxpayers who do not reach this threshold — they assume that the Schedule B is not necessary at all; however, the bottom portion of Schedule B requires a Taxpayer to identify whether they have signatory or ownership over foreign accounts, whether they had to file an FBAR, and whether they had to report a foreign trust — even if they do no have interest or dividend income to report on the top section of Schedule B.
Earlier Years Held Non-Willful (2010-2011)
In the earlier years, the court noted that it was unclear that Taxpayer had reviewed any Schedule B before submitting the tax return. This is crucial, because the Hughes Court is seemingly taking the position that if the Taxpayer had not reviewed Schedule B, then there would not be any presumption that the Taxpayer was aware (or acted reckless) if they missed the reporting requirement. Especially in light of the fact that this was in the earlier years of the alleged violations, the court came down on the side of non-willfulness and in favor of the Defendant regarding these FBAR violations.
Later Years Found Willful (2012-2013)
For the subsequent years and after the initial penalties, the court came to the opposite conclusion — and determined that the Taxpayer was willful and that the government had met its burden by a preponderance of the evidence. Most notably, the court focused on the fact that the non-compliance was “at least reckless.” Taxpayer did have an excuse as to why the form was not filed (she believed she may have qualified for an exception), but the court did not accept this argument and instead determined that because in 2012 and 2013, Defendant was aware of the Schedule B questions regarding the filing of the FBAR — willfulness penalties should apply.
Totality of Circumstances
It is important to always keep in mind that not only can two courts come to different conclusions involving the same set of facts — but the same court in one case can even come to two different conclusions on foreign account penalties for the same defendant. For Taxpayers who are out of compliance, they may want to consider speaking with a Board-Certified Tax Law Specialist — and evaluate the different FBAR amnesty programs.
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