- 1 Willfulness Penalties & FBAR
- 2 31 USC 5321 and Willful FBAR Violations
- 3 What is FBAR Willfulness?
- 4 IRM & Willful FBAR Violations 220.127.116.11.5.1
- 5 Willfulness & Reckless Disregard
- 6 FBAR Penalty Cases: Kimble and Said
- 7 Willfulness and Willful Blindness
- 8 Mitigation and Discretion
- 9 Mitigation: 18.104.22.168.6
- 10 22.214.171.124.6.1 Mitigation Threshold Conditions
- 11 126.96.36.199.7 FBAR Penalties – Examiner Discretion
- 12 Willful FBAR Penalties Put Taxpayers at Risk
- 13 Meet our International Tax Law Specialist Team
Willfulness Penalties & FBAR
Willful FBAR Penalties: When it comes to international tax law, the concept of willfulness can be very deceiving to a US Person Taxpayer. The term willfulness in everyday life is usually defined as someone acting intentionally in performing a behavior or action. This is not the case when it comes civil tax law penalties. The focus of today’s article is the concept of willfulness and FBAR penalties, including how the IRS enforces willful FBAR penalties — and two recent Appellate Court decisions. While willful FBAR penalties used to be less common, courts across the nation have been affirming the IRS issuance of willful FBAR penalties — even in situations where the Taxpayer did not act with any actual intent (reckless disregard) or actual knowledge (willful blindness). Let’s review the basics of willful FBAR penalties.
31 USC 5321 and Willful FBAR Violations
Civil FBAR Penalties are codified in 31 USC 5321.
(C) Willful violations—
In the case of any person willfully violating, or willfully causing any violation of, any provision of section 5314—
(i) the maximum penalty under subparagraph (B)(i) shall be increased to the greater of— (I)$100,000, or (II)50 percent of the amount determined under subparagraph (D), and (ii)subparagraph (B)(ii) shall not apply.*
What is FBAR Willfulness?
FBAR refers to Foreign Bank and Financial Accounts, which is reported annually on FinCEN Form 114. US persons who have an annual aggregate account value totaling more than $10,000 on any day of the year are typically required to file the annual FBAR. When a taxpayer does not timely file the FBAR — or files an inaccurate FBAR — they may be subject to fines and penalties. FBAR penalties can be either civil or criminal in nature. Despite all the fear mongering you will undoubtedly find online, the majority of penalties are civil. Therefore under most circumstances, the biggest threat to taxpayers is to their finances — and not their freedom.
What makes the title of USC so important is that Taxpayers will notice that it is not Title 26 which is the Internal Revenue Code — but rather Title 31, which refers to Money and Finance code. Thus, while the Internal Revenue Service is tasked with enforcing FBAR penalties, FBAR reporting is not covered under the Internal Revenue Code — and not technically a tax or tax penalty. This puts Taxpayers in a tough position when they want to litigate an FBAR account violation penalty, because they cannot dispute FBAR penalties in Tax Court.
*The $100,000 value adjusts for inflation. It used to be that the IRS could recover 50% per year up to 300% value of the account (50% x 6 years), but that has now been reduced to 100% max value of the account.
IRM & Willful FBAR Violations 188.8.131.52.5.1
The IRM is the Internal Revenue Manual. While it has no “force of law,” it is relied upon by the IRS personnel — and it gives Taxpayers some insight as to how the IRS agent will treat certain violations, including willful FBAR violations.
Willful FBAR Violations – Defining Willfulness
The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.
A finding of willfulness under the BSA must be supported by evidence of willfulness.
The burden of establishing willfulness is on the IRS.
Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the person only needs to know that a reporting requirement exists. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement, is a conscious choice not to file the FBAR.
Under the concept of “willful blindness,” willfulness is attributed to a person who made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.
Willfulness & Reckless Disregard
In order to prove willfulness, the US government only has to show that the Taxpayer acted with reckless disregard — no actual intent is necessary. There are two recent Appellate Court cases which affirmed the lower FBAR willfulness standard.
FBAR Penalty Cases: Kimble and Said
While the facts of these cases are not identical, both Appellate Courts came to the same conclusion — reckless disregard is sufficient to prove a civil willful FBAR violation. It has been a longstanding tradition in tax law that in order to prove willfulness in the civil arena, the government does not have the burden of proving intent.
In both Kimble and Said, the court concluded that reckless disregard was sufficient to meet the willfulness standard.
What is so crucial about this concept for FBAR filers, is that even though the government has not proven intent and instead has only shown reckless disregard — the same willful FBAR penalty scheme applies. Stated differently, even if a Taxpayer was only reckless — and not intentional — in their FBAR noncompliance, they will still get stuck with the same penalties as if they had acted with intent.
Here’s how each court summed up reckless disregard as it pertains to willful FBAR Penalties:
US v. Said & Willful FBAR Penalties
Here is a key passage from the Said opinion:
The willfulness requirement is satisfied if the responsible person acts with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the Government, such as by failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted.17 F.3d at 332 (quoting Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir. 1979).
Kimble & Willful FBAR Penalties
Here is a key passage from the Kimble opinion:
Contrary to Ms. Kimble’s argument that a taxpayer cannot commit a willful violation without “actual knowledge of the obligation to file an FBAR,” Appellant’s Br. 32, we have held that “willfulness in the context of § 5321(a)(5)(C) includes recklessness,” Norman, 942 F.3d at 1115. Accordingly, a taxpayer signing their returns cannot escape the requirements of the law by failing to review their tax returns. Id. at 1116 (“[W]hether [the taxpayer] ever read her . . . tax return is of no import because ‘[a] taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as . . . she is charged with constructive knowledge of its contents.’”) (quoting Greer v. Comm’r, 595 F.3d 338, 347 n.4 (6th Cir. 2010)).
Willfulness and Willful Blindness
Similar to the concept of reckless disregard, is the concept of willful blindness. With willful blindness, it is the idea that a Taxpayer is aware that they may have a responsibility to do something but seemingly and intentionally avoids learning about the requirement. This is done so if they get caught — they can then (try to) take the position that they did not know about it. One recent case in which the court succinctly summarized the concept of willful blindness & FBAR is US v. Horowitz.
Horowitz & Willful Blindness
As provided by the court in Horowitz:
The Horowitzes argue that their friends told them they did not need to pay taxes on the interest in their foreign accounts.
Their failure to have the same conversation with the accountants they entrusted with their taxes for years, notwithstanding the requirement that taxpayers with foreign accounts complete Part III of Schedule B, easily shows “a conscious effort to avoid learning about reporting requirements.” Williams II, 489 Fed. App’x at 658 (quoting Sturman, 951 F.2d at 1476).
On these facts, willful blindness may be inferred. See Poole, 640 F.3d at 122 (“[I]n a criminal tax prosecution, when the evidence supports an inference that a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts pointing to such liability, the trier of fact may find that the defendant exhibited ‘willful blindness’ satisfying the scienter requirement of knowledge.” (quoted in Williams II in the context of civil liability)).
Mitigation and Discretion
IRS examiners do have discretion to reduce foreign bank and financial account penalties — including willful FBAR penalties. There are various factors that the taxpayer must meet in order for the examiner and their manager slash supervisor to approve penalty reduction.
The statutory penalty computation provides a ceiling on the FBAR penalty. The actual amount of the penalty is left to the discretion of the examiner. IRS has adopted mitigation guidelines to promote consistency by IRS employees in exercising this discretion for similarly situated persons.
184.108.40.206.6.1 Mitigation Threshold Conditions
“For most FBAR cases, if IRS has determined that if a person meets four threshold conditions, then that person may be subject to less than the maximum FBAR penalty depending on the amounts in the accounts.
For violations occurring after October 22, 2004, the four threshold conditions are:
The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as no history of past FBAR penalty assessments.
No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.
The person cooperated during the examination (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews (the taxpayer back-filed correct reports).
IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.”
What Does This Mean?
This part of the Internal Revenue manual provides a four-prong test to determine whether or not a Taxpayer may qualify to have the FBAR penalty mitigated. In other words, if the Taxpayer can meet the four-prong test as indicated above then they may be able to have their penalties mitigated by the IRS examiner –but as seen below, mitigation is still at the discretion of the examiner.
220.127.116.11.7 FBAR Penalties – Examiner Discretion
“The examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty. When a penalty is appropriate, IRS penalty mitigation guidelines aid the examiner in applying penalties in a uniform manner. The examiner may determine that a penalty under these guidelines is not appropriate or that a lesser penalty amount than the guidelines would otherwise provide is appropriate or that the penalty should be increased (up to the statutory maximum).
What Does This Mean?
It is important to remember that just because the examiner has the discretion to reduce or eliminate FBAR penalties, it does not mean they will. The analysis is subjective in nature and therefore, while you may find your position to be convincing — the IRS examiner may not agree. And, even if the agent does agree, it also requires manager/supervisor approval.
Willful FBAR Penalties Put Taxpayers at Risk
The fact that the IRS does not need to prove a Taxpayer acted with actual intent or knowledge in order to prove willfulness, makes willful FBAR penalties very dangerous — and puts FBAR filers at great risk for willfulness exposure. In addition, courts across the country have been affirming the IRS findings that lower levels of willfulness are acceptable and not the standard willful FBAR penalty should still apply.
Meet our International Tax Law Specialist Team
Golding & Golding specializes exclusively in IRS offshore disclosure and compliance.
Contact our firm for assistance.