How 2022 Helped Define FBAR Willfulness (2023 Update)

How 2022 Helped Define FBAR Willfulness (2023 Update)

Why FBAR Willful Blindness Just Became More Dangerous

In 2023, the Supreme Court of the United States issued a very crucial ruling on matters involving non-willful Civil FBAR penalties. The court determined that whether a Taxpayer has one account or several accounts that they missed reporting on their annual FBAR – the IRS is only limited to issuing one penalty per form, not per account. For non-willful Taxpayers that have missed several  foreign accounts each year the concern is whether the IRS may try to pursue more violations as being willful rather than non-willful, in order to seek higher penalties.

Potential Uptick in Willful FBAR Penalties

One of the main concerns that tax specialists have is that as a result of the new Supreme Court Ruling, the IRS may try to find a larger gray area to fit willfulness penalties. The problem with willfulness is that the penalty can reach 50% of the maximum value of each missed account per year. And, what makes willful blindness so dangerous is that it does not require any intent  — and is based on the totality of the circumstance, which gives the IRS agents a lot of leverage to determine willful vs non-willful. Let’s revisit the concept of willful blindness by exploring the Office of Chief Counsel Internal Revenue Service memorandum (2018):

Court Rulings (Williams, Bedrosian, McBride, and Garrity)

As provided by the IRS Chief Counsel 2018 Memorandum:

      • “Consistent with the Supreme Court’s interpretation of the word “willful” in the civil context, courts have held that the standard for “willfulness” for civil FBAR violations includes recklessness and willful blindness.

United States v. Williams

      • The Fourth Circuit in United States v. Williams, 489 F. App’x 655, 660 (4th Cir. 2012), reversed for clear error the district court’s finding that willfulness had not been established, because the taxpayer’s “undisputed actions establish reckless conduct.”

Bedrosian v. United States

      • The district court in Bedrosian rejected the argument that in order for the government to sustain a civil willful FBAR penalty, it must meet the standard used in the criminal context and show “that the actions POSTS-135605-17 3 amounted to a voluntary, intentional violation of a known legal duty. See Cheek v. United States, 498 U.S. 192, 201 (1991).” Bedrosian v. United States, No. CV 15-5853, 2017 WL 4946433, at *3 (E.D. Pa. Sept. 20, 2017) (on appeal to the 3d. Cir. on other grounds). Id.

United States v. McBride and Bohanec

      • The court in United States v. McBride, 908 F. Supp. 2d 1186, 1210 (D. Utah 2012), held that willfulness for civil FBAR violations includes both recklessness and willful blindness, as did the court in United States v. Bohanec, 263 F. Supp. 3d 881, 889 (C.D. Cal. 2016). As the court in Bedrosian noted, every federal court to have considered the willfulness standard for civil FBAR violations has concluded that the civil standard applies, and the standard includes “willful blindness”1 and “recklessness” No. CV 15-5853, 2017 WL 4946433.

United States v. Garrity

      • The court in Garrity similarly noted that numerous courts have found that “willfulness” in the civil FBAR context includes reckless conduct. United States v. Garrity, 2018 WL 1611387, at *6 (D. Conn. Apr. 3, 2018) (citing cases holding that “willfulness” for civil FBAR violations includes recklessness, and noting that “defendants cite no case in which a court has held to the contrary.”)

Glob.-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011).

      • Willful blindness to the obvious or known consequences of one’s action also generally satisfies a “willfulness” requirement in the civil context. Glob.-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011).

      • “Willful blindness” is established when an individual “takes deliberate actions to avoid confirming a high probability of wrongdoing and [when he] can almost be said to have actually known the critical facts.” Global-Tech Appliances, Inc., supra, 131 S. Ct. at 2070-71. In the tax reporting context, the government can show willful blindness by evidence that the taxpayer made “a conscious effort to avoid learning about reporting requirements.” Williams, supra, 489 F.App’x at 659-60. Additionally, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved, may lead to a conclusion that the violation was due to willful blindness. See IRM

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

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