Why US v Hughes is a Key FBAR Penalty Case: 5 Facts

Why US v Hughes is a Key FBAR Penalty Case: 5 Facts

Why US v. Hughes is a Key FBAR Penalty Case

There was a recent ruling by the District Court of Northern California in the case of US v. Hughes involving FBAR penalties, which is a case our international tax law specialist team has written about extensively. The reason why this particular court ruling is so important is that it is one of the few rulings involving foreign bank and financial account reporting (FBAR) in which the court came to the conclusion that a Taxpayer could be liable for both willful penalties and non-willful penalties stemming from the same common nucleus of fact. In other words, there were several years of noncompliance for this particular Taxpayer and the court found that in some years the Taxpayer was non-willful while in other years the Taxpayer was willful. Here are five important facts of US v. Hughes and why FBAR compliance is an important factor for any Taxpayer with foreign bank and financial accounts.

Schedule B is Crucial to Willful vs. Non-Willful

As many court rulings have provided, one of the key issues in determining whether or not a person was willful or non-willful boils down to Form 1040, Schedule B – and whether it was timely filed and properly completed. In this case, there was a discrepancy regarding 2010 and 2011 and Schedule B filing — and then again for tax years 2012 and 2013. For tax years 2010 and 2011, the court took the position the Taxpayer was not willful for FBAR penalties, despite not filing Schedule B. As to the issue of 2010/2011, since Taxpayer had not attached any Schedule B Form, it was easier for the court to arrive at a finding of non-willful. It should be noted that the version of Schedule B in 2010 differs from later years and it did not require Taxpayers to certify they were required to file an FBAR or not. For 2012 and 2013, Schedule B was filed but the FBAR was not.

Accountant Experience Alone Does Not Make You Willful

Even though Taxpayer missed filing Schedule B for 2010 and 2011 and had some accounting/tax return preparation experience, that was not sufficient enough to hold that she should be held to a higher standard of duty and automatically classified as willful. In other words, just because a person may have some tax or accounting experience does not automatically make them willful when they miss a reporting form. For 2010/2011, the Schedule B was not submitted but she was still not considered willful for those years.

Blaming Turbotax is not a Good Excuse

Many Taxpayers we have spoken to over the years have indicated that the TurboTax instructions are inaccurate, unclear and/or misleading when it came to whether or not they had to file international reporting forms such as the FBAR and Form 8938 – especially after 2012, when the FBAR became electronic. Taking the position that commercial tax software is the reason for the noncompliance will typically not work — unless it is absolutely apparent that there was a clear mistake caused by the software program that the Taxpayer could not have been aware of.

Still, in reading the opinion, the Taxpayer’s rationale for not filing the FBAR in 2012 and 2013 does make sense. She testified that she identified “Yes” on Schedule B as to whether she had foreign accounts and as to whether she was required to file the FBAR.  It seems she misunderstood that the program itself would not handle that portion of the submission — but the court rejected her claim, based on how she used the TurboTax Software.

As provided by the Court in Hughes:

      • Hughes also suggested that she believed checking the box indicating that she was required to file an FBAR with her 2012 satisfied her obligations, and perhaps that TurboTax would take the necessary steps to include the form.

      • This position is inconsistent with the manner in which Hughes prepared and filed her returns: using the unassisted “forms mode” of TurboTax, and printing her returns to file as hard copies.

      • Using that method, Hughes would have been aware that she never completed an FBAR form, and that the paper return she filed did not include such a form. To the extent her testimony suggests otherwise, it is not credible.

Willfulness is Still Proven Only By a Preponderance of the Evidence

One of the most unfair aspects of willful FBAR penalties is that most courts take the position that the government is only required to prove by a preponderance of the evidence — which is the lowest standard available. Even in a prior IRS Memoranda that was circulated, it was surmised by IRS counsel at that time that FBAR should be proven by the middle-level “Clear and Convincing Evidence standard” and not just preponderance of the evidence. Especially in light of the sheer amount of penalties a Taxpayer can be issued for non-compliance with FBAR, it seems unfair that a Taxpayer can get hit with a six- or seven-figure penalty, without the US government being required to show the Taxpayer acted with actual “intent” or prove their case beyond a mere preponderance of the evidence.

An excerpt from the IRS 2006 Memorandum:

      • 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 (“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.

Boyd Raises the Stakes

There is a recent Ninth Circuit Court of Appeals case US v. Boyd, in which the Taxpayer was successful in convincing the Court that non-willful FBAR penalties should be limited to a per-form penalty and not a per-account penalty. Therefore, if the Taxpayer is able to convince the courts that the 2012 and 2013 penalty should be considered non-willful, she may be able to significantly reduce penalties in accordance with the Ninth Circuit Boyd ruling.

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