Court Applies Enhanced FBAR Penalties Based on Willful Blindness Standard
A new U.S. District court decision is the latest in a now lengthy string of cases addressing the various aspects of the FBAR requirements, including penalties that should be applied in the case of a late filing.
The decision in United States v. Horowitz, 2019 U.S. Dist. LEXIS 9484 (D. Md. 2019) serves as an interesting test case involving U.S. taxpayers who, despite claiming innocence in not filing past-year FBARs, and despite of qualifying for the OVDP amnesty program, were ultimately penalized as willful violators of their FBAR filing obligation.
First, a quick review of the FBAR requirements and a brief summary of past cases on the issue of the FBAR penalty:
THE FBAR REQUIREMENT – A QUICK BACKGROUND
The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including expats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.
The BSA requires that a Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year.
The FBAR form (known more formally as FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The FBAR due date is April 15th, with an automatic extension of 6 months.
A “non-willful”’ failure to report foreign bank accounts can result in a penalty of up to $10,000 per account per year, subject to inflation.
A “willful” failure to file may be subject to “enhanced” FBAR penalties equal to the greater of $100,000, subject to inflation, or 50% of the balance in each unreported account.
In addition, criminal penalties of up to $250,000 or 5 years in jail (or both) may apply in the case of willful conduct.
DEFINING THE TERM “WILLFUL”
Currently, the Internal Revenue Code and Treasury regulations do not provide guidance for distinguishing willful versus non-willful FBAR filing violations.
In the IRS’s Internal Revenue Manual, the IRS suggests that the term “willful” should carry the same meaning as in the criminal context. It states that, “the test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.” It explains that willfulness is shown by a taxpayer’s knowledge of the FBAR filing requirements and the person’s deliberate choice not to comply with the requirements.
Courts, however, have generally rejected the stricter “intentional violation” threshold used in the criminal context, and instead employed a broader “reckless violation” threshold for FBAR violations.
The Internal Revenue Manual also suggests that so-called “willful blindness” may be enough to meet the “willful” standard. The Manual explains that “willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.” Several cases have implemented the “willful blindness” standard in applying the enhanced FBAR penalty, while others have not.
THE HOROWITZ CASE
In the Horowitz case, Peter and Susan Horowitz maintained a Swiss account with a balance of almost $2 million. The account was originally opened when the taxpayers lived abroad in Saudi Arabia, but they kept the account open when they moved back to the US. The Horowitzes did not disclose the account to their U.S. tax preparer. They signed their tax returns each year answering “No” to the 1040, Schedule B, question about whether they had money in an account overseas or filed the FBAR to disclose the foreign account.
In 2010, they finally disclosed the account as part of entering the OVDP tax amnesty program, but they opted out of the program some time afterwards. In 2014, the IRS assessed penalties of $247,030 against each of them for the 2007 and 2008 tax years.
The Horowitzes appealed the proposed enhanced FBAR penalties, and the Appeals officer actually partially sided with them and requested that the IRS Appeals FBAR coordinator remove and reverse the FBAR penalties as prematurely assessed. The IRS then sued to collect the enhanced penalties.
The Court held, among other things, that the willfulness penalty should apply with respect to both Peter and Susan for 2007 and with respect to Peter only for 2008 (because Susan did not have a financial interest in the account in that year).
It then brought case law precedent that “willful blindness” is an appropriate standard for determining whether enhanced FBAR penalties should apply. The Court argued that the standard was violated when the Horowitzes answered “No” to the 1040, Schedule B, question about whether they had money in an account overseas or filed a file the FBAR to disclose the foreign account.
The Horowitzes testified that friends in Saudi Arabia advised Peter that the FBAR was not required because the money in the account was earned overseas. Susan testified that she did not know about the FBAR at the time of the filing. They also argued that their U.S. tax accountants did not ask about their overseas bank accounts, and that they did not explain to the Horowitzes exactly what was being asked on the tax return about foreign accounts.
The Court concluded that the Horowitzes were “willfully blind” with respect to their FBAR requirements, and therefore the IRS correctly imposed the enhanced FBAR penalty. The Court reasoned that the fact they did not have a conversation about their accounts with their tax preparers, despite being aware enough to ask the advice of their friends on the matter, showed a conscious effort on their part to avoid properly learning what their obligations were at the time, which amounts to willful blindness.
Further, the Court reasoned, “Because a taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents, their signatures are prima facie evidence that they knew the contents of the return, including the foreign accounts question and the cross-reference to filing requirements, which put them on inquiry notice of the FBAR requirement.”
FAILING TO FILE IS A SERIOUS MATTER
For FBAR delinquent taxpayers, programs are provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.
The team at Expat Tax Professionals has years of experience helping FBAR delinquent taxpayers come into compliance with their reporting obligations. We can help you determine which program is best for your particular case, so that you can put past delinquencies behind you for good.
By Joshua Ashman, CPA & Nathan Mintz, Esq.