An Analysis of the Meaning of "Willful" in the FBAR Context

Treasury's enforcement of the Foreign Bank Account Reporting (FBAR) rules has grown aggressively over the last few years. It is chasing both known and suspected taxpayers who Treasury believes hold funds in undisclosed off-shore accounts. Many times, the pursuit of those taxpayers generates legal action to collect a penalty or exact jail time. All of those cases turn on the statute, the key word of which is "willfully."

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Compliance with FBAR reporting is encouraged by penalties (both civil and criminal) that may be imposed for failure to properly file the form when it is due. As indicated above, the standard that the Government must meet before the penalties may be imposed (other than the penalty for negligence) is that the taxpayer acted "willfully" in failing to file the required form.

United States v. Williams

In United States v. Williams [489 Fed. Appx. 655 (4th Cir 2012)], Williams failed to report his interest in two Swiss bank accounts for the 2000 tax year. He opened those accounts in the early 1990's. On his 2000 income tax return, Williams checked "no" to the question as to whether he had an interest in a foreign financial account and, of course, did not file the FBAR form. In a series of not so fortunate events, Williams finally did make full disclosure about his bank accounts, but not until he was tried and plead guilty to civil and criminal charges for failure to file.

The district court [United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (ED Va 2010)] found that Williams's failure to disclose his foreign accounts on his tax return was not motivated by a desire to keep the accounts secret since, prior to the filing deadline of June 30, 2001, the federal government knew of his accounts and had even gone so far as to freeze them. In reaching its decision, the district court reviewed the "willful" violation standard and emphasized that the term "willfully" has many meanings and that its construction often depends on the context in which it is used. The court's opinion stated that the Supreme Court clarified that "[w]here willfulness is a statutory condition of civil liability, it is generally taken to cover not only knowing violations of a standard, but reckless ones as well." [Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007)]. Further, "a single, or even a few, inadvertent errors would not amount to a 'willful' violation. At some point, however, a repeated failure to comply with known regulations can move a conduct from inadvertent neglect into reckless or deliberate disregard (and thus willfulness)..." [American Arms Int'l v. Herbert, 563 F.3d 78, 85 (4th Cir 2009), citing RSM, Inc. v. Herbert, 466 F.3d 316 (4th Cir 2006)].

Based on the review of the willfulness standard and all facts and circumstances surrounding the case, including Williams's testimony, the district court held that the government failed to differentiate tax evasion from "failing to check the box admitting the existence of a foreign bank account."

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With one dissent, the Fourth Circuit reversed the district court's finding. In so doing, the Fourth Circuit focused on an overall intent of Williams to evade taxes. "Willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information" and it "can be inferred from a conscious effort to avoid learning about reporting requirements." [citing United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir 1991)]. In addition, the Fourth Circuit noted that "willful blindness" may be inferred where "a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability." [citing United States v. Poole, 640 F3.d 114, 122 (4th Cir 2011)].

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In reversing the district court, the Fourth Circuit effectively disregarded the finding of the district court that Williams lacked the motivation to conceal his Swiss bank accounts notwithstanding Williams's realization that the IRS was on notice of Williams's ownership of the Swiss bank accounts.

United States v. McBride

In United States v. McBride [110 AFTR 2d 2012-6600 (DC Utah 2012)], the district court held for the government on the issue of whether McBride's failure to file FBAR form was willful. The facts of that case were more egregious than the facts in Williams. To avoid paying tax on a potential large chunk of income, McBride approached a financial management firm that the court characterized as a firm that "employed strategies designed to disguise the ownership of its clients' assets" by using nominees and shell companies to hold title to foreign bank accounts. The firm proposed a strategy to McBride about which McBride had some doubts. Notwithstanding those doubts, McBride did not seek a legal opinion (the court emphasized that point more than once in its decision) and proceeded with the proposed strategies. McBride also failed to discuss the strategy with his personal accountant who prepared his 2000 income tax return.

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Case Implications

Williams and McBride are not the only cases that address the issue of willful violation of FBAR requirements. See, for example, United States v. Sturman, 951 F.2d 1466 (6th Cir 1991), cert denied, 504 U.S. 985 (1992) (criminal); United States v. Clines, 958 F.2d 578 (4th Cir 1992), and United States v. Pflueger, 2012 U.S. Dist. LEXIS 43945 (D Haw 2012). The Williams and McBride cases are particularly valuable, however, because they are recent and they both focus on "willful."

Let's see if we can learn anything from those cases.

Firstly, we are significantly bothered by the courts' taking what most people would consider a rather innocuous oversight and converting it into a death-trap. The reality is that the overwhelming number of taxpayers who use tax preparers rely on the preparer to act properly. The number of taxpayers who actually read and understand their tax returns is probably well below 10 percent. Courts faced with the Williams and McBride facts who hang their analytical hats on the taxpayers' failure to check the right box are engaging in lazy thinking. Unquestionably, a taxpayer who checks the wrong box generates evidence that weighs toward a finding of wrong-doing, but that is all it is — evidence. Failure to properly check that box should not be the end of the inquiry.

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Williams and McBride may only be the tip of the judicial iceberg on the FBAR "willful" issue. Taxpayers and their tax advisors may be well advised to monitor future cases and legislative developments of the willful violation standard to determine any potential liability that the taxpayer faces. More importantly, tax advisors, especially accountants, should ask, and ask again, whether their clients have any foreign bank or securities accounts.

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