Thursday, September 2, 2010

Government Fails to Prove Willfulness in FBAR Civil Case (9/2/10)

In Williams v. United States (EDVA Civil Action No. 1:09-cv-437, decision dated 9/1/10), the court declined to find willfulness.

The opinion is relatively short, so I won't rehash the opinion. Some significant facts from the case are:

1. "Between 1993 and 2000 Williams deposited more than $7,000,000 in assets in the accounts, earning more than $800,000 in income over that period."

2. During the year in issue (2000, for which the FBAR was due 6/30/01), the Swiss were focusing on the accounts perhaps at the request of the U.S., the Swiss interviewed Williams about the accounts, the Swiss froze the accounts at the request of the U.S. and the U.S. was aware of the accounts (it is not stated whether that request was a tax driven request or some other law enforcement imperative request.) (The timing of some of these events were disputed by the Government, but the district judge would have none of that.)

3. On his 2000 1040, Williams failed to include the income from the accounts and, on Schedule B, failed to check the FBAR question.

4. Williams failed to file the FBAR by June 30, 2001.

5. Williams' lawyers and accountants had advised him of the requirement to file the FBAR.

6. The Government had not proved that Williams willfully failed to file the 2000 FBAR.

7. "On October 15, 2002, Williams disclosed the accounts by filing his income tax return for the tax year 2001."

8. On February 2003, Williams disclosed the accounts pursuant to an earlier version of the offshore voluntary account program (the OVCI program).

9. "On June 12, 2003, Williams pleaded guilty to one count of conspiracy to defraud the United States and to one count of criminal tax evasion in connection with funds held in the Swiss bank accounts during the years 1993 through 2000." (Apparently, Williams' attempt at voluntary disclosure did not work, presumably because the disclosure was not timely.)

10. "On January 18, 2007, Williams filed the TDF 90-22.1 form for all years going back to 1993, including tax year 2000."

The key legal holdings are:

1. The legal review standard is de novo, in which the Government must prove willfulness -- in this context the intent to violate a known legal duty.

2. The maximum penalty for the willful violation then was $100,000.

3. The court found on the facts presented that the Government had not proved that the defendant knew the legal duty in question. The Court reasoned:
In this case, the Government has failed to prove a "willful" violation. The Court finds that the Government's case does not adequately account for the difference between failing and willfully failing to disclose an interest in a foreign bank account. n5  Further, the Government fails to differentiate tax evasion from failing to check the box admitting the existence of a foreign bank account.
n5. It is worth noting that Congress has since amended 31 U.S.C. § 5321 to allow the government to assess a civil penalty for FBAR violations regardless of whether the violation is willful. See 31 U.S.C. § 5321(a)(5), as amended by P.L. 108-357. Further, the statute now provides a "reasonable cause" exception. See 31 U.S.C. § 5321(a)(5)(B)(ii). While the issue of Williams' liability under the statute as amended is not before the Court, the Court notes that Congress found it necessary to expand the coverage of § 5321 to address a class of conduct falling short of the "willful" standard solely accounted for under the old statute. Clearly, simply failing to file a Form TDF 90.22.1 was insufficient to subject an individual to liability for a civil penalty under the old statute.
4. The court was not persuaded, on these facts, that Williams' no answer to the foreign account question on his 2000 1040 Schedule B gave his the requirement knowledge of the legal duty.

5. Moreover, since the accounts were surely known by all, including the U.S. by June 30, 2001, it would make no sense for Williams not to disclose them by filing the FBAR.

6. Williams was not estopped by his evasion guilty plea.
The Government argues that Williams' guilty plea should estop him from arguing that he did not willfully violate § 5314 for the tax year 2000. However, the evidence introduced at trial established that the scope of the facts established by Williams' 2003 guilty plea are not as broad as the Government suggests, and there remains a factual incongruence between those facts necessary to his guilty plea to tax evasion and those establishing a willful violation of § 5314. That Williams intentionally failed to report income in an effort to evade income taxes is a separate matter from whether Williams specifically failed to comply with disclosure requirements contained in § 5314 applicable to the ALQI accounts for the year 2000. As Williams put it in his testimony at trial, "I was prosecuted for failing to disclose income. To the best of my knowledge I wasn't prosecuted for failing to check that box." Tr. at 34.
I think the case illustrates the difficulty the Government will meet in establishing willfulness for the truly draconian FBAR penalty (in its present iteration).  Perhaps this will encourage at least some taxpayers in the current voluntary disclosure initiative to opt out and be subject to the normal FBAR penalty regime.  Assuming that the Government cannot meet the high standard (as illustrated by this case), the penalty costs could be a whole lot less than the program requires.


  1. Jack, could you consider doing a post about Brady materials with respect to criminal tax? Do they have to disclose these in plea deals or only in cases brought to trial? What would you view as Brady materials in a criminal tax context?

    In particular, I am thinking about the fact that there must be a great deal of internal emails within the government about 1) general ignorance about who needs to file FBARs, 2) the legal liability created for taxpayers by the noisy versus quiet methods for filing voluntary disclosures prior to March 2009, 3) the conversations around the ever changing voluntary disclosure program.

    I got thinking about these issues in a criminal tax context after reading a reference to United States v. Ranger Electronic Communications Inc., No. 1:96-CR-211, 1998 U.S. Dist. LEXIS 146673 (W.D. Mich. Aug. 24, 1998), where the defendant was indicted for importing federally banned radio equipment. The case was dismissed with with prejudice after trial had begun because the government acted in bad faith by concealing Brady material which included e-mail communications with the Federal Communications Commission regarding public confusion about federal regulations concerning the importation of electronic equipment and the need for public notices to clarify those regulations.

    With all the posts over the last year about potential prosecutions of quiet disclosures and prosecutions of frustrated voluntary disclosures, it would be very timely to hear your thoughts on what would constitute Brady material in this context and in what situations they are required to turn it over.

  2. Jack,  why are FBAR penalties in East Coast   50% and in California 10% to 25% penalties?  I need help.

  3. There are differences between the East Coast and the West Coast, but the application of FBAR penalties or the in lieu of penalties in the OVDI is not one of those differences.

    Jack Townsend


Please make sure that your comment is relevant to the blog entry. For those regular commenters on the blog who otherwise do not want to identify by name, readers would find it helpful if you would choose a unique anonymous indentifier other than just Anonymous. This will help readers identify other comments from a trusted source, so to speak.