Burden of Proof for Willfulness in FBAR Violations (9/6/11)

A key issue in considering the FBAR willfulness penalty is the standard standard of proof if the Government pursues the FBAR penalty. The Government is required to pursue the FBAR penalty by filing a suit and, if successful, obtaining judgment, rather than through the panoply of collection devices for tax assessments.

In United States v. Williams, 2010 U.S. Dist. LEXIS 90794 (E.D. Va. 2010), previously discussed here, the court said that it was applying a preponderance of the evidence standard but it is clear that it held the Government to a fairly strict standard of proof. For burden of proof afficionados, I should state that historically in Anglo-American jurisprudence, a party alleging fraud must prove the fraud at a higher level than preponderance of the evidence. See generally Grogan v. Garner, 498 U.S. 279 (1991) (applying, however, preponderance of evidence for fraud exception to bankruptcy discharge because of the nature and context of that exception). For example, if the IRS asserts the civil fraud penalty under § 6663, the Code only says that the burden of proof is on the IRS (§ 7454(a)) but the Code is silent as to whether the burden is preponderance of the evidence or clear and convincing. But the law is clear that the IRS must prove fraud by clear and convincing evidence. See T.C. Rule 142(b); John Gamino, Tax Controversy Overburdened: A Critique of Heightened Standards of Proof, 59 Tax Law. 497, ___ n. 38 (2006) (“Tax Court Rule 142(b) echoes the statutory language but specifies the clear and convincing standard by which the government must carry its burden. While not technically controlling in other courts, Rule 142(b) is representative of the broadly prevailing rule.”). The clear and convincing burden is conceptualized as heavier than preponderance (the normal civil burden) and lighter than beyond a reasonable doubt (the criminal burden).
The term “willfulness” in the FBAR statute has the same meaning as willfulness in the criminal tax statutes and the civil fraud penalty. For that reason, the IRS itself has recognized that it would expect courts to apply a “clear and convincing” standard. See ILM 200603026 (1/20/06) (“Because the FBAR penalty is not a tax or a tax penalty, the presumption of correctness with respect to tax assessments would not apply to an FBAR penalty assessment for a willful violation – another reason we believe that the Service will need to meet the higher standard of clear and convincing evidence.”)

It is not clear why the Court in Williams said it was applying the lesser preponderance standard; since it held for the taxpayer, the application of the lesser preponderance of evidence standard did not affect the outcome. When I say that it is not clear in Williams why the court did applied the preponderance of the evidence standard of proof, the court offered no explanation; I understand from counsel for Williams that the issue was not briefed, perhaps because the preponderance of the evidence was all that was needed for the defendant to win.

What this means in the current context of the offshore voluntary disclosure initiatives, as Williams presages, is that the Government may have considerable resistance from the Courts in pursuing those who either did not join the voluntary compliance programs or who opt out.  The systemic resources will be burdened by pursuing the willfulness penalty in many cases and the Government may choose to throttle back on this use of its limited resources rather than risk losing many cases which will damage its tax enforcement priorities.  Perhaps the Government will choose to pursue only the relative few, very good cases, to make its point with some victories in the cases which it should win all along.  This means that many might avoid even the assertion of the willfulness penalty.