Thursday, January 12, 2012

NTA Discussion of the Williams Case (1/12/12)

The National Taxpayer Advocate's report discussed in the preceding blog has a component titled Most Litigated Issues: Case Advocacy, Appendices, here.  In that component, the NTA discussed the Williams case (see report at pp 601 - 603).  The discussion is (footnotes omitted):

The National Taxpayer Advocate's report discussed in the preceding blog has a component titled Most Litigated Issues: Case Advocacy, Appendices.  In that component, the NTA discussed the Williams case (see report at pp 601 - 603).  The discussion is a good review for students and practitioners.  The discussion is (footnotes omitted):
In United States v. Williams, the District Court for the Eastern District of Virginia held that the government did not prove that a taxpayer’s failure to report his foreign accounts on a Report of Foreign Bank and Financial Accounts (FBAR) was willful, even though Schedule B of his income tax return indicated that he had no foreign accounts and he acknowledged willfully failing to report income from the accounts on his return.

Mr. Williams, a U.S. citizen and New York University-trained lawyer, pled guilty to tax evasion and criminal conspiracy to defraud the government with respect to more than $7 million in unreported income that he deposited in foreign accounts and more than $800,000  in earnings on those deposits.  in connection with this plea, Mr. Williams admitted that he intentionally failed to report income in an effort to evade income taxes between 1993 and 2000.  Acting on a request from the U.S., the Swiss government froze his accounts in 2000.
A U.S. person with a financial interest in, or signature authority over, one or more foreign financial accounts with an aggregate value greater than $10,000 is required to file Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts (FBAR), by June 30 of each year. In addition, U.S. Individual Income Tax Return, Form 1040, Schedule B asks:  
 At any time during 2010, did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?  [yes/No.]  See instructions on back for exceptions and filing requirements for Form TD F 90-22.1 
Although Mr. Williams pled guilty in 2003, he did not file any FBARs for 1993 through 2000 until 2007, at which point the six-year period for imposing an FBAR penalty had expired for each year except 2000.  He or his preparer checked “no” in the box on Schedule B of his 2000 return, indicating that he had no foreign accounts.
After sentencing, the IRS initiated a civil examination of Mr. Williams and sought to impose the maximum FBAR penalty for 2000. To succeed, it had to meet its burden to prove that Mr. Williams “willfully” violated a known legal duty to file the FBAR (i.e., that he knew he was required to file and intentionally failed to do so).   The IRS argued that his failure to file was willful because his signature on the tax return was prima facie evidence that he knew the contents of the return.  in other words, the IRS sought to infer that the violation was willful from the fact that he signed a return that referenced the FBAR filing requirement next to a false statement indicating that he had no foreign accounts.  the IRS also argued that Mr. Williams’ guilty plea should estop him from arguing that he did not willfully violate the FBAR reporting requirement.   
The court held that the government failed to establish Mr. Williams willfully violated the FBAR reporting requirement.  it concluded that Mr. Williams’ plea acknowledged he intentionally failed to report income on his return, but not that he willfully failed to file the FBAR.  Mr. Williams testified that he relied on his accountants to fill out his Form 1040 and the court was not persuaded that he was lying about his ignorance as to its contents or the requirement to file the FBAR.  the court noted that he failed to file the FBAR in June 2001, after he learned that U.S. and Swiss authorities knew about the accounts and had frozen them.  Moreover, he disclosed the accounts during conversations with the IRS in January 2002, disclosures that would be consistent with his belief that the IRS already knew about The accounts six months before in June 2001, when he was alleged to have willfully failed to disclose the accounts.  This case is significant because it indicates that a taxpayer’s response to the checkbox on Schedule B may be insufficient to establish that a taxpayer willfully violated the FBAR requirements, even if the taxpayer intentionally omitted income from the accounts on his or her return.
I have discussed Williams in prior blogs.  The principal blogs are:

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

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

8 comments:

  1. Jack

    The Government has apparently appealed the Williams case to the 4th circuit and its supposed to he heard this spring. I'm not sure if the government is arguing on the facts of the case or is also trying to set a precedent that merely not ticking the 'Schedule B' is not sufficient to declare the violation willful.

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  2. Jack-

    Just finished my follow up post on the BK discharge issue. I pulled the briefs filed in the 4th Circuit. The government is arguing estoppel, due to the criminal plea, but is also arguing in the alternative that, if there is no estoppel, the trial Court botched the definition of "willful" in title 31. The government's position should be pretty scary to anyone who has eliminated their exposure through OVDI or the passing of the statute of limitations.

    While I suspect that the 4th Circuit will rule against the taxpayer without addressing the government's back up argument on the definition of "willfulness," there is going to be lots of hand-wringing if the opinion has language which approves of the governement's position that all they need to prove "willful" conduct for purposes of the civil FBAR penalty is to show that a taxpayer who had signatory authoritiy over an unreported foreign account reviewed the tax return, checked the "no" box on schedule B, and then failed to file an FBAR.

    What do you think of the following argument against the government's position. Ratzlaf held that you can't have criminal liability under Title 31 unless you know that your conduct is unlawful. Although Congress legislatively overruled the result in Ratzlaf for criminal purposes, the language in the Title 31 criminal provisions construed by the Supremes in Ratzlaf is the same as the language imposing civil liability for "willful" failure to file an FBAR. Arguably the failure of Congress to change the language in title 31 which governs civil FBAR penaties, while legislatively overruling Ratzlaf for criminal purposes, means that Ratzlaf should govern the result in cases involving a "willful" failure to file an FBAR for purposes of determining the amount of the civil penalty.

    I used that argument, among others, in a couple of cases under the 2009 OVDI when I was trying to persuade the IRS to lower the 20% compliance penalty. I never got any response from the IRS to that argument, but I did get the penalty lowered.

    Maybe you have already posted on this argument. I've not gone back and read old posts, and did not start hanging out here until late last year. Your thoughts?

    Best regards,

    Anon

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    Replies
    1. To Anon:

      Another excellent analysis. Thanks.

      I think your Ratzlaf argument is excellent. Was it not developed in the taxpayer's brief on Appeal? That would have been the principal argument I would make on the issue of what must be proved where there is an unmitigated willfulness requirement for a civil penalty. But alas, I don't recall that I ever had to make it in a real world context. In my Federal Tax Crimes book, I do say the following:

      Willful for this purpose is, presumably, Cheek willfulness - the intentional violation of a known legal duty. 494 The Government’s position is that willfully means something less in this civil penalty context n495. But, given the potentially draconian nature of the penalty, a court recently appeared to hold the Government to a very high standard of proof – perhaps approaching the Cheek standard – and relieved a taxpayer from this penalty in a case where his facts were not very good. n496

      n494 IRM 4.26.16.4.5.3  (07-01-2008) defines willfulness as “a voluntary, intentional violation of a known legal duty,” which is the same as the Cheek / Pomponio definition of willfulness for purposes of the criminal tax provisions.
      495 In a motion for summary judgment in United States v. McBride (D. Utah No. 2:09-cv-378-DB-BCW), the Government said:
      The civil standard for willfulness is satisfied where the individual at issue acts “voluntarily in withholding requested information, rather than accidentally or unconsciously,” Lefcourt v. United States, 125 F.3d 79, 83 (2d Cir. 1997), or in reckless disregard of statutory duty. Safeco, 551 U.S. [57] at 57 [(1998)}.
      In the same case, the Government argues alternatively that if the Cheek-type standard does apply to the willfulness element of the FBAR civil penalty, the defendant in McBride met that standard.
      496 [Omitted here because it goes off on the burden of proof standard about which I have previously blogged.]

      You might take a look at my blog on the McBride case here -- http://federaltaxcrimes.blogspot.com/2010/10/government-pursues-fbar-penalty-in.html#more

      Best, and keep up the good work.

      Jack Townsend

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    2. there is going to be lots of hand-wringing if the opinion has language which approves of the governement's position that all they need to prove "willful" conduct for purposes of the civil FBAR penalty is to show that a taxpayer who had signatory authoritiy over an unreported foreign account reviewed the tax return, checked the "no" box on schedule B, and then failed to file an FBAR.


      With modern tax software and online filing, its a lot less clear what 'reviewing a return' means. I think its changed this year (likely as a result of all the FBAR publicity and the new form 8938), but a number of popular tax software packages/sites in at least some previous years would fill in the 'No' box on Schedule B by default and not force a taxpayer to review it. Even if the taxpayer willfully did not check or checked the wrong answer, unless the web page or software specifically warned a taxpayer about the FBAR form on the same page where it asked the question (the way Schedule B actually does), it could be argued that even if the taxpayer willfully did not report the foreign account on Schedule B, his failure to file the form was not willful. That makes a big difference since the taxpayer might be subject to just the civil fraud penalty for tax return issues, but would be subject to the far stiffer FBAR penalty for willfully not filing the FBAR.

      For the Williams case, this wouldn't be an issue, since his return was a paper return, but could be an issue in other cases.

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    3. I said


      That makes a big difference since the taxpayer might be subject to just the civil fraud penalty for tax return issues, but would be subject to the far stiffer FBAR penalty for willfully not filing the FBAR.


      What I mean was that "the taxpayer might be subject to just the civil fraud penalty for tax return issues, but would NOT be subject to the far stiffer FBAR penalty for willfully not filing the FBAR. " even if one admitted to tax fraud on the original tax return AND admitted to willfully not clicking the Schedule B question. To put it another way, there is not necessarily a straight line inference between not reporting income/answering Schedule B incorrectly and willfully not filing the FBAR.

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    4. There may not be a straight-line inference between civil fraud for income tax purposes and willfulness for FBAR purposes, but I would not count on the IRS or a court finding lack of willfulness where it has found civil fraud related to foreign financial accounts.

      Jack Townsend

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    5. Jack


      I would not count on the IRS or a court finding lack of willfulness where it has found civil fraud related to foreign financial accounts.


      I agree completely. But I think this case should show that if civil fraud or even criminal fraud are established (via plea or court case), that is not sufficient to sustain FBAR filing penalties.

      The paired question is whether the government needs to prove some form of tax fraud (or some other illegal behavior related to the account) at all to sustain FBAR filing penalties. As a matter of law, no, since technically an improper motive is not needed to willfully violate FBAR requirements. But as a matter of actual practice, it might be difficult for the government to get a judge or jury to agree to willful FBAR penalties unless there was some improper motive involved. [ I recollect one of your articles or blogs goes into some detail about whether an improper motive is required to establish willfulness]

      its interesting that despite all the Sturm und Dung over FBAR filing, this has been the only civil trial for FBAR willfulness that I can find, and the government didn't do too well. That may just reflect lack of enforcement, or it may reflect the government's desire to bring a criminal case when it has very good evidence, and offering a deal when the evidence is not so good.

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  3. Jack

    I'm not a lawyer, but as I understand it, determining whether not ticking the Schedule B question is sufficient to make a violation willful is a fact approach and the appeals court would only overrule in the case of clear error. And as I understand from your previous post, the judge applied a lower standard for willful: 'preponderance of the evidence' so the Government couldn't argue against that, surely ?

    Its notable that the IRS manual says that the 'Schedule B' question by itself is not sufficient to establish willfulness. If or are audited in the future, the potential impact would be immense.

    Jack, is there any indication that the IRS is applying the 'Schedule B' standard as a marker of willfulness when auditing people who opt out of the OVD programs ? That would certainly deter opt outs..

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