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.