In presenting my analysis, I will assume the reader's familiarity with the two prior blog discussions of the case. Those are:
- McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (11/11/12), here.
- McBride #2 - Proof of Willfulness (11/13/12), here.
First, as I previously noted, the facts were particularly damning against McBride on many fronts. So, I am not sure that particular statements should be taken from the case and assume that they are controlling in less-damning fact patterns. I have addressed a similar concern with respect to the Fourth Circuit's nonprecedential, unpublished opinion in United States v. Williams, 2012 U.S. App. LEXIS 15017 (4th Cir. 2012), here. See Fourth Circuit Reverses Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here; see also, however, my blog on nonprecedential opinions, Nonprecedential / Unpublished Appellate Decisions Morphing Into Precedent? (Federal Tax Crimes Blog 8/29/12), here. Williams also presented an egregiously bad fact pattern, so as I note in the blog for that reason and for the reason that the Fourth Circuit itself said that the opinion was nonprecedential, I am not sure how much enlightenment the Williams opinion offers in less egregious fact patterns. The McBride opinion relies significantly upon the Williams opinion and thus incorporates by reference the weakness of the Williams opinion as guidance in other cases with less egregious facts.
Second, probably the most troublesome notion in McBride, as in the Fourth Circuit's Williams opinion, is that the taxpayer is deemed to have read the return he or she subscribes under penalty of perjury and thus, in answering no to the Schedule B question, the taxpayer is deemed to know about the FBAR filing requirement which is provided with the question and thus, if he or she fails to file the required FBAR, that failure is deemed to have been willful. Wrenched from the facts of McBride and Williams that notion is troublesome indeed. Since almost every case involving offshore accounts involving some U.S. income tax noncompliance involves both a no answer to the Schedule B question and a failure to file the FBAR, that notion, if accepted full bore in less egregious fact patterns, would mean that every such case involves deemed willfulness and will be subject to the FBAR willful penalty. I don't think the notion is correct independent of McBride and Williams and egregious fact patterns like to them.
The IRS in the IRM takes a much more nuanced approach to the FBAR willful penalty . I think it is important to consider the IRM provision in its entirety, IRM 220.127.116.11.5.3, here:
18.104.22.168.5.3 (07-01-2008)Third, I am particularly troubled by some of the hyperbole. Let me give an example. Readers familiar with the IRS / DOJ offshore account juggernaut will surely recognize the name Kevin Downing. Mr. Downing was a, if not the, principal DOJ Tax Division criminal attorney starting with the UBS prosecution. He recently left DOJ Tax and is now in private practice. He is quoted in the article I discussed in McBride #2, Jeremiah Coder, District Court Allows Second FBAR Penalty Collection to Proceed, 2012 TNT 219-3 (11/10/12), as follows regarding the sweep of the McBride opinion:
FBAR Willfulness Penalty - Willfulness
1. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.
2. A finding of willfulness under the BSA must be supported by evidence of willfulness.
3. The burden of establishing willfulness is on the Service.
4. If it is determined that the violation was due to reasonable cause, the willfulness penalty should not be asserted.
5. Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the only thing that a person need know is that he has a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.
6. Under the concept of "willful blindness" , willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. An example that might involve willful blindness would be a person who admits knowledge of and fails to answer a question concerning signature authority at foreign banks on Schedule B of his income tax return. This section of the return refers taxpayers to the instructions for Schedule B that provide further guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file Form 90-22.1. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to follow-up on this knowledge and learn of the further reporting requirement as suggested on Schedule B may provide some evidence of willful blindness on the part of the person. For example, the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on a Schedule B is not sufficient, by itself, to establish that the FBAR violation was attributable to willful blindness.
7. Willfulness can rarely be proven by direct evidence, since it is a state of mind. It is usually established by drawing a reasonable inference from the available facts. The government may base a determination of willfulness in the failure to file the FBAR on inference from conduct meant to conceal sources of income or other financial information. For FBAR purposes, this could include concealing signature authority, interests in various transactions, and interests in entities transferring cash to foreign banks.
8. The following examples illustrate situations in which willfulness may be present:
A. A person admits knowledge of, and fails to answer, a question concerning signature authority over foreign bank accounts on Schedule B of his income tax return. When asked, the person does not provide a reasonable explanation for failing to answer the Schedule B question and for failing to file the FBAR. A determination that the violation was willful likely would be appropriate in this case.
B. A person files the FBAR, but omits one of three foreign bank accounts. The person had closed the omitted account at the time of filing the FBAR. The person explains that the omission was due to unintentional oversight. During the examination, the person provides all information requested with respect to the omitted account. The information provided does not disclose anything suspicious about the account, and the person reported all income associated with the account on his tax return. The willfulness penalty should not apply absent other evidence that may indicate willfulness.
C. A person filed the FBAR in earlier years but failed to file the FBAR in subsequent years when required to do so. When asked, the person does not provide a reasonable explanation for failing to file the FBAR. In addition, the person may have failed to report income associated with foreign bank accounts for the years that FBARs were not filed. As with example a. above, a determination that the violation was willful likely would be appropriate in this case.
D. A person received a warning letter informing him of the FBAR filing requirement, but the person continues to fail to file the FBAR in subsequent years. When asked, the person does not provide a reasonable explanation for failing to file the FBAR. In addition, the person may have failed to report income associated with the foreign bank accounts. As with examples a. and c. above, a determination that the violation was willful likely would be appropriate in this case.
Kevin M. Downing of Miller & Chevalier agreed. "As long as the accountant is asking the question, once you don't give those records, you're done. It's a great case," said Downing, a former Department of Justice trial attorney. The civil penalty, which is up to 50 percent of the account balance for every year the offense was committed, is "staggering," he said.Mr. Downing seems to be suggesting that, if the "you" -- the taxpayer -- does not advise the accountant of the offshore account, so that it is not reported on the income tax return and on an appropriate FBAR, "you're done." For the reasons noted above, if that is what Mr. Downing intended to say, I think he is just wrong. The IRM says otherwise and, in the same article in which Mr. Downing's comments appears, we have this from Mr. John McDougal, a principal IRS attorney involved in the offshore account initiative.
Speaking on his own behalf, John McDougal, special trial attorney and division counsel, IRS Small Business and Self-Employed Division, said, "I don't think that just checking the box 'no' on the tax return in and of itself is enough to justify a willful penalty," adding that the context in which the box was checked must be considered.Indeed, the context is everything, which is why damning context cases like McBride and Williams offer little guidance in less damning contexts.
Moreover, Mr. Downing is fear mongering by suggesting that a taxpayer -- any taxpayer -- is at real risk of a 50% penalty for each year. Even in the most egregious cases the Government identifies and criminally prosecutes, the FBAR penalty is limited to 50% of the highest amount in a single year (the highest year). Even a single 50% penalty is significant, but it is far less than up to 300%.
I don't know why the DOJ and IRS cap the penalty at 50% in the very egregious criminal cases, but it probably has something to do with a potential Excessive Fines constitutional attack. See Steven Toscher and Barbara Lubin, When Penalties Are Excessive -- The Excessive Fines Clause as a Limitation on the Imposition of the Willful FBAR Penalty, Journal of Tax Prac. & Proc. 69 (December 2009-January 2010), here. Perhaps even some sense of fairness and decency is present in the policy as well.
And, I have heard Mr. Downing himself say that the civil penalty difference (or delta) is the difference between 50% in the single highest year and the percentage required by the particular iteration of OVDI/OVDP. When I heard him make that statement, the OVDI requirement was 25% for the highest year. So the difference between the program penalty result and the worst willful result being imposed in the worst cases was 25%, and that is what Mr. Downing said. He did not in any way suggest that the delta was greater than 25% and certainly not up to 300% for 50% for multiple years.
Fourth, I think there is much more to be heard on the burden of proof issue I address in McBride #1. That is just my speculation. The only judicial authority is the two district court opinions in McBride and Williams that hold to the contrary.
In summary, for the foregoing reasons and the ones addressed in the prior blogs on McBride (and the Fourth Circuit's Williams opinion), I think McBride and Williams offer very little guidance in materially less egregious cases. For that reason, taxpayers with less egregious fact patterns should not necessarily rush into OVDP to obtain the benefit of the delta (now 22 1/2%) or, if in OVDI/OVDP, fear opting out. Obviously, making reasonable decisions, requires careful consideration of all of the facts to ensure that the facts present a materially better and more compelling case than did McBride and Williams.