Thursday, November 15, 2012

McBride #3 - Summary Analysis

I want to summarize my thoughts about the meaning, if any, of the McBride case beyond reconciling the dispute between the Government and McBride.  What does it tell taxpayers and the tax community?  I think that there has been some hyperbole about the case that will not bear close analysis.

In presenting my analysis, I will assume the reader's familiarity with the two prior blog discussions of the case.  Those are:
  1. McBride #1 - Court Holds Government Must Prove FBAR Willful Penalty by a Preponderance (11/11/12), here.
  2. 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  I have addressed a similar concern with respect to the Fourth Circuit's nonprecedential, unpublished opinion in United States v. Williams, 2012 U.S. App.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Williams on Willfulness (Federal Tax Crimes Blog 7/20/12; revised 7/24/12), here; see also, however, my blog on nonprecedential opinions, Nonprecedential / Unpublished Appellate Decisions Morphing Into Precedent?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so as I note in the blog for that reason and for the reason that the Fourth Circuit itself said that the opinion was nonprecedential, I am not sure how much enlightenment the Williams opinion offers in less egregious fact patterns.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 4.26.16.4.5.3, here:
4.26.16.4.5.3  (07-01-2008)
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.
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:
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.

20 comments:

  1. I wonder if, perhaps, Williams and McBride don't stand for a very simple proposition: If it's clear that the taxpayer hid money offshore to avoid taxes, judges really don't give a "hoot" if he knew about the FBAR or not. They'd like him to be punished with a willful FBAR penalty and will come up with some pretext for finding him to have actual or constructive knowledge (or some equivalent) in order to reach the desired conclusion.

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  2. At least at this stage, I think something more is required -- some particularly egregious conduct besides merely not paying tax and not filing the FBAR. Something really bad to show that the taxpayer really had the intent to avoid tax and hide their skullduggery.

    Jack Townsend

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  3. Jack, thanks for responding to my post. Two things: First, I don't see how "Something really bad to show that the taxpayer really had the intent to avoid tax and hide their skullduggery" is more than "it's clear that the taxpayer hid money offshore to avoid taxes." Second, and more important, I don't think it's right that the willful FBAR penalty should serve as a surrogate "super-fraud" penalty for taxpayers willfully omitting foreign income. That's not what he willful FBAR penalty is about. It's a penalty for willfully refusing to file an FBAR. The fact that the courts adopt a test conflating the two is, in my view, somewhere in the continuum between slopping reasoning and judicial dishonestly.

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  4. "I don't think it's right that the willful FBAR penalty should serve as a surrogate "super-fraud" penalty for taxpayers willfully omitting foreign income."

    Very nicely put. I think you may have nailed it. The FBAR penalty is being used here because it is, simply, the easiest available and largest hammer. Unfortunately, in this arena it seems that there's no particular connection between "rightness" and "justice".

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  5. Jack said, "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."
    This indicates the flaw in the program. Those with relatively good facts may end up choosing forward compliance, and therefore not end up paying additional taxes due for past years, and the IRS is creating a lot of extra work for itself because of optouts motivated by the draconian penalties inside the program. I'm not the first to say this, either.

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  6. 1) Another data point is Dr Ahuja's case. There may have been other bad facts at trial (Jack, do you have a transcript for that
    trial ?), but the worst case against Dr. Ahuja seemed to be the large
    size of the accounts (and possibly the offshore credit card in Jersey).
    Those seem to be far better facts than McBride or Williams.

    That case was decided by a jury, not a judge. But it was a criminal case, with a much higher standard of proof and he was found guilty of one year's FBAR violation.

    2) Also, like it or not, I think that judges in other FBAR civil willfulness cases will take their cues from the Wiliams case and the McBride case. Even though the Williams case is unpublished and in another circuit, this judge referred to it. I also suppose that district judges don't like being overruled, so even judges in other circuits would be (after Williams) wary of finding against the government in willfulness cases, even when the facts are not so egregious.

    So, any way you cut it, this opinion looks like a very significant victory for DoJ Tax.

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  7. 2 more comments

    1) Jack, the IRM section dealing with willfulness proofs was written in 2008. Its possible that the IRS's current position may be 'stricter', just as the general crackdown on offshore accounts has intensified.

    2) The penalty was on a per account, per year basis (25 K * 4 accounts * 2 yrs) = 200K. This was under the old FBAR law. The defense counsel did not challenge the interpretation of the IRS that it was entitled to penalize each account separately. In this case, it did not matter, because the IRS could alternatively have penalized at the maximum amount (100K) for 2 years to arrive at the same amount. However, a future defendant should consider raising the possibility to a judge that this interpretation may be invalid, and that the penalty should be on a per form basis.

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  8. 1) It is possible that the IRS position is stricter. However, I am hearing that the IRS has settled in opt out without a willful penalty where the income was omitted from the 1040, the Schedule B question was answered No with no disclosure of the countries, and no FBAR was filed. So the mere confluence of those factors should not alone cause the imposition of the penalty, even under the IRS's current administrative practice. I extrapolate from the known (including that the IRS has not withdrawn or even publicly expressed dissatisfaction with the IRM provision adopted in 2008) to the unknown, that more damaging facts will be required. And, of course, in the two cases, much more damaging facts were required and in the reported criminal cases where the taxpayers agreed to a willfulness penalty, much more damaging factors were present. I just think it is dangerous to attempt to draw conclusions from snippets in cases wrenched from the context of the cases.


    2) This is an excellent point. Thank you for making it. I think most tax practitioners who practice regularly in this area think that there may be some uncertainty about the IRS position that it applies the nonwillful penalty on a per account basis. And, as to the willful penalty, the per account problem would arise only if the IRS took the position that the minimum willful penalty was per account, since the IRS applies the 50% prong of that penalty by aggregating the deposits (with elimination for duplication), thus mooting the per account problem. In all events, of course, practitioners should be prepared to explore that issue when and if it becomes relevant for their clients.


    Jack Townsend

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  9. 1) I do not have a transcript of the trial. I suspect that there were some other bad facts, but for total balance, I do think the large size is a negative factor. The larger the size and the larger the amounts of evaded tax certainly makes the case more egregious, just as the run-of-the-mill tax cases will be much more tempting as targets for prosecution when the numbers go up.


    2) I agree that there is some risk that judges will take some cues from the Williams and McBride cases. But, where the cases are significantly less egregious in terms of overall ambiance, I think the argument could be persuasive that this case (the one before the new judge or even before the same judges) is not those cases. Keep in mind that, in Williams, the trial judge held for the taxpayer and in McBride the trial judge's first instinct was to hold for the taxpayer. So, for that reason, I doubt that the Government will pursue the issue unless it has some really bad facts other than (i) failure to report the income; (ii) failing to disclose the ownership of accounts on Schedule B, and (iii) failure to file the FBAR.


    I could speculate all day about what such bad facts could be, but the genre of bad facts might be (i) surreptitiously getting the money out of the country without filing the required CMIRs or perhaps even disguising it as a business transactions (perhaps overpaying an overseas supplier that forwards the money to an offshore account); (ii) using shell entities to hide the existence of the account and the taxpayer's relationship to it; and so forth.


    Again, this is my speculation. I have no "inside" information on it. I just read the tea leaves that are before me, recognizing that I don't have even all the tea leaves before me.


    Thanks for your comments.


    Jack Townsend

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  10. To your point 1 above, do you have data on the opt out cases in terms of max foreign account balance, total taxes, etc. that IRS is willing to let go without 27.5% super fraud penalty

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  11. Let me ask it this way. Do you think the "something more" need
    logically support the conclusion that the taxpayer was aware of the FBAR
    requirement (or made a conscious decision to avoid learning about it)?

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  12. Logically, the something more should be relevant to the issue of whether the person knew of the FBAR duty and intentionally violated the duty to file.

    When the failure to file is driven only by tax considerations (set aside drug dealing, etc.), then the something other should include the tax considerations. Thus, if there is no tax noncompliance and simply a failure to file the FBAR, there should be no penalty or, perhaps, there should be only if the taxpayer's knowledge of the failure to file and deliberate snubbing of the duty is factually overwhelming. And even then, arguably if the failure to file the FBAR has no other law noncompliance aspect, the penalty should be light even with a deliberate snubbing of the duty (at least arguably).

    Where, however, there is a significant law noncompliance issue (here tax), then that should be taken into consideration in assessing the penalty. At least I think that is how it is viewed, and I could make that argument. The failure to file the FBAR is a step in avoiding discovery of the tax noncompliance. And the FBAR is required in order to assist in the detection of noncompliance of the law (tax, druges, etc.), so the purpose for the noncompliance is relevant.

    Now, I could argue otherwise. The tax law already prescribes an elaborate and comprehensive system of criminal and civil penalties for punishing tax law noncompliance. Why is that not sufficient?

    But then, Congress did prescribe the penalties for FBAR noncompliance and intended that the FBAR requirement be useful in determining tax noncompliance.

    Hence, in sum, tax noncompliance is relevant to the determination of willfulness (i.e., in criminal law terms it supplies motive and thus gives a reason for the noncompliance) and to the determination of the amount of the penalty (both willful and nonwillful ) that should apply.

    Sorry, for the meandering.

    Jack Townsned

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  13. I appreciate the meandering, actually. I absolutely appreciate that the tax noncompliance supplies a motive for all manner of concealing the account, including not filing the FBAR. Nevertheless, given how obscure the form has been until very recently, and the reality that most people do not read their returns with care (if at all), I think it's entirely consistent with deliberate tax noncompliance that a person would have been nonwillful in failing to file the FBAR by reason of never having heard of it. I think both the Williams and McBride opinions are very troubling in that they seem to willfully (so to speak) disregard that possibility.

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  14. I agree. The dissent in Global-Tech explores that concept. Willful means intentional. In this context, it means you know about the FBAR, you know you have a duty to file the FBAR, and you don't file the FBAR. That is a specific intent crime. Yet, the courts whittle away at that by introducing some notion of should have known -- wrapped in such rhetoric of willful blindness, deliberate ignorance, conscious avoidance, and more whimsically but less accurately "ostrich" on which Judge Posner has some good comments).

    Williams and McBride are just playing out these expansions of the "willful" statutory requirement in an FBAR context. I am troubled by those expansions and reason as follows: (i) Congress used the term willful in the statutes involved (most of the criminal tax statutes and the FBAR civil penalty statute), (ii) the Supreme Court says that willful means the intentional violation of a known legal duty, at least in a tax context and where used in the BSA (including FBAR), per Ratzlaf; and (iii) something less than intentional of a known legal duty is not willful. Of course, the answer to that is that, despite the logic, if the courts say some lesser activity can be willful, then who is there to stop them from doing so.

    When the Ratzlaf court said that it treated the word willfully seriously in a BSA conviction, Congress changed the rules to permit some lesser conduct to satisfy the criminal standard. So, if the courts stuck to their guns and took the standard Cheek definition of willful seriously, the willful ignorance, etc., concept could not apply and then Congress could decide whether it wanted to relax the standard. But, again, that is just my view and it is not widely accepted, but it seemed to resonate with the dissent in Global-Tech.

    Jack Townsend

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  15. Jack,

    I am sure you have seen or read Nina Olsons most comments at a recent international tax enforcement conference. (Don't know the place or date.)

    I understand she has suggested that IRS implement an approach to its Offshore Voluntary Disclosure Initiative (OVDI) that would only penalize taxpayers based on their level of non-compliance.

    I assume it was reported on in Tax Notes. (as a novice, I don't have a subscription) I haven't noticed that you have posted anything on it, or if I missed it, I apologize.

    To me, from what I have read, this was is a pretty public criticism of the OVDI program and I wonder about the timing. It comes on the heels of one Commissioner leaving, (who stonewalled her on the TAD 'bait and switch') and a temporary Commissioner stepping in. It seems like this is a very public message directed to the new guy, Steven Miller, to change the program. Would be interested in your thoughts

    One comment that caught my eye about willfulness, and it was this.

    Olson suggested practitioners rely on the standard of willfulness as established in Ratzlaf v. U.S., (Sup Ct 1994) 510 U.S. 135

    If the Ratzlaf standard for willfulness isn't satisfied, then Olson said that the taxpayer should be given a break and permitted to only pay the accuracy-related penalties. “Such an approach would increase voluntary compliance and would stop terrorizing the entire country of Canada,” Olson observed.

    Would be interested in your thoughts on this willful standard, and also the four-category solution to improve the OVDI experience and encourage additional taxpayer compliance which she presented. Maybe she has been reading some of the suggestions on your open forum? We can hope, eh?

    http://federaltaxcrimes.blogspot.com.au/2012/04/open-forum-comments-to-congress-and-irs.html

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  16. I am not familiar with the Nina Olsen statement you refer to, but I think this has been a concern she has had for some time. For example, in a June 2012 report "National Taxpayer Advocate Identifies Challenges and Issues for Upcoming Year in Mid-Year Report to Congress", IR-2012-66 (6/27/12), she said:

    Other Areas of Focus. Additional areas on which the National Taxpayer Advocate intends to focus in the coming year include:

    * * * *

    The impact of the IRS's crackdown on persons with offshore accounts, which often subjects individuals who were not engaged in tax evasion to draconian penalties, and the related issue of modifying the terms of the Offshore Voluntary Disclosure Program so that individuals who made honest mistakes can correct them without fear of excessive penalties.

    http://www.taxpayeradvocate.irs.gov/Annual-Reports-To-Congress/FY-2013-Objectives-Report-To-Congress-News-Release

    I think this generally covers what you refer to. Whether she will be able to convince the IRS is not clear. She has been raising this concern for a long time and there has been no major movement by the IRS. I think much of the concern could be alleviated if the IRS would publish what it is doing on regular audits and opt out audits.

    Thanks for your interest,

    Jack Townsend

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  17. Given how strongly the IRS pushed back against Nina's Taxpayer assistance order granting blanket FAQ 35 relief (and given that the new acting IRS commissioner seems to be one of the architects of the offshore crackdown), I see NO prospect of any blanket relief or even a general significant change in IRS postures.

    I can see the TAS helping with individual cases where the penalty seems way out of whack, although even then I would think that it would be unlikely for relief to be provided unless people opt out. For people in the OVDP program, the FAQ 35 issue meant that people in the program felt they had been baited and switched, and hence had better grounds for arguing for relief within the program. Without that, the IRS can rightly say that taxpayers have opt out, Appeals and other standard IRS processes for relief. .

    The TAS could help by providing more statistics on opt out results, and may help if the iRS starts employing the truly draconian willful penalties willy-nilly, but otherwise, I think their remit is limited.

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  18. Wondering,


    Your comments are good. Thanks.


    I am not sure that TAS can provide opt out statistics. I think the IRS examination function will have to do that. Obviously, the IRS can only release data if it does not identify the taxpayer involved, so it will have to be aggregate data. And, of course, the problem with data is that it can be unhelpful and even misleading.


    For example, let's say that by date X, the IRS has processed 50 cases on opt out and has issued 45 no FBAR penalty warning letters. The conclusion that one might draw from the results of just those data points, is that the IRS is being real lenient on opt outs. But, what if those 50 cases represented a set of the most taxpayer-friendly cases and, indeed in 40 out of the 45 successful results, the taxpayers at the time of the omissions were in comas and thus could not have willfully violated the FBAR or even the income tax requirements. The apparently successful results would not only not be useful to those with more complex fact patterns, it would be misleading and could encourage taxpayers to opt out when they should not opt out.


    The point I am making is that, when and if the IRS releases data on opt outs, it should contain as much criteria as possible to make the data meaningful.


    I am sure that the IRS has that data. I understand that it has a review process to insure consistency in results (at least an acceptable level of consistency). It could only do that by have some database with such criteria so that the IRS is not relying upon mental memory of participants in determining consistency. It would seem to me that most -- perhaps all -- of that database could be released without impairing the integrity of 6103, and that could be useful to taxpayers and practitioners. And, I think it would be useful to the IRS as well, because taxpayers and practitioners could then better calibrate their position papers to the IRS's practices.


    Jack Townsend

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  19. I think that in assessing the penalty, it should be proportional to the unpaid tax. This is already the case with domestic tax issues: 20% accuracy, or 70% fraud, or zero for a QAR. I will not suggest an appropriate percentage for FBAR violations, but a penalty based on high balance or per-form penalty leads to disproportionate results.

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  20. has
    I wonder if there is an analogy to be drawn with the Trust Fund Recovery penalty, which can be draconian for a 'responsible person' who 'willfully' avoids paying over taxes. I am not completely familiar with how the IRS pursued this penalty over the past few decades, but I get the impression that the IRS tried to define 'responsible person' and 'willful' downwards and as broadly as it could in court cases. For the most part, the courts gave the IRS most of what it wanted (one loss in the Supreme Court) and an occasional loss in the circuits, but in general the service has beenj successful.

    So the relevance to the FBAR penalty is that the IRS may be seeking to move further down the 'culpability' chain in administering severe penalties until it gets slapped down by a judge. The Williams case looked like a slapdown, but DoJ tax won at the appellate level.

    That's a bit of a ramble, but my takeaway is that the IRS will try and get stricter and stricter in assessing (or trying to assess) the willful penalty. I doubt they would go beyond 50%, but they may claim that incorrect 'Schedule B' answers for multiple years show 'recklessness' or 'reckless indifference' even in the absence of facts as bad as in the McBride case.At least until they get some real pushback from Congress or the courts.

    It may also be worth seeing if the IRS tries to go beyond 50% in Dr. Ahuja's case. Assuming the criminal conviction is upheld, the service now has 50% for one year, and they could go back and penalize civil violations for previous years.

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