Saturday, December 8, 2012

Hale Sheppard Article on Lessons from Williams (12/8/12)

Hale Sheppard, a frequent commentator on the IRS's offshore account initiative, has published a new article on the Williams case that has been a frequent topic on this blog.  The new article appears in the December 2012 issue of Journal of Taxation and is titled Third Time's the Charm: Government Finally Collects ‘Willful’ FBAR Penalty in Williams.  The article can be obtained from the Tax Blawg blog entry titled IRS Finally Collects Civil “Willful” FBAR Penalty in Williams Case – Court Introduces New Lower Standard for Penalizing Taxpayers with Unreported Foreign Accounts (Tax Blawg 12/7/12), here (providing a link with a summary) or directly with this link, here, provided on that blog here.  The article itself has a good history of the civil and criminal journey of Mr. Williams which produced several noteworthy case opinions.

The blog summary end (substantially as the article ends) s as follows:
Alarmists might conclude that Williams stands for the proposition that (i) the standard for asserting civil FBAR penalties is willfulness, (ii) in this context, the government can establish willfulness by showing that the taxpayer was merely reckless, (iii) recklessness exists where a taxpayer does not read and understand every aspect of a complex tax return, including all schedules and statements attached to the return (including Schedule B), as well as any separate forms (including the FBAR) alluded to in the schedules, and (iv) the taxpayer’s motive for not filing an FBAR is not relevant.  Pragmatists, on the other hand, might see Williams as an aberration, based on narrow facts, with little precedential value, and with questionable real-world applicability.  Most people likely will fall somewhere in between.  Regardless of the viewpoint, it is undeniable that Williams introduced issues critical to the FBAR debate, many of which remain unresolved.  Taxpayers and their advisors would be wise to follow the evolving issues, as the incidence of FBAR and other international tax enforcement issues will continue to rise in the future.
Now, some of the related drill down from the article including only the parts I think particularly relevant for my blog (footnotes omitted):

* * * *
Burden of Proof in Civil FBAR Cases 
In rendering its decision in Williams II, the district court noted that the case was one of first impression regarding the proper legal standard to be applied in reviewing FBAR penalty cases. The statute under which the government initiated the collection suit, U.S.C. section 5321(b), permits the government to commence an action to recover FBAR penalties that already have been assessed.The district court noted that this provision is silent as to the relevant legal standard in such actions. 
Forging new ground, the district court in Williams II held that the de novo standard applies, such that the government must prove its case by a preponderance of the evidence. The district court indicated that the de novo standard is particularly appropriate in this case, given that the provision authorizing the civil FBAR penalty, 31 U.S.C. section 5321, "provides for no adjudicatory hearing before an FBAR penalty is assessed." 
FBAR Cases Generally Require a Trial 
Williams II shows that actions to collect FBAR penalties asserted by the IRS do not lend themselves to early resolution on brief. The district court emphasized in rejecting the government's motion for summary judgment that the question of whether the taxpayer "willfully" failed to file an FBAR for a certain year is an "inherently factual question," which generally needs to be developed through the trial process. 
* * * *
Reasonable Reliance on Qualified Tax Professionals 
The "reasonable reliance on a qualified tax professional" defense was unique in Williams II. The government presented evidence that the taxpayer never provided any information whatsoever about the foreign accounts or foreign source income to his accountant from 1993 through 2000. The government also demonstrated that the accountant sent the taxpayer an organizer each year, which specifically asked whether he had an interest in or authority over a foreign account during the year. The taxpayer completed the organizer for 2000, affirmatively checking the "no" box to the foreign-account inquiry. Distancing himself from this reality, the taxpayer focused on the fact that he hired U.S. tax attorneys with a reputable national firm in early June 2001, who failed to advise him to file an FBAR by 6/30/01. 
The district court did not address the reliance issue in its decision in Williams II, centering the discussion instead on the taxpayer's motives and the distinction between not reporting income on Forms 1040 and not reporting foreign accounts on FBARs. The Fourth Circuit, however, made short order of the reliance defense, underscoring the following in footnote 6: 
"[T]o the extent [the taxpayer] asserts he was unaware of the FBAR requirement because his attorneys or accountants never informed him, his ignorance also resulted from his own recklessness. [The taxpayer] concedes that from 1993-2000 he never informed his accountant of the existence of the foreign accounts—even after retaining counsel and with the knowledge that authorities were aware of the existence of the accounts." 
* * * * 
Questioning the FBAR Penalty Amount 
The scope of FBAR "collection actions" was examined and clarified in Williams II. The parties had divergent opinions on the role of the district court. 
The government argued that the amount of the FBAR penalty asserted by the IRS is not subject to judicial review, and that there is no authority for the proposition that a district court, hearing a "collection action" under 31 U.S.C. section 5321(b)(2), can review the Service's administrative record or the factors considered by the IRS in determining the penalty amount. As summarized by the government in the post-trial brief, "[a]s this case simply concerns the United States' effort to collect a debt, the Court's review is limited to determining whether or not the FBAR penalty is a valid debt." 
In other words, the government maintained that the district court's sole job is to determine, on a  de novo basis, whether a taxpayer "willfully" failed to file the FBAR. The taxpayer, on the other hand, repeatedly argued that the court had the authority under the Administrative Procedures Act to review decisions by administrative agencies, such as the IRS, for abuse of discretion and  with respect to arbitrary and capricious actions. In his response to the government's post-trial brief, the taxpayer further suggested that, if the court were to hold that he acted willfully, it should schedule a separate briefing to address the proper amount of the penalty. 
Because the district court held that the taxpayer did not "willfully" fail to file the FBAR and no penalties were thus sustained, this issue was not specifically addressed in Williams II. Moreover, the taxpayer did not seem to renew this issue in Williams III. This issue remains important for the following reasons.  
Since the IRS was delegated the authority to assert FBAR penalties back in 2003, it has had discretion about whether a particular taxpayer should be penalized. The relevant provision—31 U.S.C. section 5321(a)(5)(A)—expressly states that the IRS "may" (not "shall" or "must") assert an FBAR penalty in certain cases. The Service's discretion has expanded in recent years, covering both the existence and amount of the penalty. The relevant provision in effect in 2000 only penalized "willful" violations, and the penalty amount was the larger of $25,000 or the highest balance in the unreported account (not to exceed $100,000).  
Under the AJCA provisions that became effective after 10/22/04, the IRS may use its discretion in determining the penalty amount in cases of non-willful violations. Lest there be any doubt in this regard, the Service's own Internal Revenue Manual outlines the following parameters for its agents: "Examiners are expected to exercise discretion, taking into account the facts and circumstances of each case, in determining whether penalties should be asserted and the total amount of penalties to be asserted." This requires the IRS to decide whether the FBAR violation was attributable to "reasonable cause," which lends itself to judicial review.  
Impact on Voluntary Disclosure Participants
The taxpayer's success in Williams II, followed by the taxpayer's defeat in Williams III, will trigger additional uncertainty for taxpayers who are currently participating in one of the Service's pseudo-amnesty programs, such as the offshore voluntary disclosure program
(OVDP). Generally speaking, those participating in the OVDP must:  
(1) File Forms 1040X for the last eight years, 
(2) Pay the back taxes, 20% accuracy penalties, and interest charges with respect to the Forms 1040X, 
(3) File all appropriate information returns, including FBARs, for the last eight years, and 
(4) Pay a catch-all/FBAR penalty equal to 27.5% of the highest aggregate balance in the unreported foreign accounts during the eight-year period. 
The IRS released a series of frequently asked questions (FAQs) to clarify common issues related to the OVDP. FAQ 51 addresses the limited options available to taxpayers who are displeased with the proposed penalties by the IRS, including the potentially enormous FBAR-related penalty. The main path for dissatisfied taxpayers is to "opt out" of the OVDP under FAQ 51. Among the risks associated with opting out are facing a full-blown audit for all relevant years, the assessment of FBAR penalties higher than those offered within the OVDP, and potential criminal charges. FAQs 51 and 51.3 state the following about the potential criminal issues:
"Taxpayers are reminded that, even after opting out of the Service's civil settlement structure, they remain within Criminal Investigation's Voluntary Disclosure Practice. Therefore, taxpayers are still required to cooperate fully with the examiner by providing all requested information and records and must still pay or make arrangements to pay the tax, interest, and penalties they are ultimately determined to owe. If a taxpayer does not cooperate and make payment  arrangements, or if after examination, issues exist that were not disclosed prior to opt out, the case may be referred back to Criminal Investigation. 
"[T]o the extent that issues are found upon a full scope examination that were not disclosed by the taxpayer, those issues may be the subject of review by Criminal Investigation. 
"If I opt out of the OVDP and undergo a regular examination, is there a chance my case could be referred back to Criminal Investigation for penalties and prosecution? Yes. Criminal Investigation's Voluntary Disclosure Practice provides a recommendation that you not be prosecuted for violations up to the date of your disclosure. If your disclosure is ultimately determined to have not been complete, accurate, and truthful, or if you commit a crime after the date of your voluntary disclosure, you are potentially subject to penalties and prosecution." 
After the taxpayer victory in Williams II, people speculated that many taxpayers would be emboldened to opt out and roll the proverbial dice with the Service's Examination Division and Appeals Office. As one article put it, a possible outcome of Williams II was that "some taxpayers will be encouraged to opt out of the voluntary disclosure initiative and take their chances with the normal FBAR penalty regime." That sentiment has rapidly changed, of course, with more recent articles hypothesizing that Williams III may discourage borderline taxpayers from leaving the set terms of the OVDP, regardless of how distasteful they may find those terms. Gauging the impact of Williams III on opt out decisions will be interesting, yet difficult to quantify. 
Assessing the Weight of Unpublished Decisions 
Williams III, as the first case to wrangle with tricky civil FBAR penalty issues, is important. The Fourth Circuit, however, decided to issue it as an "unpublished" opinion, expressly noting in the decision itself that "[u]npublished opinions are not binding precedent in this circuit." Many taxpayers and practitioners would like nothing better than to ignore or demote the case on this basis. Doing so would be imprudent, however, because the potential use and value of  "unpublished" decisions is surprisingly broad. 
Rule 32.1(a) of the Federal Rules of Appellate Procedure generally provides that a court may not prohibit or restrict the citation of federal judicial opinions, orders, judgments, or other written dispositions that have been designated as "unpublished," "not for publication," "non-precedential," "not precedent," or the like. Moreover, the Advisory Committee Notes to Rule 32.1 state the following: 
"Rule 32.1 is extremely limited. It does not require any court to issue an unpublished opinion or forbid any court from doing so. It does not dictate the circumstances under which a court may choose to designate an opinion as "unpublished" or specify the procedure that a court must follow in making that determination. It says nothing about what effect a court must give to one of its unpublished opinions or to the unpublished opinions of another court.... Under Rule 32.1(a), a court of appeals may not prohibit a party from citing an unpublished opinion of a federal court for its persuasive value or for any other reason. In addition, under Rule 32.1(a), a court may not place any restriction on the citation of such opinions. For example, a court may not instruct parties that the citation of unpublished opinions is discouraged, nor may a court forbid parties to cite unpublished opinions when a published opinion addresses the same
This procedural rule and the related commentary create ambiguity regarding how much weight Williams III will carry in the future. One thing is for sure, though—the case will not quietly disappear, as the Service's FBAR enforcement efforts continue to rise. 
Varying Interpretations of Willfulness 
Other cases have previously addressed the concept of "willfulness" in the context of criminal issues, including criminal FBAR violations. Those cases stand for the proposition that willfulness means a "voluntary, intentional violation of a known legal duty."  Williams II and Williams III are important because they are the first in which the courts have interpreted the concept of "willfulness" in the civil FBAR context. 
The Fourth Circuit in Williams III indicated that the taxpayer's conduct (i.e., checking the "no" box in response to the foreign-account question on Schedule B of his Form 1040 for 2000, not reviewing the Schedule B or its cross-references to the FBAR filing requirement, etc.) constituted "reckless conduct" and "willful blindness" to his FBAR duty. Interestingly, the legal standard applied by the court in Williams III is significantly lower than that previously indicated by the IRS. In other words, even the Service believes that it must reach a higher level to impose the civil FBAR penalty, as demonstrated by the following IRS materials.  
The Service issued a legal memorandum in 2006, CCA 200603026 , in connection with two of its international enforcement programs. One of the issues addressed was the proper  interpretation of the "willfulness" standard in the context of civil FBAR penalties. The Service's directness on this point was remarkable: "The first question is whether the phrase ‘willful violation (or willfully causes any violation)’ has the same definition and interpretation under 31 U.S.C. §5321 (the civil penalty) and §5322 (the criminal penalty). The answer is yes. " (Emphasis added.) 
Lest any doubt remain, CCA 200603026 goes on: "Both section 5321(a)(5), providing for a civil penalty, and section 5322(a), providing for criminal penalties, contain a similar ‘willfulness’ requirement.... The same word, willful, is used in both of these sections. Statutory construction rules would suggest that the same word used in related sections should be consistently construed."
In referring to Justice Blackmun's dissenting opinion in the Supreme Court's decision in Ratzlaf, the IRS then explained the following in CCA 200603026: "[W]e agree with his conclusion that in the case of the FBAR penalty, in order for there to be a voluntary intentional violation of a known legal duty, the accountholder would just have to have knowledge that he had a duty to file an FBAR, since knowledge of the duty to file an FBAR would entail knowledge that it is illegal not to file the FBAR. A corollary of this principle is that there is no willfulness if the accountholder has no knowledge of the duty to file the FBAR." (Emphasis added.) 
Similar to CCA 200603026, the IRS acknowledges in its own Internal Revenue Manual that, in the context of willful FBAR penalties, the test is whether "there was a voluntary, intentional violation of a known legal duty" and "willfulness is shown by the person's knowledge of the [FBAR] reporting requirements and the person's conscious choice not to comply with the requirements."  
To be fair, the Manual suggests that "willful blindness" might rise to the level of willfulness. Even in these situations, though, the IRS clarifies that "[t]he 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." 
Another good article by Hale.  Thanks, Hale.

1 comment:

  1. You cannot criminalize the ordinary behaviour of citizens who are long term residents in foreign countries without their being consequences: (1) millions of people must renounce their US citizenship as a matter of protecting themselves and their families from the United States. These people rejoice the day that the United States Department of State finally gives them a relinquishing or renunciation appointment, and their fellow relinquishers congratulate them upon having finally given up the most hated citizenship in the world; (2) You cause the literal hatred of the United States and her people by many of these people who would have been your good will ambassadors. You will find no sympathy from the people that you have alienated. Note that hostility towards Americans will rise and you will notice it as you travel abroad. Already in several European countries, if you try to open a bank account, they show you the door if you are an American.

    That said, the Williams case destroys the confidence that the United States is capable of due process for millions of people whom the FBAR law has criminalized and FATCA will try to expose. This is a major disaster in my view.

    Peter W. Dunn


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