Friday, July 25, 2014

Article on Risks of Certifying NonWillfulness (7/26/14)

Tax Notes Today has the following article:  Andrew Velarde, Streamlined Program Non-Willful Certification Can Be Hazardous, 2014 TNT 143-4 (7/25/14) (no link available).  The article reports of several prominent practitioners on a Bloomberg sponsored webcast:  Robert F. Katzberg, of Kaplan & Katzberg, Alan Granwell of Sharp Partners, and Bill Sharp of Sharp Partners.

The thrust of the article is the certification of non-willfulness is risky and not for the poorly counseled, particularly because false certifications can lead to higher penalties (even than offered by OVDP) or even criminal prosecution.

I do agree with the thrust of the article.  I will quibble with part of one of the paragraph of the article.
Citing Cheek v. United States, 498 U.S. 192 (1991), Alan W. Granwell of Sharp Partners PA said that willfulness requires awareness of a legal duty, but it does not go so far as to require the taxpayer to be aware of the specific statutory provision for a tax violation. Speaking on willfulness under foreign bank account reporting requirements, which are under Title 31, William M. Sharp, also of Sharp Partners, said that it could be more difficult to show an intentional disregard of a known legal duty under Title 26 than under Title 31. In United States v. McBride, No. 2:09-cv-00378 (D. Utah 2012) 2012 TNT 219-21: Court Opinions, the court determined that the taxpayer's signature on the return constituted knowledge of a duty to comply with FBAR requirements. 
I focus on the second two sentences of this paragraph.

1.  The standard for both Title 26 criminal violations with a willful element is intentional violation of a known legal duty.  The sentence in the paragraph above uses "disregard" rather than "violation," but I think the word disregard weakens the requirement and prefer the standard formulation of intentional violation of a known legal duty.  That is perhaps a quibble.  But, focusing on whether there would be a difference in the Government's difficulty of proof between Title 26 and Title 31's FBAR requirements, the standard is exactly the same.  The only difference is proof levels.  In both Title 26 and Title 31's FBAR criminal prosecutions, the standard is the same and the proof level -- beyond a reasonable doubt -- is the exactly same.  No difference.  Now when we turn to the civil FBAR penalty and compare to the Title 26 and Title 31 criminal penalties, the proof level is different.  Criminal requires beyond a reasonable doubt.  Civil requires preponderance or, I argue, clear and convincing.  But the standard -- intentional violation of a known legal duty is the same.

2. The last sentence describing McBride is, I think, just wrong.  The opinion in McBride is here.  Results in cases such as McBride are determined by the entire tapestry of facts.  McBride had a plethora of bad facts on the issue of intentional violation of a known legal duty -- no one of them perhaps conclusive but considered together certainly gave rise to an inference that permitted that district court to conclude by a preponderance that McBride was liable for the FBAR willful civil penalty.  Accordingly, I disagree with the suggestion that the Court found that merely a signature on a return, answering the Schedule B question no, is sufficient to establish violation of a known legal duty as to the FBAR.

The McBride judge interpreted -- misinterpreted -- Williams as a holding that merely signing a return with the Schedule B question answered no establishes a willful violation, at least under the concept of willful blindness.  I have addressed that the general notion of willful blindness as it played out in Williams and McBride in a recent blog, More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (7/22/14), here.  I don't know that I can add much here to that discussion, but I will note that, after Williams, key IRS personnel said that the signature on the return and the Schedule B question answered no will not suffice.  Further,  in virtually every opt out that I have done and become aware of, the return omitting the income and answering the question no has not  -- repeat, has not -- resulted in a willful penalty.  And, in the one case that I have, that fact was present but the written determination did not rely upon that fact, except in the context of  other facts that the IRS felt proved its case (wrongly, I think).  Hence I do disagree with the article's interpretation of McBride, and, by reference, Williams.

Finally, I can't imagine the IRS asserting or DOJ Tax defending/prosecuting the FBAR civil willful penalty or a court or jury approving the penalty where the only bad fact was the signature on a return where the Schedule B question was answered no.  Of course, a key additional fact that would be required would be that the taxpayer knew of the account when he signed the return (otherwise, the no answer would be an honest answer not permitting any inference of intent to violate a known legal  duty).  But if that is all the bad facts there were,

Having said all of that, certifications of nonwillfulness should not be done without proper counseling except perhaps in those cases clearly on the good end of the spectrum.  Most of the cases are not on the clear end of the spectrum.  In those cases, certifying willfulness might carry unacceptable levels of risk that the taxpayer should consider before certifying.  To the extent that the taxpayer certifies in that environment, may it be said that he is willfully blind as to the consequences?  (I couldn't resist.)

There is one comment to the article on the Tax Notes site.  I cut and paste the comment:

Martin S July 25, 2014 at 8:21 AM
I have worked on a number of OVDP and streamlined matters. In an alarming number of cases, new and previously undisclosed accounts percolate to the surface, usually quite late in the process and after multiple inquiries of the client. A very cautious approach must be taken to ensure that the taxpayer is not later determined to be willful in part because of the omission of an account during, late, or after the disclosures have been made. CPA and other non-attorney practitioners should always insist that competent legal consul be consulted by the client. If the client refuses to consult with legal counsel then a CPA should, in my opinion, consider withdrawing from the engagement. If not and the client is later found to be willful or the disclosure otherwise goes south the client could turn on the CPA and IRS OPR might take an interest. I think this is just too much risk for a CPA to take. The authors make very good points and we should take heed.

One other key excerpt from the article:
Asked at a tax controversy forum in June if further guidance would be provided on what was needed to certify non-willfulness, John McDougal, special trial attorney and division counsel, IRS Small Business and Self-Employed Division, said that the concept of willfulness is well documented in case law and that the IRS would rely on practitioners to advise their clients on risks of criminal prosecution.


  1. Do you think the IRS enforcement efforts here will differ here between non-resident and resident taxpayers? If not, then the new streamlined procedures seem to make life much more difficult for non-resident taxpayers who could have qualified under previous program. This is especially true since the non-wilfulness relates to unfiled tax returns as well as FBARS. As someone else posted earlier, can an expat who has failed to file, whether recently or over many years, make the certification? The new certification expands the scope of the program but at the same time, increases the risk exponentially. A previous streamlined application, if rejected, would result in a potential audit. The current one could include criminal sanctions.

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