Monday, December 1, 2014

More on Willfulness (12/1/14)

In Ratzlaf v. United States, 510 U.S. 135 (1994), here, the Supreme Court addressed the willfulness requirement in the BSA's criminal penalty for structuring.  The syllabus thus says that willfulness requires that "the Government must prove that the defendant acted with knowledge that the structuring he or she undertook was unlawful, not simply that the defendant's purpose was to circumvent a bank's reporting obligation."  Then, in the conclusion of the opinion, the Court held that "the jury had to find he knew the structuring in which he engaged was unlawful." (p. 149)

Ratzlaf means that for a jury to find willfulness for structuring, the Government must prove each of the following:  (i) the defendant knew of the legal duty not to structure, (ii) the defendant intended to violate that known legal duty, and (iii) the defendant knew that it was a crime to intentionally violate that known legal duty.

Congress changed the structuring statute shortly after the Ratzlaf decision to eliminate the willfully element for structuring.  See § 5324(a), here (as amended); the pre-amendment statute is quoted in Ratzlaf; see also USAM Criminal Resource Manual 2033, Structuring, here.  After, the amendment, all that is required for conviction for structuring is (i) the defendant knew of the legal duty not to structure, and (ii) the defendant intended to violate that known legal duty.  The defendant need not know that it was a crime to violate that known legal duty.

The question I raise here is whether the civil FBAR willful penalty in Section 5321(a)(5), here, requires that key third element that the Supreme Court so clearly held in Ratzlaf was required by the term willfully in that sister BSA provision, Section 5324 (prior to amendment for structuring only).  Ratzlaf seems to answer that question:
A term appearing in several places in a statutory text is generally read the same way each time it appears. See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479 (1992). We have even stronger cause to construe a single formulation, here § 5322(a), the same way each time it is called into play. See United States v. Aversa, 984 F.2d 493, 498 (CA1 1993) (en banc) ("Ascribing various meanings to a single iteration of [§ 5322(a)'s willfulness requirement] — reading the word differently for each code section to which it applies — would open Pandora's jar. If courts can render meaning so malleable, the usefulness of a single penalty provision for a group of related code sections will be eviscerated and . . . almost any code section that references a group of other code sections would become susceptible to individuated interpretation.").
I suppose that one could argue that perhaps the Ratzlaf element (iii) is not required because the FBAR willful penalty is a civil penalty rather than a criminal penalty as involved in Ratzlaf.  I don't see how that can change the meaning of the same word "willfully" simply because there is a civil penalty with the same textual requirements of the criminal penalty. (In this regard, the mens rea required for the Section 6663 civil fraud penalty is the same as the tax crimes willfully element (often not worded crisply as intent to violate a known legal duty, but meaning that in practical effect) [I will post authority on this tomorrow]; the only practical difference is in the burden of proof.)

I hope that someone litigating an FBAR willful civil penalty will explore this issue further.

And, to extend this line of thinking, readers will recall that willfully for purposes of most Title 26 tax crimes means "voluntary, intentional violation of a known legal duty."  See Cheek v. United States, 498 U.S. 192, 201 (1991), here.  This formulation seems to require only the first two elements of Ratzlaf's formulation -- in an income tax setting, (i) the defendant knew the tax duty (such as reporting and paying tax on all income) and (ii) the defendant intended to violate that known tax duty (by intentionally not reporting the income).  I think that that is the way Cheek is read today and the standard jury instructions so reflect that reading.

The following are typical tax evasion instructions on the willfully element (both are in the CTM Proposed Jury Inst. No. 26.7201-18):
To act willfully means to act voluntarily and deliberately and intending to violate a known legal duty.  Negligent conduct is not sufficient to constitute willfulness. 
From the Seventh Circuit Pattern Jury Instructions. 
The term “willfully” means the voluntary and intentional violation of a known legal duty, in other words, acting with the specific intent to avoid paying a tax imposed by the income tax laws or to avoid assessment of a tax that it was the legal duty of the defendant to pay to the government, and that the defendant knew it was his/her legal duty to pay. 
These instructions clearly do not include requirement (iii).  [Note: the CTM quotes an earlier version of the Seventh Circuit Pattern Jury Instructions; the current version, the 2012 edition, available here, does not include this instruction.  I don't think the omission was meaningful, and the instruction highlights the issue discuss here that requirement (iii) is not required for tax willfulness.]

However, there is sparse academic debate over whether, for tax crimes, Cheek via the Ratzlaf spin requires (iii) -- that the defendant knew that his intentional violation of the known legal duty was a crime.  Kenneth W. Simons, Ignorance and Mistake of Criminal Law, Noncriminal Law, and Fact, 9 Ohio St. J. Crim. L. 487, 515-516 (2012); and Peter W. Low and Benjamin Charles Wood, Lambert Revisited, 100 Va. L. Rev. 1603, 1611 at n. 32 (2014). In this regard, Cheek was decided before Ratzlaf, but the Supreme Court in both Ratzlaf and Bryan v. United States, 524 U.S. 184 (1998), here,  equated the structuring and tax willfully elements.  If that equation were followed, (iii) -- that would be required.  It would be a very, very long shot given that the Cheek definition requiring only (i) and (ii) is so entrenched. but defendants with little else of a defense may want to pursue this matter, for the Government’s burden to prove that the defendant knew his violation of the tax law was a crime might be insurmountable.

Here are the relevant quotes from the two articles cited:

From the Low and Wood article (one footnote omitted):
As a general matter with respect to this second characterization, had Lambert been aware of the legal duty to register, but not the fact that failure to register was a crime, her conviction most likely would not have been controversial and undoubtedly the Supreme Court would not have set it aside.  n32 The situation is more complex, however, when a duty is created by the non-criminal law, when failure to obey the duty is punished by the criminal law, and when the question is whether the defendant must know about the duty. We will return to this issue later, but for now the answer must be sometimes yes, sometimes no.
   n32. Cf. Cheek v. United States, 498 U.S. 192 (1991). Cheek was a prosecution, in part, for "willfully" failing to file a tax return. The Court held that "willfully" required the "voluntary, intentional violation of a known legal duty." Id. at 201. It was a defense, therefore, if Cheek did not know that the tax laws required him to file a return. But the Court held that it was not a defense to believe that the federal tax structure was unconstitutional or, we would extrapolate, to believe that it was a not a crime to fail to file a return or pay a tax even though it was known that there was an obligation under the Internal Revenue Code to do so. Cheek had to know the legal duties imposed by the tax laws, not that it was a crime to disobey them.
   There is debate in the cases and the literature about whether this view of Cheek is correct, see Kenneth W. Simons, Ignorance and Mistake of Criminal Law, Noncriminal Law, and Fact, 9 Ohio St. J. Crim. L. 487, 515-16 (2012), but we think it clear that the case does not involve a mistake of criminal law. Cf. People v. Hagen, 967 P.2d 563, 568 n.4 (Cal. 1998) ("[A] taxpayer may defend ... on the basis ... that he mistakenly believed certain deductions were proper under the tax laws, but not on the basis that he was unaware it was a crime to lie on one's tax return."). 
From the Simons article (some footnotes omitted):
2. The criminal law simply criminalizes acts that violate a civil regulatory prohibition 
The second problem occurs when the criminal law merely criminalizes behavior that violates a civil prohibition. Thus, suppose a criminal statute makes it a crime to "knowingly" or "willfully" violate a specific civil prohibition, such as a prohibition on emitting specified environmental pollutants or on violating worker safety regulations. Such a statute would at least require the defendant to know the facts that, as a matter of law, constitute violation of the prohibition. But sometimes courts will interpret such a statute as requiring knowledge of unlawfulness, especially if, absent such a requirement, "otherwise innocent conduct" would be punished.

Should this category be understood as M Crim Law or M Noncrim Law? The answer is unclear. For example, consider the well-known case of Cheek v. United States. n77 Cheek was convicted of "willfully" failing to file a required tax return, despite his claim that he sincerely believed that under the tax laws he owed no taxes because he had been advised by an anti-tax group that wages are not income. n78 The Court held that if the jury accepted that he honestly believed that wages are not income, he should be acquitted, even if that belief was unreasonable. n79 The government must prove his knowledge of his legal duty to pay taxes on income, the Court concluded. 80
   n77 Cheek v. United States, 498 U.S. 192 (1991).
   n78 Id. at 192.
   n79 Id. at 196-97.
   n80 At the same time, however, the Court also held that an honest but unreasonable belief that the tax laws are unconstitutional is not a defense. Id. at 205-06.  
Joshua Dressler classifies Cheek as involving a mistake of "different-law" n81 -that is, a M Noncrim Law-but the Court itself and most commentators treat the alleged mistake in the case as a M Crim Law (albeit an unusual M Crim Law case in which certain legal mistakes excuse). n82 In one sense, Dressler's characterization of Cheek as an instance of a claim of ignorance or [sic - of] M Noncrim Law is plausible; for the civil tax law requirements have their own distinct rationales (including collecting revenue, redistributing income and wealth, encouraging investment, and creating incentives for particular types of economic and social activities), just as property law and divorce law serve purposes independent of the criminal law. And when criminal sanctions are added to such a civil prohibition, and an additional mens rea requirement is imposed through a term such as "willfully," arguably it is not enough that the defendant is simply aware of the facts that make his conduct a civil violation; sometimes, at least, the legislature means to require more culpability than that, and specifically mens rea as to the illegality of the underlying conduct. n83 On the other hand, this type of case is quite different from larceny or bigamy, where the civil law (property or family law) that is made relevant by the criminal law is the source of a wide range of legal obligations and remedies. n84 In the end, perhaps this category, of criminalization of a civil prohibition, should be treated, not as a typical instance of M Noncrim Law, but as a sui generis category, taking into consideration the policy factors mentioned above.  n85
   n81 Dressler, supra note 36, at 177.
   n82 See Leonard, supra note 10, at 555; LaFave, supra note 29, at 311. The Court justifies this unusual requirement on the basis of the unusual complexity of the tax laws. On the other hand, the California Supreme Court has characterized Cheek as involving a mistake of "nonpenal law" rather than of penal law, in a case permitting a M Law defense to a charge of tax evasion under state law. After describing the reasoning in Cheek, the court says:
We agree malefactors cannot be permitted to redefine the criminal law by their own subjective misconceptions of that law. For that reason, mistake or ignorance of the penal law is almost never a defense. There are a number of circumstances, however, in which violation of a penal statute is premised on the violator's harboring a particular mental state with respect to the nonpenal legal status of a person, thing, or action. In such cases, the principle is "firmly established that defendant is not guilty if the offense charged requires any special mental element, such as that the prohibited act be committed knowingly, fraudulently, corruptly, maliciously or wilfully, and this element of the crime was lacking because of some mistake of nonpenal law." (Perkins & Boyce, Criminal Law (3d ed.1982) pp. 1031-32, italics added.) As Perkins and Boyce emphasize, the mistake must be one of nonpenal law. . . . Thus, a taxpayer may defend against a section 19405(a)(1) charge on the basis, for example, that he mistakenly believed certain deductions were proper under the tax laws, but not on the basis that he was unaware it was a crime to lie on one's tax return. People v. Hagen, 967 P.2d 563, 568 n.4 (Cal. 1998) (citation omitted).
   n83 On the other hand, "willfully" might coherently be understood to reflect a more stringent requirement for criminal prosecution, not as to law, but only as to fact. "Willfully" usually requires at least knowledge with respect to the relevant facts. But requiring knowledge of the facts sometimes amounts to a higher mens rea requirement than the civil prohibition alone would demand.
   n84 Moreover, the Commentary to § 2.02(9) of the Model Penal Code appears to classify this category of cases as involving culpability as to the governing criminal law, i.e., as a case governed by the final "unless" clause in § 2.02(9): [T]here may be special cases where knowledge of the law defining the offense should be part of the culpability requirement for its commission, i.e., where a belief that one's conduct is not a violation of the law ought to engender a defense. Such a result might be brought about directly by the definition of the crime, e.g., by explicitly requiring awareness of a regulation, violation of which is denominated as an offense. Model Penal Code § 2.02(9) cmt. at 251 (1985).
   n85 Another example that seems to belong to this second category (and perhaps to the first as well) is posed by Larry Alexander: defendant knows that he is not allowed to hunt an animal that is on the endangered species list, but does not realize that polar bears have just been added to that list. Alexander, supra note 19, at 243. On the one hand, the list exists for purposes other than criminal punishment; on the other, asking a hunter to check the list before acting is not terribly burdensome. 


  1. I recently read a reference to the FBAR on an expat tax forum while looking for information helping us to decide whether to open a Roth IRA for my husband. Had never heard of this before. After doing some reading online, I not only realized that he had been required to file said FBAR the last two years but also that we could be assessed serious penalties for not doing so.

    I've since done a lot of research and am trying to find information on whether quiet compliance or OVDP opt-out is too risky for us, as the (streamlined?) OVDP penalty seems pretty harsh for our situation.

    The facts:
    Husband was granted green card in July of 2012 and moved here at that time, did not get a job until June of 2013. For 2012 tax year, I filed married filing separately; he did not file as he had no income while a resident alien. For 2013 tax year, I filed married filing jointly using TurboTax. I answered YES to foreign accounts question (true, good thing), but NO to over $10,000 question (false, bad thing). Don't remember any reference to FBAR in TurboTax questions.

    However, I've since discovered that the amount in his account was about $18,000. I did not think he had this much as the account is barely used (he has never made a withdrawal and makes a maximum of one deposit a year), and I didn't realize the seriousness of not making sure of my assumption. None of this would be a big problem if I hadn't failed to report the interest income on this account on our 2013 tax return. It honestly didn't even occur to me that I would have to come up with numbers other than those listed on the different 1099s, w2s, and other forms I had gathered. You have to keep in mind this was the very first time I've filed taxes with my foreign spouse. I didn't even realize this account earned interest, but we looked into it and it apparently has great interest rates, and earned like $500-$600 last year, such that we probably owe close to (but not over) $100 in taxes for the 2013 tax year.

    I would like to just file the 2012 and 2013 FBARs late with an explanation as to why we did not know we were required to file, and then file an amended 2013 return and pay the taxes owed and interest, as this would obviously cost less than the OVDP penalty. It just seems like OVDP is a tax amnesty program not for people like us but rather for repeat offenders who have willfully been hiding large amounts of assets abroad to escape taxation. And it's hard to believe the IRS would penalize us so harshly. I think under the streamlined program (if we qualify), we would owe 5% of $18000, so about $900. Plus the back taxes. However, if we don't go through the program, we apparently risk the maximum $10,000 late filing fee, in the worst case scenario.

    Main question is: what is the risk of quiet compliance by backfiling 2 FBARs and amending most recent tax return (our #1 choice), v. OVDP opt-out (#2 choice) v. straight-up OVDP? All choices are legal as far as we can tell, so we are mostly talking about risk in terms of likelihood and amount we'll have to pay. Assuming OVDP is the recommendation, do we qualify for the streamlined 5% penalty rate?

  2. Dear Bathsheba,
    quiet filings will probably draw more attention in a possible audit, given your situation. I don't think you need any professional help. Just enter the domestic streamlined. Which when you enter will take care of all your filing obligations, taxes due via amended returns, and delinquent FBARS. To walk away with just over a $1000 liability, when others that could not use the Streamlined before the recent changes paid much dearly is a gift. I think given the small amount involved the IRS will accept a non-willful certification and let you pass on by.

  3. Only you can decide of course.
    First option: streamlined domestic, with amended returns and delinquent FBARS. Cost $1,000 and I would expect that the IRS would accept it and that would be the end of it. Cost:$1,000 plus your time.
    Second option: quiet disclosure. Given the numbers I doubt they would bother assessing penalty, but then again, it might be a couple of thousand dollars (just guessing) but that would be a big chunk of $18k.
    Third option: o forward option"do nothing about the past and just start filing the 2014 FBAR before 6/30/2015 and report the interest for 2014 on your 2014 return. This is the go-forward strategy. Its legal because you found about about fbar and tax on foreign interest AFTER the 4/15/2014 tax deadline and 6/30/2014 tax deadline (this now being December 2014.) Here too again the IRS might do nothing but in the unlikely case they assessed a nonwillfulpenalty I am (again guessing) that it wuld only be a couple thousand dollars.
    Again, I cant tell you what to do since if you end up paying more than $1,000 Im not going to reimburse you. Nor, if you decide on go-forward an the IRS doesnt penalize you, am I going to expect a cut of the savings.
    Also Im not a lawyer so I cant advise you. And getting advice from a lawyer would cost you way more than $1,000.
    If I were in your shoes I would probably choose domestic streamlined, apy the $1,000 and hope the IRS approves the request. Note that when you go directly into streamline you do not get a from 906 as confirmation that your requet was approved. In other words, no news is good news.
    What I would stay away from is OVDP. Many nonwillful have gone into this, and paid a ton of money in accounting and legal fees, spent countless hours, and had to fight tooth and nail in the few optouts. Those who did not opt out of course paid up to 27.5% plus back taxes, penalty, interest, fees etc.

  4. Thanks @Blackseal1234. Is that the prevailing opinion here?? $1000 is a good deal given my situation?

  5. Thanks, @Guest! If $1000 wasn't such a huge sum for us we wouldn't even hesitate. But it feels so harsh given that it was an honest oversight on the very first time my husband filed u.s. taxes after moving over. And it's not like we can take the money from his foreign account because it's a special house savings for youth that has fantastic tax benefits and from which you can only make a one-time withdrawal for a house purchase. So we are trying to figure out what the penalty might be outside of the streamlined program. You think a couple grand; that is helpful. Has anyone ever tried the FBAR helpline? I wonder if they could give answers...

  6. Look I have been in this program for 3 years and spent over $170,000 in legal and accounting fees which I could have totally avoided if I waited for the new domestic streamlined program. I opted out and I am looking at 2 more years before things get settled. I expect another $50,000 in legal fees just addressing all the assine IRS questions in the audit. The IRS has thrown you a gift, which will only cost you about $1000. Don't look a gift horse in the mouth. The alternatives will cost you much more and may not provide you with any security. I know everything is relative and that a $1000 is a big deal for you. But that is only 2 hours of a good tax lawyers time. Don't be pennywise pound foolish . Run into the Domestic streamlined and count your self lucky to get off with only $1000.

  7. Outside the streamlined prog (with go forward or just amnding the past returns quietky and going forward on FBARS) my guess (and it's a guess only) is a couple thousand dollars as a worst case scenario. Best scenario especially on go forward is that they would not even bother to do anything, i.e. if all of a sudden you file fbar for 2014 and report $500 foreign interest on the 2014 return, it may not catch their attention. And even if they audit you you ight get no penalty, jur a warning letter (Letter 3800.)
    I agree that any penalty in your case would be excessive BUT I am not the IRS. My guess is: Streamlined, 99% chance of $1000 cost (and 1% chance of streamlined not being approved and a pnslty of a couple thousand.
    My guess of go-forward 90% of paying zero, 5% chance of beibg audited paying couple thousand, 5% chance that if audited you pay nothing and only get a warning letter.
    These are all guesses. Nobody can give you any certainty.

  8. I need an answer from some one who has filed SDOP. Do we need to file state tax returns for last tree year after filing SDOP ?. or it is separate program we need not to worry about state returns. There is no specific mention about state tax return in SDOP explantation. Would be great if somebody can share their experiences.

  9. To: needurgenthelp. The IRS is going to inform your state about your amended federal tax returns at some point. It may be 6 months or a year from now, but they will notify them. When they do your state is going to look for amended state returns, when they can't find any they may start an audit. If you owed a lot of extra federal tax, the clock will have been ticking and you could get hit with penalties and interest charges at the state level. The only problem with filing amended state returns now is that the IRS may determine that your amended federal returns are not correct, in which case your amended state returns would also not be correct. If you trust that your federal returns are audit proof I would file your amended state returns to stop the interest clock and penalty clock from ticking. On the other hand if your state has SOLs it might be better to hold off and let the clock work to your advantage. I paid my state taxes immediately by filing 8 years of amended returns, because the interest clock was too painful if I waited for the IRS to finish my OVDP. Just double check with a CPA about SOL in your state.

  10. The answer is, it depends on your state. Many states require you to amend the State return when you amend the Federal, and for the same years. My state also requires interest at a hefty 13% per year. Since most states dont' have OVDP protection from prosecution, I think it would be smart to amend the return and pay before the state contacts you so they will find that you have amended the return and paid the taxes.
    I think NY does have a program similar to OVDP for state taxes, but I'm not sure, and there may be a couple of other states.


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