Since being handed enforcement authority from the Financial Crimes Enforcement Network in 2003, the Service has begun a campaign to provide stricter enforcement of the long-neglected Report of Foreign Bank and Financial Accounts (FBAR), which requires disclosure of foreign financial assets through Form TD F 90-22.1. Willful violations were required for any penalty under the pre-2004 law and carry heavy penalties under existing law, so these enforcement efforts rely to a great extent on the interpretation of the willfulness provision.
Williams and McBride were the first two cases to address the willfulness requirement for an FBAR civil penalty. In Williams, the court held that failing to file an FBAR after signing a tax return constitutes “a conscious effort to avoid learning” about the FBAR requirement, which satisfies the willfulness requirement. In McBride, the court held that signing a tax return constitutes knowledge of the duty to comply with FBAR, which satisfies the willfulness requirement. By holding that taxpayers willfully violate the FBAR statute simply by signing a tax return and then failing to file, both Williams and McBride construe the willfulness requirement more broadly than applicable precedent would have dictated.
This Comment argues that the current text of the statute and precedent require a more narrow reading of the FBAR willfulness requirement. It argues that taxpayers should not be charged with constructive knowledge after signing a tax return. Instead, a court should have to find that the taxpayer is aware of the existence of the FBAR requirement in order to find a willful violation. In addition to being consistent with the text of the statute and precedent, this approach would avoid the liability nightmare created by a combination of the Williams–McBride strict liability standard and the ill-defined “other financial account” language in the law.
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The Williams–McBride interpretation of the willfulness requirement in 31 U.S.C. § 5321(a)(5) is flawed because it imposes a strict liability standard where both the statute and the case law indicate otherwise.
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Before addressing the ways this standard misapprehends precedent, it must be noted that this standard cannot possibly be applied to the current version of section 5321(a)(5). Under the pre-2004 version applicable in Williams and McBride, the civil penalty in section 5321(a)(5) could be assessed only for willful violations. But under the current version of section 5321(a)(5), there are separate penalties for non-willful violations. Using the Williams–McBride standard of willfulness, it is difficult to conceive of how a violation could be nonwillful.
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IV. Conclusion: Future Courts Should Look to Sturman
The solution for future courts is to look past the flawed Williams–McBride reasoning and adhere to the Sturman standard, which looked for an actual intent to violate the FBAR requirement or a course of conduct that would allow a court to infer willfulness. This would clearly avoid the liability problems created by the strict liability of Williams–McBride while upholding the relevant Supreme Court precedent and the current version of the statute.Readers interested in pursuing this matter should read the article.
I have argued in various Federal Tax Crimes Blogs that the proper use of willful blindness is not to compel a finding of willfulness from facts from which a jury could infer the defendant willfully blinded himself, but to permit a finding of willfulness from such facts. In other words, the jury must still find willfulness an intentional violation of a known legal duty -- but only as an inference which it makes applying the proper standard (preponderance, clear and convincing or beyond a reasonable doubt). This test would then let the trier of fact determine willfulness. The trier of fact's factual determination or willfulness or nonwillfulness could be reversed under the appropriate appellate standing -- clearly erroneous in a bench trial or no reasonable juror could find willfulness or nonwillfulness in a jury trial. That is not the standard the Williams court applied and instead applied a legal conclusion that compelled the determination from the fact that the defendant did not read the 1040 and, for that reason, was willfully blind.
For more recent blogs on this subject, see:
- More on Recklessness as Cheek Willfulness (Including for FBAR Civil Penalty) or Willful Blindness (Federal Tax Crimes Blog 7/22/14), here.
- Willful Blindness / Conscious Avoidance and Crimes Requiring Intent to Violate a Known Legal Duty (Federal Tax Crimes Blog 7/21/14), here.
Note to readers: I have a special subject link to Conscious Avoidance which is the same concept as Willful Blindness. I started doing using Conscious Avoidance for the link before the Supreme Court opinion in Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. ___, 131 S. Ct. 2060 (2011), here. Now the more common description of the concept is willful blindness. I will try to make changes to the links when I have time.