FBAR Collection Suit Against Person Convicted of Willfully Failing to File FBAR (12/11/18)

I have previously written on the criminal conviction of Arvind Ahuja.  See Prominent Neurosurgeon Convicted for Offshore Accounts (Federal Tax Crimes Blog 8/23/12), here. On December 7, 2018, the Government filed an FBAR willful penalty collection suit for a single willful penalty for the year 2009 in the amount of $4,662,540.50.  United States v. Ahuja (E.D. Wisc. Dkt. No. 18-cv-01934).  The Complaint is here (from Court Listener).  As of today, no answer has been filed.

Key excerpts:

On Willfulness:

15. On his IRS Form 1040 for 2009, Ahuha checked “no” on that part of Schedule B requiring him to disclose his interest in foreign bank accounts.  

16. In August of 2008 and on subsequent dates, Ahuja’s accountant informed Ahuja of his obligation to report his interest in any foreign financial accounts. Ahuja knew or should have known he had a duty to report his interest in the foreign financial accounts. 

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23. On August 22, 2012, Ahuja was found guilty by a jury in this district for, among other charges, his willful failure to submit a Report of Foreign Bank and Financial Accounts and filing a false income tax return for the year  ending December 31, 2009 in the case of United States v. Arvind Ahuja, Crim. No. 2:11-cr-00135-CNC (E.D. Wisc.). 

 On the FBAR penalty assessment and amount due:

19. On July 12, 2017, a delegate of the Secretary of the Treasury timely made an assessment in the amount of $4,622,540.50, under 31 U.S.C. § 5321, against the defendant, Arvind Ahuja, for his willful failure to submit a FBAR for the year ending December 31, 2009, and assessed both a late-payment penalty of $63,069.19, under 31 U.S.C. § 3717(e)(2) and 31 C.F.R. § 5.5(a), plus interest. The amount assessed under 31 U.S.C. § 5321 is commonly known as a “FBAR Penalty.” The FBAR Penalty assessed is 50% of the account balance on the day of the FBAR violation.  

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22. With interest and other statutory accruals, the amount due with respect to the assessment described above is, as of September 19, 2018, $5,007,288.38. The United States is entitled to judgment in its favor and against Ahuja in this amount, plus statutory additions including interest according to law.

JAT Comments: 

1.  The pleading is a streamlined pleading, a notice pleading in the civil procedure jargon.  About as minimal as I can recall having seen.  In prior pleadings, the Government has had more allegations related to willfulness but perhaps, for the reasons noted below, it thought the bare minimum plus the allegation in par. 23 would suffice.

2.  Paragraph 23 apparently is asserted to support some type of preclusion, probably issue preclusion (collateral estoppel) from the criminal conviction.  Here is my summary discussion of the the differences between issue preclusion and claim preclusion:

Issue preclusion is the term currently preferred for a concept previously called collateral estoppel; and claim preclusion is the term currently preferred for res judicata (although res judicata has sometimes “embrace[d] both claim and issue preclusion”).  Bravo-Fernandez v. United States, ___ U.S. ___, ___ n. 1, & ___, n. 2, 137 S. Ct. 352, 356 n. 1 & 359 n. 2 (2016).  In Bravo-Fernandez, the Court described the related terms of issue and claim preclusion (cleaned up):
• Issue preclusion: “In criminal prosecutions, as in civil litigation, the issue-preclusion principle means that “when an issue of ultimate fact has once been determined by a valid and final judgment, that issue cannot again be litigated between the same parties in any future lawsuit.” 
• Claim preclusion: “instructs that a final judgment on the merits forecloses successive litigation of the very same claim.” 

3.  Further on issue preclusion, here is my discussion on issue preclusion in the normal tax context of a conviction for tax evasion followed by a civil suit with the issue of civil fraud (usually in connection with the civil fraud penalty but also in connection with the statute of limitations)(footnotes omitted):

Section 6663 imposes the civil fraud penalty to underpayments with respect to a filed return “If any part of any underpayment of tax required to be shown on a return is due to fraud.”  § 6663(a).  This penalty is often referred to as the civil fraud penalty.  The penalty is “75 percent of the portion of the underpayment which is attributable to fraud.”  Id.  The underpayment is the amount of tax the taxpayer owes over what the tax the taxpayer reported; some or all of that underpayment may be due to fraud..  The civil fraud penalty is a civil sanction with a remedial character rather than a punishment in addition to the criminal fraud penalty, so that it is not double jeopardy and will survive the death of the taxpayer subject to the penalty.  

The Code does not define fraud, but it may be viewed as the civil counterpart of criminal tax evasion in § 7201. Examples of how courts have stated civil fraud under § 6663 are:  (i)  civil fraud requires “intentional commission of an act or acts for the specific purpose of evading tax believed to be due and owing”; and (ii) civil fraud requires that “the taxpayer have intended to evade taxes known to be due and owing by conduct intended to conceal, mislead or otherwise prevent the collection of taxes and that is an underpayment.”  In making the determination, as with criminal cases, courts will often look to certain common patterns indicating fraud–referred to as badges of fraud, such as unreported income, failure to keep adequate books, dealing in cash, etc.  The key differences between the two is that § 6663 is a civil penalty and has a lower burden of proof (clear and convincing rather than beyond a reasonable doubt) as I note later.  

Because of this commonality between § 7201, tax evasion, and § 6663, civil fraud, the interpretations of willfulness for tax evasion apply to the civil fraud penalty.  Thus, just as willful blindness can be considered to establish willfulness for tax evasion, so it may be considered to establish civil fraud for § 6663.  Also, the so-called “Cheek” defense to criminal tax evasion–a subjective good faith misunderstanding of the law, however objectively unreasonable–is a defense to the § 6663 civil fraud penalty.  This defense is not available if the taxpayer knew the law and simply disagreed or the taxpayer knew the law and thought it unconstitutional; rather he must have a good faith belief that his actions complied with the law. As I discuss below, conviction of tax evasion is preclusive that the taxpayer committed civil fraud for purposes of § 6663. 

In order to prevail on the civil fraud penalty, the IRS is first required to prove that some portion of the understatement is attributable to fraud by clear and convincing evidence.  § 7454(a).  Like the criminal standard “beyond a reasonable doubt,” there is no satisfactory language to inform precisely what “clear and convincing.”  The Tax Court says that it is “a stringent and extraordinary burden” that is difficult to sustain.  Perhaps the best that can be said is that clear and convincing lies somewhere on the continuum between “more likely than not” (the usual civil burden) and “beyond a reasonable doubt” (the criminal burden).  If the IRS meets that burden, the entire understatement will be subject to the penalty except to the extent that the taxpayer establishes by a preponderance of the evidence that it does not arise from fraud.  § 6663(b). 

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If the taxpayer is found guilty of tax evasion (§ 7201) in the context of a filed tax return in the criminal prosecution, the conviction will be preclusive on the issue of the taxpayer's fraud and, at least theoretically as to some minimum amount of tax on the notion that the tax evasion conviction required a tax due and owing although the amount of the tax due and owing is not determined by the tax evasion conviction.  That will likely meet the Government’s initial burden to shift to the taxpayer the burden of proving that there was no civil fraud as to the total amount asserted by the Government.  Interestingly, in a case where the taxpayer convicted of tax evasion proved that there was no tax due (thus contradicting the tax evasion conviction based on some tax due and owing), the Court held that this theoretical issue preclusion as to some possible amount did not require it to find that there was some minimal tax due.