Third Circuit Sustains FBAR Willful Penalty (6/7/22)

In Collins v. United States, 36 F.4th 487, (3rd Cir. 6/6/22), CA3 here and GS here, the Court affirmed the district court’s holding that Collins was liable for the willful FBAR penalty.  See United States v. Collins, 2021 U.S. Dist. LEXIS 23260, 2021 WL 456962 (W.D. Pa. Feb. 8, 2021), GS here.

The steps in the Court of Appeals reasoning were:

1. Collins had unreported foreign accounts.

2. Collins joined OVDP, apparently in 2010.  After filing his “amended returns for 2002 to 2009, which yielded modest refunds stemming from large capital losses in 2002,” Collins opted out of OVDP, presumably hoping to pay less on opt-out.  The IRS audited and found that the amended returns failed to report PFIC income, which generated additional tax of “$71,324 for 2005, 2006, and 2007, plus penalties.”  Further, by opting out, Collins subjected himself to potential willful FBAR penalties rather than the mitigated miscellaneous penalty in OVDP.  The IRS proceeded to asset the FBAR penalty, although the IRS mitigated the penalty substantially under the IRM mitigation rules and agent discretion.

3. The District Court, on trial, “found a ‘decades-long course of conduct, omission and scienter’ by Collins in failing to disclose his foreign accounts” and held that the penalty determination (as mitigated) was “neither arbitrary and capricious nor an abuse of discretion.”

4. On the willful determination, The Court of Appeals articulated and applied the “civil standard of willfulness, which encompasses recklessness * * * * The dispositive question here is whether “Collins knew or (1) clearly ought to have known that (2) there was a grave risk that he was not complying with the reporting requirement, and if (3) he was in a position to find out for certain very easily.”  (Cleaned up.)

5. The Court of Appeals handily affirmed the district court’s holding that “Collins’s failure to disclose his foreign accounts was willful—not just reckless, but with ‘an actual intent to deceive.’”

Another Failed Judicial Contest of the FBAR Willful Penalty (3/23/21)

In Kimble v. United States, 991 F.3d 1238 (Fed. Cir. 3/22/21), TN here, in an appeal from an adverse holding in a refund suit, the Court sustained the willful FBAR civil penalty.  Unfortunately for Kimble, neither the facts nor the law was helpful.

The Court almost summarily dispatched Kimble’s main arguments about the CFC’s holding sustaining the penalty.

Here, the parties do not dispute that Ms. Kimble failed to disclose a foreign bank account that she was required to disclose. Rather, Ms. Kimble argues that her violation was not “willful.” We hold that, based on the undisputed facts, it was not clear error for the Court of Federal Claims to find Ms. Kimble's violation willful.

Contrary to Ms. Kimble's argument that a taxpayer cannot commit a willful violation without “actual knowledge of the obligation to file an FBAR,” Appellant's Br. 32, we have held that “willfulness in the context of § 5321(a)(5)(C) includes recklessness,” Norman, 942 F.3d at 1115. Accordingly, a taxpayer signing their returns cannot escape the requirements of the law by failing to review their tax returns. Id. at 1116 (“[W]hether [the taxpayer] ever read her . . . tax return is of no import because '[a] taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as . . . she is charged with constructive knowledge of its contents.'”) (quoting Greer v. Comm'r, 595 F.3d 338, 347 n.4 (6th Cir. 2010)).

The undisputed facts show that Ms. Kimble knew about the numbered account and took efforts to keep it secret by, among other things, not disclosing the account to her accountant. She did not review her tax returns for 2003-2008, but she represented under penalty of perjury that she had reviewed her tax returns and had no foreign accounts. J.A. 17. In other words, Ms. Kimble had a secret foreign account, she had constructive knowledge of the requirement to disclose that account, and she falsely represented that she had no such accounts. Under these facts, it was not clear error for the Court of Federal Claims to hold that she committed a willful violation. n2 

   n2 Ms. Kimble's reasons for the violation (her subjective belief about the need for secrecy, advice from her ex-husband, etc.) do not alter our inquiry. A taxpayer can be “willful” even if her violation has good reason. See Bedrosian v. United States, 912 F.3d 144, 153 (3d Cir. 2018) (inquiring into “subjective motivations and the overall 'egregiousness' of [the taxpayer's] conduct . . . [is] not required to establish willfulness in this context”); Norman, 942 F.3d at 1116 (“Actions can be willful even if taken on the advice of another.”). And there is no “reasonable cause” exception for willful violations. 31 U.S.C. § 5321(a)(5)(C)(ii).

The Court then moved to Kimble’s hail Mary arguments and also handily dispatched them.

Report that Prominent Billionaires Are Subject to Criminal Investigation (8/24/20)

This is a fascinating report of a tax investigation in process against two very prominent billionaires, Robert Brockman and David Smith.  David Voreacos & Neil Weinberg, Billionaire Robert Smith Fighting U.S. Criminal Tax Inquiry (1) (BloombergLaw 8/21/20), here.  This is an ongoing investigation, so charges may never be brought and, if they are, the  shape of the charges are uncertain.

What caught my eye and, I think may be of interest to readers of this blog is the following discussing divorce proceedings between Smith and his estranged wife:

            Experts on both sides of the divorce pored over the family finances. In 2014, Smith approached the IRS seeking amnesty from prosecution under a program used by more than 56,000 Americans who failed to report offshore assets, according to two of the people familiar with the matter. Through the program, the IRS collected more than $11 billion in back taxes, fines and penalties, while learning who enabled offshore tax evaders.

            But the IRS rejected Smith, according to people familiar with the matter. The agency typically turned down taxpayers if it already knew they had undeclared offshore accounts.

Now, I don’t know but assume that, because of the specificity (although limited), the investigators are correct about his attempt to go into the voluntary disclosure program and being rejected.  The article does not state whether Smith attempted the OVDP or Streamlined or OVDP with Streamline transition.  The Streamlined Procedures were adopted in 2014 the year that the article indicates he approached the IRS.  Of course, if Smith’s tax underpayment and FBAR failure to file (or file correctly) are the subject of a criminal investigation, the IRS must now think him willful which would have in 2014 disqualified for the Streamlined Procedures (even the Transition).  But, if the IRS already had Smith on the radar screen knew when he attempted to join OVDP, he would have been disqualified as the article notes. 

We don’t know whether he was disqualified from OVDP because of already being on the radar screen or he attempted Streamlined (either direct or through transition from OVDP) and was rejected because his nonwillful certification was inadequate.  Of course, if he attempted Streamlined via OVDP transition and was rejected, he still could have solved his criminal problem by staying in OVDP and not opting out.

Some unanswered questions and surely there must be more questions.  And the statutes of limitations may be an issue since one would assume that the targets of the investigation have kept their income tax filings current and, within a range, proper, at least in the case of Smith who knew when he was rejected (in 2014) that he had potential criminal issues.

TIGTA Report on Improvement in Some Features of OVDP (6/21/16)

The Treasury Inspector General for Tax Administration has released a report titled Improvements Are Needed in Offshore Voluntary Disclosure Compliance and Processing Efforts (June 2, 2016 Reference Number: 2016-30-030), here.  The key highlights presented are:

WHAT TIGTA FOUND 

The IRS needs to improve its efforts to address the noncompliance of taxpayers who are denied access to or withdraw from the OVDP. TIGTA reviewed a stratified random sample of 100 taxpayers from a population of 3,182 OVDP requests that were either denied or withdrawn from the OVDP. Although 29 of these 100 taxpayers should have been potentially subject to FBAR penalties, the IRS did not initiate any compliance actions. Projecting the sample results to the population of denied or withdrawn requests, the IRS did not assess approximately $21.6 million in delinquent FBAR penalties. 

TIGTA also identified internal control weaknesses that led to delayed or incorrect processing of OVDP requests through poor communication among IRS functions involved in the OVDP. These weaknesses include the use of separate inventory controls and two separate IRS addresses for taxpayers to send correspondence, which contributed to incorrect processing of some taxpayer disclosure requests. In addition, the IRS does not have a process to determine the appropriate skill level needed for revenue agents to work OVDP request certifications. OVDP cases are not equivalent to audits of taxpayers’ returns and generally do not require as much technical analysis as traditional tax audits. 

WHAT TIGTA RECOMMENDED 

TIGTA recommended that the IRS: 1) review all denied or withdrawn offshore voluntary disclosure requests identified in this report for potential FBAR penalty assessments and criminal investigation; 2) develop procedures for reviewing denied and withdrawn cases for further compliance actions; 3) centrally track and control OVDP requests; 4) establish one mailing address for taxpayer correspondence; 5) ensure that employees adhere to timeliness guidelines throughout the entire OVDP process; and 6) classify OVDP certifications so that some can be worked by lower-graded revenue agents.  

IRS management agreed with all six recommendations and has taken or plans to take corrective action on five of them. Although the IRS agreed with the potential value of establishing one mailing address for taxpayer correspondence, this recommendation has been put on hold until a decision is made about the future status of the OVDP.

The report has a summary of the development of the various programs over the years since 2009 and the processing system.  The report focuses on taxpayers who were denied access to OVDP or who, having entered, withdrew or opted out.  Those persons were subject at a minimum to civil audit and some were potentially subject to criminal investigation and prosecution.  The report concludes that the IRS should have better following-through mechanisms.  Based on what it believes was an appropriate representative sample, the report suggests that there is some revenue from auditing and/or investigating those individuals.  I have not analyzed the report otherwise, but do find the following interesting.

1. Withdrawn OVDP Requests.  The sample selected included 50 taxpayers out of a total population of 781 withdrawn OVDP requests.  Only 20% of those in the sample had some form of compliance action or were included in the Streamlined Procedure.  "Of the Streamlined Procedure cases that have closed, 10 taxpayers were assessed $142,711 in penalties."  (JAT Note:  It is not clear to me what the group that withdrew and then were accepted in Streamlined Procedure is comprised of; my understanding was that those who were in OVDP up to the point of the intake letter could not withdraw and must either seek Streamlined Transition within OVDP or must opt out (different than witndrawing); I suppose it could include the class of people who had passed preclearance but not yet submitted the intake letter.)

2. Denied OVDP Request.  TIGTA reviewed 50 of 2,401 taxpayers who were denied entry to OVDP.  Only 12 of the 50 "were denied participation in the OVDP were either subjected to further criminal investigation or examination efforts, or were deceased."  Then, these is some detail behind the 34 (68 percent) of taxpayers in the sample.  (JAT Comment:  I have to say that I have had only taxpayer who failed preclearance because he had been scheduled for NRP audit; he ultimately got the OVDP result without formally being in the program.)

3. Recommendation to Review Denied or Withdrawn Requests. TIGTA recommended that the LB&I Division review all denied or withdrawn requests for FBAR penalty assessments and possible referral to CI.  In the Management's Response the IRS agreed and had technical specialists review all withdrawn and denied requests, with follow up indicated for 17.  The IRS disagreed with the revenue potential from such follow-throughs.

4. Recommendation for Immediate Review of Denied or Withdrawn Requests  TIGTA recommended (Recommendation 2) that "The Commissioner, LB&I Division, and the Chief, CI, should develop procedures to require the immediate review of any future denied or withdrawn offshore voluntary disclosure requests for further compliance actions."  IRS agreed.

5.  Other Administrative Recommendations. The balance of the recommendation dealt with processing and administration procedures.  However, I did find that, in response to a recommendation (Recommendation 4) that the IRS have one mailing address for submitting offshore voluntary disclosure requests and related documentation:

The IRS agreed with this recommendation, but is putting the recommendation on hold until a decision is made about the future status of the OVDP. While the IRS agreed with the potential value in this recommendation, at this time and in light of the nonpermanent status of the OVDP, it cannot commit the resources needed for making this change.

I infer from this that there is some current consideration being given about "the future status of the OVDP."  The IRS has always said that it could modify or withdraw the terms of OVDP at any time (although it would be expected to be prospective only and may even have a delayed effective date).