Practitioner Experience with No Answers to the FBAR Question on Form 1040 (10/5/10)

Daniel Gottfried posted an article titled Proving Willfulness in FBAR Reporting – Checking “No” Ain’t Apropos. The article is reprinted also in Tax Notes at Tax Notes, Sept. 27, 2010, p. 1394; 128 Tax Notes 1394 (Sept. 27, 2010) and in Tax Notes at 2010 TNT 188-14.

The article presents the results of a survey of practitioners who assist U.S. taxpayer clients in making voluntary disclosures of foreign bank accounts as they relate to the U.S. income and estate tax obligations and the FBAR filing requirements.

The article relies upon considerable anecdotal experience of the survey participants to conclude that answering no to the FBAR question on Schedule B of the 1040 (or failing to answer it) is not persuasive evidence that the taxpayer knew of his or her obligation to file the FBAR. The truly draconian FBAR penalties require that the taxpayer know of the legal duty to file the FBAR and intend to fail to file the FBAR. That standard is practically the same as the willfulness standard for the commonly charged tax crimes, although the burden of proof would be lesser in a civil penalty case than in a criminal case and, as a consequence, there may be some relaxation of the articulation of the standard.

The difficulty of making an FBAR civil penalty case is shown in the recent case of United States v. Williams, Civil Action No. 1:09-cv-437 (E.D. Va., Sept. 1, 2010), which I blogged here. Williams indicates that the Government will have to place on strong evidence for the taxpayer's specific knowledge of the obligation and intent to fail to file. Williams certainly suggests that an even stronger case would be required for the criminal FBAR penalty.

Gottfried's survey and article and the Williams case suggest that taxpayers in the voluntary disclosure program should at least consider the opportunity to opt out and take their lumps under the standard FBAR civil penalty regime which, if consistently applied, may produce FBAR penalties less than the prescribed penalty under the voluntary disclosure program. Of course, when the income tax penalties are considered on an opt out, the taxpayer may have some difficulty avoiding the 20% accuracy related penalty because the IRS will consider most of them to be at least negligent. But it is doubtful that the Government would be able to establish civil fraud in many of these cases, so the income tax civil penalty should be a push at worst from the perspective of taxpayers having the facts that would motivate them to opt out of the settlement program civil penalty regime.