Friday, June 8, 2012

Burden on Government to Prove Willfulness in FBAR Matters (6/8/12)

Steven Toscher, bio here, a well-known player in the field, and his associate, Lacey Strachan, bio here, have published an excellent article on the requirement that the Government prove willfulness in criminal and civil FBAR penalty cases.  Steve Toscher and Lacey Strachan, Proving Willfulness in an FBAR Case, Journal of Tax Practice and Procedure (April - May 2012), here.

The article is excellent.

Addendum on 6/8/12 at 6:07 pm:

Here are my quick comments on the article:

1.  The authors note that, in all cases, the Government must prove willfulness which is the voluntary intentional violation of a known legal duty.  This is the same standard in a criminal context for the traditional federal tax crimes and for proving fraud in a civil income tax context.  There are some who think there might be a relaxed definition of willfulness in a civil case, but I think it is basically the same definition except that the burden of proof is more stringent in a criminal case.

2.  In the criminal cases, that proof of willfulness must be beyond a reasonable doubt.  The law is not certain as to the level of proof in a civil case.  The issue is whether the Government must prove willfulness by a preponderance of the evidence (i.e., just more likely than not, say 51%) or by clear and convincing evidence (say 65-80%).  I have discussed this issue in prior blogs, the most pertinent of which is Burden of Proof for Willfulness in FBAR Violations (9/6/11), here.  The authors correctly note that the only case directly addressing the issue, a trial level opinion in Williams (currently on Government appeal to the Fourth Circuit), the district court said it was applying the preponderance of the evidence standard, but it held against the Government so the standard of proof was not critical to its holding (i.e., the Government would lose whichever standard it applied).  I personally think that dictum holding  is wrong on that issue, but that is just my opinion. See my blog discussion.

3.  The authors correctly note that signing the return even with the Schedule B question answered "no" is not enough.  In other words, the Government does not win in a criminal or civil case simply by proving a foreign bank account and resulting requirement to file an FBAR, coupled with proof of the "no" answer.  More is required.  Indeed, I think, much more.  The Government had much more in Williams and still lost.  In Sturman, the article says, "the defendant admitted knowledge of and failure to answer the question on Schedule B of his Form 1040." There were also some very bad surrounding facts. But most taxpayers are not going to make the type of admission Sturman apparently made.

4.  The authors sum up with this conclusion:
With the IRS’ recent commitment to international compliance, we will see a rise in FBAR litigation, both civil  and criminal. In such cases, it will often be undisputed that an FBAR form was not filed and that the taxpayer signed a return containing a Schedule B. These cases will turn on whether the taxpayer’s failure to file an FBAR was willful. Given that the FBAR has been a relatively unknown form until recently, the IRS and the DOJ start with the fact that a Schedule B was filed with taxpayers’ returns to establish the taxpayer’s knowledge of the filing obligation. However, more is required and that “more” is what counsel need to focus on. To impose the draconian civil penalties for a willful violation or prosecute someone for failing to file an FBAR, the government must be held to the standard of proving that there was a voluntary, intentional violation of a known legal duty.


  1. Jack

    Interesting article, and you have made a number of the same comments before, especially with respect to the definition of willfulness in a civil context, and the burden of proof for willfulness in FBAR civil cases.

    In the Williams case, the attorney did win the case, but (and you have mentioned this before) did not bring up the issue up in appeal that a higher burden of proof ('clear and convincing') should be used, and that the government's definition of willfulness is too broad. I am not sure a lawyer can bring that up at the appellate stage (although it could be used to rebut the government, certainly).  Also from one of the government's briefs, it seems Williams' lawyer brought up the argument that Williams was being penalized 100K twice, once for each account, but did not bring it up again on appeal. The idea that each separate account represents a separate violation might have been brought up at appeal too.

    The article mentioned that you need more (arguably a lot more) than not ticking/incorrectly ticking Schedule B to establish willfulness. The question, of course, is how much more. In Williams case, there was criminal fraud plea, entities, untaxed income etc., but what subset of that might be enough to establish FBAR willfulness ?  If someone has filed FBARs for some accounts, and not for other obvious financial accounts, that might be good indicators of willfulness.

  2. Sturman had some really bad facts. He had 100+ US and foreign companies, lots of banks, entities etc. Not to mention that some of his proceeds were only borderline legal (illegal porn), and that there were rumors he was tied to  the mob. And he admitted to knowing of the Schedule B question.

    One hopes  IRS Technical specialists and attorneys use more nuance rather than an answer to this question to decide whether someone is a willful violator.

  3. Thanks Jack for posting this. I hope some Minnow's read this and start developing some stronger spinal muscles for eventual Opt Outs. This should give them  hope.  

    I guess we will never know how many actually "Plead guilty" (sort of) by accepting the "in lieu of penalty" when they had a very defensible non willful argument and Opting Out would have served them well. I would love to know what portion of all the Revenue the International Revenue Service (IRS) claims as success was really misappropriated from Minnows because of this issue. I think many examiners willfully knew they could bully them into accepting the unacceptable.  Bullying sounds like a strong characterization. Maybe it is. However, I think it is reasonable to assume that in a bureaucratic process where you are expecting Whales, and you all you get are Minnows, you try to turn the Minnows into Whales for you look good to your superiors and for your stats. In some ways, it is just human nature that comes from living inside their own little bubble where their is group think and little individual initiative, actually none, as discretion is removed. 

    Fear of the unknown makes victims of the weak and risk adverse. Like in criminal cases where significant percentage of people accept a "plea bargain" and make a confession of guilt when they are innocent, this is the civil equivalent. We wonder why it happens.  Fear, intimidation, and a desire to get on with one's life without a protracted and expensive legal process leads Minnows to these bad options decision points.  Either way they are going to penalized severally.  Be it OVDI penalties, or attorney fees and LCUs.  Sad commentary for this OVDP/OVDI "justice" program.  It did not have to be this way. 

    Good program on "To The Point" last week on this very subject.

  4. Jack,

    Unrelated to this thread, can your either create a new one or comment on this article:
    Do you know the case, or can you find out some information that would be interesting for the audience of this blog.


  5. Jack

    You have commented before about the high burden of proof the IRS carries for civil fraud. All the 'badges of fraud' and so on, and the IRS still loses many civil fraud cases.

    Do you think the IRS could possibly carry the burden of civil fraud for someone with no bad facts,  some (possibly very small) amount of unreported income from an offshore account, and a Schedule B with  an incorrect check mark ? I suspect NO, which is why the IRS touts the FBAR penalty with its far higher levels (50% of account balance), as opposed to a mere 75% of tax due for civil fraud.

    There is something twisted about an FBAR penalty possibly orders of magnitude higher than a tax fraud penalty that could be sustained on such  slim evidence.  This argument is possibly something that an attorney could make in a case where the civil fraud penalty has not been sustained (or not been asserted), but the government is trying to collect an FBAR penalty. It could not be made in the Williams case (since he was had already pled guilty to tax fraud, but in other cases it might be a possibility. [ The government could probably counteract that an improper motive is not necessary to establish willfulness, but the fact is that I think a judge would be reluctant to conclude willfulness without an improper motive]

  6. (Re. the last sentence of the comment by Anonymous of 6/08/2012 5:34 pm)
    Regarding penalties for disclosing only some accounts on the FBAR, obviously there is no defense in regards to not knowing about the form.
    I think any differences in the types of accounts disclosed would become important.  If an account with big stock gains is not disclosed, whereas a smaller account with little income was not disclosed that would look bad; whereas if the accounts with the bulk of the money and bulk of the income were disclosed, and a small account was not, things would look quite different.

  7. I think the average is not the best way to look at the issue. It depends upon the dispersion in the $133,000 average. Let me just use an example. Say that there are 10 taxpayers in the program and only one of them is the patently willful actor. Let's say an inside the program in lieu of penalty for that actor is $1,300,000. Then, the other nine would would have had an average inside the program in lieu of penalty of $50,000 (say on 25% penalty, indicating a high balance of $250,000), opt out and get an average FBAR penalty of $1,000. On this dispersion, the average is $130,900, close enough to the indicated average of $133,000. But, this dispersion shows that (1) the bad actors (whales) are penalized heavily; and (2) the better actors (minnows) are treated more lightly (or should I say kindly);

    I know I have not factored the income tax cost into the above, but the point should be equally true when they are factored in. It all depends upon the dispersion on the final costs.

    I use only an illustration of the dispersion. Perhaps, if the IRS wanted some transparency, it could publish the dispersion which likely would not violated the secrecy requirements of Section 6103.

    Jack Townsend

  8. AB....  I have to agree with Jack, that the average doesn't really tell us anything.   We need full disclosure of the stats of this program, but I am doubtful we will ever get it.  It has been declared a success, and no one is really interested in challenging the IRS narrative, or delving into what "success" really means.  There is no votes in it for a politician, and as we know, no interest in the media, so Shulman, as he leaves office will have the last word.  

    Maybe someday, when Shulman is old, and more reflective, or when he is representing clients against the programs his own jihad launched, maybe he will turn to Jack and this blog for some guidance on what to do.  Then he may read many of the good suggestions of a better way to deal with offshore compliance. 

    However, I am somewhat resigned to the fact that he will never know, understand or care.  

  9. I think 'Just Me's posts and web site says that his examiner claimed he was 'willful' based solely on the Schedule B question. it seems that either examiners are poorly trained (or in a hurry), using this as a quick method to categorize someone as 'willful' without doing the full analysis required to meet the willfulness standard. Or they are using these higher penalties to coerce people to take the in program penalty instead of opting out or to start from a higher negotiating point when debating penalties.

    This strikes me as dubious behavior. Even if such penalties are overturned subsequently, it causes unnecessary stress for taxpayers. Jack, isn't the IRS supposed to only assert penalties when they think they are justified/can be reasonable sustained, and not as a 'negotiating ploy' to coerce people ?

  10. I have asked Just Me to respond to this. I had not recalled that there was an attempt to impose the willful penalty on the basis of the Schedule B answer alone. Indeed, I had not recalled the IRS asserting that the willful penalty would apply. I thought the dispute between Just Me and the IRS was whether he could get the benefit of FAQ 35 for an audit penalty calculation before he had to opt out. There may have been some dispute about the amount of the penalty the IRS claimed, but I did not recall that it related to an affirmative assertion that he was willful.

    But, obviously, Just Me is the person who can answer that question and I expect he will answer it.

    Jack Townsend

  11.  Jack

    I think you said in an earlier blog that the government had been suggesting in the Willams case that 'recklessness' was sufficient to prove willfulness. Is there any legal definition of 'recklessness' ? Does it mean reckless indifference to a known regulation (for instance, in this case it would mean that someone had to know of the legal duty to file an FBAR) ? Or just a very high level of negligence in general ? I know this is vague, but its hard to unpack willfulness beyond the definition you mention above : "a voluntary, intentional violation of a known legal duty."

  12. Maybe the 5% penalty is their way of saying that they don't want these people into OVDI. But then, they might as well spell it out in plain English.

  13. True. But it is the Government's claim. I should note that the definition of willfulness for tax crimes - "voluntary, intentional violation of a known legal duty" seems to permit conviction based on willful ignorance, deliberate ignorance, conscious avoidance and the like (all terms referring to the same thing). See my prior blogs on this subject: And, the civil Trust Fund Recovery Penalty in Section 6672 which requires willfulness also accommodates such lesser conduct similar to willful ignorance. Thus the Court of Appeals for the Federal Circuit said in Jenkins v. United States, 2012 U.S. App. LEXIS 11618 (Fed. Cir. 2012).:

    In addition to encompassing a deliberate [*12] choice to pay other creditors instead of paying the trust fund taxes to the government, "[w]illful conduct may also include a reckless disregard of an 'obvious and known risk' that taxes might not be remitted."

    I think the concept is like negligence -- when the facts are sorted out, it will be evident whether there is reckless disregard or not.

    Jack Townsend

  14.  Jack

    Thanks. So my takeaway is that practitioners (or taxpayers for the self represented) in minnow cases need to emphasize that willfulness needs to go beyond Schedule B or some other single fact to look at all the facts of the case, and emphasize (possibly using the Williams case, even if reversed) that, as you say, 'more, much more is needed'.  I presume the IRS would normally not want to waste resources doing a full development of a case (which is why they offer a 25%/27.5% penalty in the VD programs for an expedited solution) with few obvious bad facts, and might choose to settle for a smaller non-willful penalty.

  15.  Jack

    is the general definition and burden of proof for  'wilfulness' the same for the recovery of civil trust funds as it is for (say) the civil fraud penalty ?  [ To put it another way, does the court quote you mention above have application beyond a failure to pay trust fund taxes ?] I remember reading that the government generally has very strong powers to extract  harsh 'penalties' (really taxes due) from 'responsible' parties where employment taxes are concerned.

  16. Apropos of this discussion:

    The IRS may have been listening to this discussion. It just updated its  own manual on BSA procedures.

    It has this line:

    willfulness may be imputed under the concept of "willful blindness"
    or "reckless disregard"

    The reckless disregard part seems to be new.

    Also, I think this new

    Intent is determined by analyzing all the facts and circumstances of the case and it is often shown by circumstantial evidence.
    The BSA examiner must thoroughly document facts on the issue of intent.

    Jack, any thoughts on the implications for go forward audits or opt outs that are not already processed ? I am not sure if this is meant to apply more to business requirements under the BSA or to FBARs. Technically it applies to both, but I am not sure what prompted this change to the manual.

  17. If the tax liability is minimal then an assumption of wilfulness would imply that the taxpayer chose to risk possible life altering penalties and criminal prosecution to save a small amount on tax unless the assertion is that knowledge of the Fbar existed but that of the penalties did not. Assuming that no other irregularities exist (illegal funds, etc) IMHO it doesn't seem likely that a case for wilfulness could be made in a court under these circumstances notwithstanding schedule b responses. And would this not apply to a lot of minnow cases?


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