Court Finds Taxpayer Willfully Failed to File FBARs (6/25/19)

In United States v. Flume (S.D. TX No. 5:16-cv-00073 Order dated 6/11/19 Dkt. No. 86), here, the Court held Flume liable for the willful FBAR penalty.  The case continues the holdings that, even if Flume did not have the intent to violate a known legal duty, his recklessness with regard to knowledge of the duty establishes liability for the penalty.

The key points that I gathered in my quick read are:

1.  The Court found that Flume was not a credible witness.  That alone creates a huge hurdle in a case where his intent and knowledge and testimony about his intent and knowledge are at issue.

2.  Flume was a successful business man and thus, if indeed he had not reviewed the return and understood the Schedule B question, he acted with extreme recklessness.  Indeed (Slip Op. 16):

His testimony that he was simply “careless with the reading of everything on the tax return” is not credible. (RT2 5:10–11.) Moreover, Schedule B’s question about foreign bank accounts is simple and straightforward and requires no financial or legal training to understand. See McBride, 908 F. Supp. 2d at 1211 (“[B]ecause the federal tax returns contain a plain instruction regarding the disclosure of interests in foreign financial or bank accounts, the risk of failing to disclose an interest in such a foreign account is obvious.”). Even the most cursory review of his tax return would have alerted Flume to the foreign-account reporting requirement.

3.  The Court confirmed (Slip Op. 11 n. 11) its earlier rejection of a "constructive knowledge" theory that "every taxpayer, merely by signing a tax return, is presumed to know of the need to file an FBAR.”   See Robert S. Horwitz, Kimble–A New FBAR Willful Penalty Case, Some Further Thoughts on Bedrosian, Willfulness and the Overlooked Opinion in Flume (Tax Litigator Blog 1/4/19), here.

4.  The attempt to claim reliance on his tax preparers was unavailing because (i) Flume did not advise his tax preparers of the UBS account, and (ii) Flume, a successful businessman, "was reckless in failing to investigate the credentials of the people he claims to have entrusted with his tax liability."

JAT Comments:

Ron Wiener, a  reader of the blog (who has commented to me before and whose views I respect), wrote me this email about the Flume case and the cases that preceded it in the expansive application of the willful requirement for the FBAR civil willful penalty:

It’s so frustrating to me when courts pretend to be “reasonable” but in fact willfully ignore the way people act in real life.  I can almost guaranty that most taxpayers don’t even read every number that appears on their returns, let alone every word of every line that doesn’t have a number filled in.  They’re looking to see if the return reflects the main info they’ve provided to their return preparers, and to see if the reported tax liability is in the ballpark of what they expected.  They may be subjecting themselves to “penalties of perjury” when they sign the return under the legend that states they’ve examined the return and accompanying schedules; but just because the foreign financial account question is clear and easily understandable doesn’t mean that it was actually read by the taxpayer or that the taxpayer intentionally avoided learning about the reporting requirement.  [It’s the same with “privacy policies” on websites and in credit card applications, arbitration clauses in consumer contracts, etc. And when the horseback riding place has me sign a form before a ride, this is what I understand: If I don’t sign, then I don’t get to ride!]

 I responded to Ron as follows:

Your concern is one that, I think, concerns many in the tax practitioner community.  I share that concern and have advocated for a long time that the Government is not entitled to any burden of proof shortcuts and thus must prove (i) that the taxpayer intended to violated the known legal duty (not recklessly violated or constructively violated) and (ii) prove that intent by clear and convincing evidence. I appear to have lost that battle, although there is always some possibility that a court somewhere will take the stand and that, perhaps, the Supreme Court could also if there were a Government petition for certioirari.

I presume that you are responding to the Flume case.  The judge’s earlier order in the case suggested that she might be a good judge in a normal FBAR willful penalty case.  Flume’s problem was that the judge did not find him credible when the case went to trial.  A taxpayer who lacks credibility on what the judge had to decide (and the penumbra of what the judge has to decide) is really behind the eight ball, so to speak.

I have the feeling that, had Flume been credible on the subject of whether he is the typical taxpayer that does not really look at the fine details on a return by a preparer he might have had a shot.  Of course, Flume had other bad facts (that his lack of credibility did not help on), but the minimum in order to win these cases is that the taxpayer be credible.  He was not (or so the judge found).

 To which Ron replied:

What frustrating to me – and has been for many years – is that too often the judges in cases like Flume and other factually unsympathetic cases make unnecessarily broad statements about the law when they should use judicial restraint and just decide the cases in front of them on the narrow facts of those cases.  Then when a close case factually comes down the pike, the next judge misapplies the results of the prior cases by picking up their overly broad language out of context – and that’s how we get to bad places like we are now with the willfulness standard in the FBAR cases.  Happily for me – as a non-litigator – I don’t have to go into battle after battle feeling like Don Quixote.