Government Wins Fourth Straight FBAR Penalty Case: Analyzing …€¦ · rent standards for “willfulness.” That is the aim of this article.1 Government Wins Fourth Straight FBAR

110 J o u R n A l o F T A x A T i o n l m A R C h 2 0 1 7

SANFORD H. GOLDBERG, J.D., HERBERT H. ALPERT, J.D.,AND MICHAEL MILLER, J.D.

INTERNATIONALi

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Nobody likes to admit personal fail-ure or fault, and nobody likes to ac-knowledge that they did somethingintentionally wrong. Few places is thismore apparent than the world of taxdisputes, particularly those involvingunreported foreign accounts, wherethe rules are complicated, the stakesare high, and the level of denial bytaxpayers (to the IRS, to their repre-sentatives, and even to themselves)can be legendary. For decades, many taxpayers with

undeclared accounts avoided detec-tion altogether, and those who werecaught managed to dodge severe civilpenalties thanks to old laws thatcapped sanctions at relatively lowlevels, arguments about utter igno-rance of the duty to file annual FormsTD F 90-22.1 or FinCEN Forms 114(both commonly known as “FBARs”),and the total absence of the definitionof “willfulness.” Things have changeddramatically, though, in the past few

years. This is because the U.S. gov-ernment has prevailed in four sepa-rate cases, asserting maximum FBARpenalties, which are reserved forthose taxpayers committing “willful”violations. The most recent case, de-cided in December 2016, is Bohanec,118 AFTR2d 2016-5537 (DC Calif.,2016). The fact that the U.S. govern-ment has achieved this series of vic-tories is discouraging by itself, but thestandards set by the courts can bedownright dispiriting to taxpayerswith ongoing FBAR problems, as wellas to the tax representatives taskedwith defending them. Before taxpayers can effectively

mitigate FBAR penalties, they mustfirst possess a clear understanding ofthe relevant law, corresponding reg-ulations, changing positions advancedby the IRS, evolution of the case lawfrom 2010 through 2016, and the cur-rent standards for “willfulness.” Thatis the aim of this article.1

Government WinsFourth Straight FBARPenalty Case: AnalyzingBohanec and theEvolution of ‘Willfulness’

HALE E. SHEPPARD

To effectively mitigate FBAR penalties, taxpayers must understand the rel-evant law and corresponding regulations, the IRS’s changing positions onthe subject, and recent case law.

BACKGROUNDCongress enacted the Bank SecrecyAct in 1970.2 One purpose of this leg-islation was to require the filing ofcertain reports, like the FBAR, whendoing so would be helpful to the U.S.government in carrying out criminal,tax, and regulatory investigations.3Among the important provisions ofthe Bank Secrecy Act is 31 U.S.C. sec-tion 5314. This statute, in conjunctionwith the underlying regulations andFBAR Instructions, requires the filingof an annual FBAR in cases where (1)a U.S. person, including U.S. citizens,U.S. residents, and domestic entities,(2) had a direct financial interest in,an indirect financial interest in, signa-ture authority over, or some othertype of authority over (3) one or morefinancial accounts (4) located in a for-eign country (5) and the aggregatevalue of such account or accounts ex-ceeded $10,000 (6) at some point dur-ing the calendar year at issue.4Concerned with widespread non-

compliance with the FBAR filing re-quirement, the U.S. government hastaken certain actions in recent years.For instance, the Treasury Departmenttransferred authority to enforce theFBAR provisions from the FinancialCrimes Enforcement Network (Fin-CEN) to the IRS in April 2003.5 TheIRS is now empowered to investigatepotential FBAR violations, issue sum-monses, assess civil penalties, issueadministrative rulings, and take “anyother action reasonably necessary” toenforce the FBAR rules.6Congress, for its part, enacted new

FBAR penalty provisions in October2004 as part of the American JobsCreation Act (“Jobs Act”).7 Under the

law in existence before the Jobs Act,the government could assert civil pen-alties against taxpayers only when itcould demonstrate that they “willfully”violated the FBAR rules.8 If the gov-ernment managed to satisfy this evi-dentiary standard, it was authorizedto assert civil FBAR penalties rangingfrom $25,000 to $100,000, dependingon the highest balance of the unre-ported foreign financial account oraccounts.9Thanks to the Jobs Act passed in

2004, the IRS may now impose a civilpenalty on any person who fails tofile an FBAR when required, period.10

In the case of non-willful violations,the maximum penalty is $10,000,11 butthe IRS cannot assert this penalty ifthe violation was due to “reasonablecause.”12 The Jobs Act calls for highermaximum penalties when willfulnessexists. Specifically, in situations wherea taxpayer deliberately failed to file an FBAR, the IRS may now assert apenalty equal to $100,000 or 50% ofthe balance in the account at the timeof the violation, whichever amount islarger.13 Given the astronomical bal-ances in some unreported accounts,FBAR penalties under the Jobs Act canbe enormous. Generally, U.S. citizens and resi-

dents have four main duties whenthey hold a reportable interest in aforeign financial account: (1) reportall income deposited into and/or gen-erated by the account on the relevantfederal income tax return (i.e., Form1040), (2) check the “yes” box in PartIII (Foreign Accounts and Trusts) ofSchedule B to Form 1040 to disclosethe existence and location of the for-eign account, (3) electronically file an

FBAR by the deadline, which has his-torically been June 30 and which ischanging to April 15 starting with theFBAR for 2016, and (4) report the for-eign account on a Form 8938 (State-ment of Specified Foreign FinancialAssets), depending on the facts.14

With respect to the second duty de-scribed above, Part III of Schedule Bto Form 1040 contains an FBAR in-quiry and a cross-reference. The IRShas slightly modified and expandedthis language over the years, with thematerials for 2016 stating the following:

At any time during 2016, did you have afinancial interest in or a signature author-ity over a financial account (such as abank account, securities account, or bro-kerage account) located in a foreigncountry? See instructions. If “Yes,” are yourequired to file FinCEN Form 114, Reportof Foreign Bank and Financial Accounts(FBAR), to report that financial interest orsignature authority? See FinCEN Form114 and its instructions for filing require-ments and exceptions to those require-ments. If you are required to file a Fin-CEN Form 114, enter the name of theforeign country where the financial ac-count is located.

FIRST CASE ADDRESSING‘WILLFUL’ FBAR CIVILPENALTIES—WILLIAMSThe first case concerning the imposi-tion of a civil “willful” FBAR penaltywas Williams, a multi-year, multi-issuecase, with stops in the Tax Court(“Williams I”),15 the U.S. District Court(“Williams II”),16 and, ultimately, theFourth Circuit (“Williams III”).17

Key FactsSynthesizing various court docu-ments and decisions, the facts under-lying the Williams cases are as fol-

i 111l J o u R n A l o F T A x A T i o nm A R C h 2 0 1 7i n T E R n A T i o n A l

1 For readers interested in earlier coverage of thissame issue, before the recent decisions in Bohanec,118 AFTR2d 2016-5537 (DC Calif., 2016) and Bussell,117 AFTR2d 2016-439 (DC Calif., 2015), please seethe following articles by the same author. Sheppard,“Government Wins Second Willful FBAR PenaltyCase: Analyzing What McBride Really means to Tax-payers,” 118 JTAx 187 (April 2013); Sheppard, “ThirdTime’s the Charm: Government Finally Collects“Willful” FBAR Penalty in Williams Case,” 117 JTAx319 (December 2012); Sheppard, “District CourtRules That Where There’s (no) Will, There’s a Wayto Avoid FBAR Penalties,” 113 JTAx 293 (november2010).

2 P.l. 91-508, Title i and Title ii, 10/26/70. 3 Id. at section 202.

4 31 u.S.C. section 5314; 31 CFR section 1010.350(a). 5 68 Fed. Reg. 26489 (2003). 6 31 C.F.R. section 103.56(g), 68 Fed. Reg. 26489 (2003). 7 P.l. 108-357, 10/22/04. 8 31 u.S.C. section 5321(a)(5)(A) (as in effect before

10/22/04). 9 31 u.S.C. section 5321(a)(5)(B)(ii) (as in effect before

10/22/04). 10 31 u.S.C. section 5321(a)(5)(A). 11 31 u.S.C. section 5321(a)(5)(B)(i). 12 31 u.S.C. section 5321(a)(5)(B)(ii). 13 31 u.S.C. section 5321(a)(5)(C)(i). 14 For a detailed analysis of the Form 8938 filing re-

quirement, see Sheppard, “The new Duty to Report

Foreign Financial Assets on Form 8938: Demystify-ing the Complex Rules and Severe Consequencesof noncompliance,” 38 international Tax Journal 11(may-June 2012); Sheppard, “Form 8938 and ForeignFinancial Assets: A Comprehensive Analysis of theReporting Rules after iRS issues Final Regulations,”41 international Tax Journal 25 (march-April 2015);and Sheppard, “Specified Domestic Entities mustnow File Form 8938: Section 6038D, new Regula-tions in 2016, and Expanded Foreign Financial AssetReporting,” 42 international Tax Journal 5 (may-June2016).

15 Williams, 131 TC 54 (2008). 16 Williams, 106 AFTR2d 2010-6150 (DC Va., 2010). 17 United States v. Williams, 489 Fed. Appx. 655, 110

AFTR2d 2012-5298 (CA-4, 2012).

NOTES

lows.18 The taxpayer was a U.S. citizenat all relevant times. He earned an un-dergraduate degree from Universityof North Carolina, followed by a lawdegree from one of the top law schoolsin the country, New York University.He began his legal career as an asso-ciate attorney with a major interna-tional firm. He later worked for MobilOil Corporation, where he held vari-ous legal and business positions overa span of some 25 years. In 1991, the taxpayer, on Mobil’s

behalf, started exploring strategicbusiness opportunities in the former

republics of the Soviet Union. Twoyears later, in 1993, the taxpayer openedtwo accounts at Credit Agricole Indo-suez, S.A. (then known as Banque In-dosuez) in the name of ALQI Hold-ings, Ltd. (ALQI), a British VirginIslands corporation controlled by thetaxpayer. The accounts were designedto hold funds earned by the taxpayerfrom 1993 through 2000 in connec-tion with his oil trading in Russia andhis consulting for various companiesthrough ALQI. The taxpayer used the same U.S.

accountant for all relevant years, 1993to 2000. He did not discuss the foreignaccounts with such accountant. More-over, when the accountant sent him aquestionnaire/organizer in early 2001to be completed by the taxpayer in or-der to assist the accountant in prepar-ing the 2000 Form 1040, the taxpayerindicated that he did not have a re-portable interest in a foreign account. Swiss government officials notified

the taxpayer in August 2000 of theirdesire to interview him with respectto the ALQI accounts. The Swiss au-

thorities, who were apparently coor-dinating with their U.S. counterparts,interviewed the taxpayer in Novem-ber 2000. The next day, the U.S. gov-ernment directed Switzerland to freezethe accounts. It did so. In early June 2001, the taxpayer re-

tained U.S. tax attorneys at a reputablenational firm to advise him with re-spect to the ALQI accounts and re-lated tax issues. The firm met with IRSattorneys in January 2002 to discussa possible resolution of this case on anon-criminal basis. No such settle-ment was reached.

The IRS announced a tax amnestyprogram, the Offshore VoluntaryCompliance Initiative (OVCI), in Jan-uary 2003.19 The OVCI offered lenientsettlement terms to those taxpayerswho came forward of their own freewill. The taxpayer, enticed by this offer,submitted his OVCI application inFebruary 2003. The IRS rejected hisapplication, citing the fact that theOVCI was not available to taxpayerswhose applications arrived after theIRS had already initiated a civil auditor criminal investigation of the tax-payer or a related entity, or after theIRS had received information from athird-party alerting the IRS to the tax-payer’s non-compliance.20

The IRS first pursued criminalcharges against the taxpayer. In May2003, he agreed to plead guilty to onecount of criminal tax evasion and onecount of criminal conspiracy to de-fraud the U.S. government. This pleaagreement was confirmed in June2003, when the taxpayer allocuted tothe following: (1) He opened twobank accounts in the name of ALQI;

(2) The purpose of the accounts wasto hold funds that he received fromforeign sources; (3) During the rele-vant years, he deposited more than$7 million in the accounts, and thesefunds generated more than $800,000in passive income; (4) He knew thatthe funds in the accounts constitutedtaxable income, but he chose not toreport the income to the IRS in orderto avoid U.S. taxes; and (5) He wasguilty of evading taxes and of con-spiring with others to defraud theUnited States of tax revenues. The tax-payer said relatively little in his allo-cution regarding the non-reporting offoreign accounts, and he never specif-ically mentioned the FBAR:

I also knew that I had the obligation toreport to the IRS and/or the Departmentof the Treasury the existence of the Swissaccounts, but for the calendar year taxreturns 1993 through 2000, I chose notto in order to assist in hiding my true in-come from the IRS and evade taxesthereon, until I filed my 2001 tax return.

At the criminal sentencing hearingin September 2003, the court imposedthe following punishment on the tax-payer: nearly four years in jail, threeyears of supervised release, a $25,000fine, and more than $3.5 million inrestitution. The IRS initiated a civil examina-

tion against the taxpayer approxi-mately one year after the criminalsentence was announced. The Rev-enue Agent assigned to the case askedthe taxpayer, in January 2007, to filean FBAR for 2000. The taxpayerclaimed that this was the first timethat he learned of the FBAR filing re-quirement. As part of the examinationprocess, the Revenue Agent indicatedthat he would not conclude the mat-ter until the taxpayer filed FBARs forall years going back to 1993. The tax-payer did so. In May 2007, under the FBAR law

in effect for 2000, the Revenue Agentasserted the maximum penalty of$100,000 per account for the twoALQI accounts on grounds that thetaxpayer “willfully” violated the law. In addition to asserting the FBAR

penalty for 2000, the IRS issued a No-tice of Deficiency in October 2007,proposing significant federal income

112 i J o u R n A l o F T A x A T i o n l m A R C h 2 0 1 7 i n T E R n A T i o n A l

hAlE E. ShEPPARD is a shareholder in the Tax Controversy Section and Co-Chair of the internationalTax Section of Chamberlain hrdlicka, specializing in tax audits, tax appeals, and tax litigation. You canreach hale by phone at (404) 658-5441 or by e-mail at [email protected]. Copyright© 2017 hale E. Sheppard

The U.S. government has prevailed infour separate cases, asserting maximumFBAR penalties, which are reserved forthose taxpayers committing “willful”violations.

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tax liabilities, accuracy-related penal-ties, and civil fraud penalties for alleight years, 1993 through 2000. TheIRS was able to attack the taxpayeron tax issues going back to the begin-ning because no statute of limitationsexists in cases involving fraudulentForms 1040.21

Williams I—Tax Court Opines on Novel Jurisdictional IssuesThe taxpayer filed a timely Petitionwith the Tax Court contesting all theproposed adjustments set forth in theNotice of Deficiency, as well as theFBAR penalties that were not includedtherein. The IRS, predictably, filed aMotion to Dismiss the case for lack ofjurisdiction as to the FBAR penalties.22

The IRS’s theory was that the provi-sion under which FBAR penalties areasserted (i.e., 31 U.S.C. section 5321)does not fall within the Tax Court’sjurisdiction. This is based on Section7442, which provides that the TaxCourt and its divisions “shall havesuch jurisdiction as is conferred onthem by this title [26] . . . .”

No Pre-Assessment Tax Court Jurisdic-tion. The Tax Court began the opinionin Williams I by explaining that Section6212(a) authorizes the IRS to issue aNotice of Deficiency in certain situa-tions. For its part, Section 6213(a) pro-vides that the tax in question may notbe assessed until the IRS has issuedthe requisite Notice of Deficiency. Itfurther provides that the tax assess-ment must be delayed pending a pos-sible redetermination by the TaxCourt if the taxpayer files a timely Pe-tition. The Tax Court pointed out,however, that these two provisionsexpressly state that the Notice of De-ficiency is to be sent in the case oftaxes imposed by subtitle A of Title 26(i.e., income taxes), by subtitle B of Ti-

tle 26 (i.e., estate and gift taxes), or bychapters 41, 42, 43 or 44 in subtitle Dof Title 26 (i.e., miscellaneous excisetaxes). Therefore, by negative impli-cation, any other taxes and items falloutside the limited jurisdiction of theTax Court. Extending this logic, theTax Court reasoned as follows withrespect to FBAR penalties:

The same conclusion must be reached asto the FBAR penalties imposed in Title 31:The Secretary of the Treasury is author-ized by 31 U.S.C. sec. 5321(b)(1) to assessthe FBAR penalty; no notice of deficiencyis authorized by Section 6212(a) nor re-quired by Section 6213(a) before that as-sessment may be made; and the penaltytherefore falls outside our jurisdiction toreview deficiency determinations.

No Post-Assessment Tax Court Jurisdic-tion. The issue of whether the TaxCourt would have jurisdiction over asubsequent action by the governmentto collect FBAR penalties was notraised in the taxpayer’s Petition inWilliams I, nor was it broached in theIRS’s Motion to Dismiss. Nevertheless,the Tax Court addressed this topic onits own. A brief overview on the normal tax

collection process helps put this sec-ond issue in context. The IRS is re-quired to send a taxpayer a Notice ofIntent to Levy at least 30 days beforeit seizes his property to satisfy taxdebts.23 To dispute the intended gov-ernmental taking, a taxpayer may filea Form 12153 (Request for CollectionDue Process or Equivalent Hearing),which triggers a collection dueprocess (CDP) hearing.24 At the CDPhearing, the IRS Settlement Officer ischarged with deciding whether thelevy “balances the need for efficientcollection of taxes with the legitimateconcern of the person that any col-lection action be no more intrusivethan necessary.”25 The Settlement Of-

ficer ultimately issues a so-called No-tice of Determination, which repre-sents the IRS’s final administrative de-cision regarding the propriety of thelevy. If the Notice of Determinationupholds the levy, the taxpayer mayseek further review, this time from thejudiciary. He exercises this right by fil-ing a Petition with the Tax Court.26

In Williams I, the Tax Court ex-plained that the provisions underwhich the IRS may place a lien or ef-fectuate a levy are narrow. They applyonly to “taxes,” as well as the additionsto tax, additional amounts, and penal-ties described in Chapter 68 of Title 26(i.e., Sections 6651 through 6751 of theCode).27 The Tax Court then madethree points as to why it would lackjurisdiction to address any FBAR-penalty-collection issue: (1) There is nostatute expanding the definition of “tax”as used in the lien and levy provisionsof the Code to include the FBARpenalty; (2) The collection mechanismin the applicable FBAR statute, 31U.S.C. section 5321(b)(2), is not a lienor levy, but rather a “civil action to re-cover a civil penalty;” and (3) Even ifthe FBAR penalty were a tax subject tothe IRS’s lien and levy provisions, theIRS had not issued a Notice of Deter-mination, which is a prerequisite to fil-ing a Petition with the Tax Court. In summary, the Tax Court set im-

portant precedent in Williams I, hold-ing that it lacks jurisdiction to addressFBAR issues at both the pre-assess-ment stage and collection stage.28

Williams II—District Court Refuses to Uphold FBAR PenaltiesAfter dispensing with the FBAR juris-dictional issues,, the dispute turned tothe substance in district coutrt.

Chronicle of the Briefing Battle. Thetaxpayer in Williams did not hand


18 The facts were derived from various pleadings, briefs,and other documents filed by the parties in Williams I,Williams II, and Williams III, as well as the decisions inWilliams, TCm 2009-81 (Tax Court decision grantingthe iRS’s motion for Partial Summary Judgment onthe issue of whether the taxpayer’s guilty plea to taxevasion in the earlier criminal trial collaterally estoppedhim from contesting in the subsequent civil tax litiga-tion that he fraudulently underpaid his federal incometaxes for 1993 through 2000) and Williams, TCm 2011-89 (Tax Court decision upholding the federal incometaxes and civil penalties for 1993 through 2000).

19 Rev. Proc. 2003-11, 2003-1 CB 311, section 1. 20 Rev. Proc. 2003-11, 2003-1 CB 311, section 4. 21 Section 6501(c)(1). 22 The motion raised other issues that are beyond the

scope of this article. 23 Section 6330(a). 24 Sections 6330(a)-(c). 25 h. Rep’t 105-599, 105th Cong., 2d Sess. 263 (1998) (Con-

ference Report); Section 6330(c)(3)(C). 26 Section 6330(d); u.S. Tax Court Rule 331(b).

27 Sections 6301, 6230, 6231, 6330, 6331, and 6665. 28 The Tax Court later issued an opinion on the sub-

stantive tax issues, holding that the taxpayer, for 1993through 2000, was liable for federal income taxeson the net consulting income deposited into theAlQi accounts, federal income taxes on the invest-ment income generated by the AlQi accounts, civilfraud penalties on both the consulting income andinvestment income, and accuracy-related penaltiesrelated to tax underpayments resulting from disal-lowed charitable contribution deductions. Williams,TCm 2011-89.

NOTES

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over the $200,000 to the IRS after theRevenue Agent asserted the maximumpenalty in May 2007; rather, he tookthe position that he did not “willfully”fail to file an FBAR for 2000, so thepenalty could not apply. The govern-ment, therefore, filed a Complaint inthe U.S. District Court in April 2009 “for the purpose of collecting outstand-ing civil penalties.” The government did so pursuant to 31 U.S.C. section5321(b)(2), which provides that the gov-ernment may commence a civil actionto recover an FBAR penalty within twoyears of the date on which it is assessed. The government then filed a Mo-

tion for Summary Judgment on theFBAR penalty issue, with the focusbeing whether the taxpayer “willfully”failed to file an FBAR for 2000. Thegovernment, citing Ratzlaf, 510 U.S.135 (1994) (a case involving a criminalviolation of the structuring provisionsof the Bank Secrecy Act) and Sturman,951 F.2d 1466 (CA-6, 1991) (a criminalFBAR case), argued that it needs toprove only that the taxpayer inten-tionally violated “a known legal duty”to prevail. Referring to his earlierguilty plea back in 2003, the govern-ment maintained that the taxpayerhad already admitted in the criminaltrial that he knew he had an obliga-tion to report the existence of theSwiss accounts, he knew that the for-eign-source income deposited intoand generated by the such accountsconstituted taxable income to him,and he knew that he was conspiringwith others to escape detection by theIRS. Thus, reasoned the government,the taxpayer acted “willfully” in notfiling the FBAR. In a subsequent briefon the issue, the government con-tended that the taxpayer’s guilty pleato the criminal charges had the “col-lateral consequence” of subjecting himto a $200,000 civil FBAR penalty. Thegovernment also claimed that the tax-payer was trying to “have his cake andit eat too” by allocuting at the criminaltrial to obtain a reduced sentence foracceptance of responsibility, and thenattempting to avoid civil FBAR penal-ties by retracting his earlier statements. The district court was dissuaded

by the government’s argument. In re-

jecting its Motion for Summary Judg-ment, the court made two mainpoints. First, the court noted that theprimary issue, whether the taxpayer“willfully” failed to file an FBAR, wasan “inherently factual question” thatwas inappropriate for summary judg-ment. Second, while acknowledgingthat the taxpayer generally cannotdisaffirm in a subsequent civil actionthe facts underlying an earlier criminalguilty plea, the district court explainedthat the real issue in this case is defin-ing which specific facts were actuallypart of the taxpayer’s plea in 2003. Thetaxpayer previously admitted that heintentionally omitted income from hisForms 1040 for 1993 through 2000,but “there is a disconnect between thisbroad factual basis underlying hisplea and the specific question at issuehere: whether on June 30, 2001, [thetaxpayer] willfully failed to submit [anFBAR] for tax year 2000.” The case thus advanced to trial. In

its post-trial briefs, the governmentrecognized that “willfulness” is rarelydemonstrated with direct evidencesince it involves the taxpayer’s stateof mind. Therefore, the governmentpointed toward the taxpayer’s overallcourse of conduct, focusing on hisguilty plea to tax evasion and con-spiracy to defraud, his actions to con-ceal the unreported income, and hiswillful ignorance, i.e., his “consciouseffort to avoid learning about report-ing requirements.” Counsel for the taxpayer countered

by arguing here, as he had in previousbriefs, that (1) the taxpayer did not“willfully” fail to file the FBAR for 2000,(2) the government waived its right toassert the FBAR penalty when it tookcontrol of the accounts by havingthem frozen before the FBAR deadlineof 6/30/01, (3) the governmentabused its administrative discretion inasserting the maximum FBAR penaltyof $100,000 per account when con-gressional reports confirm that thou-sands of other taxpayers in similar situations had received little to nopenalties, and (4) even if penaltieswere appropriate, only one account(divided into sub-accounts for ad-ministrative purposes) instead of two

accounts existed, thereby cutting thepenalty to $100,000.

District Court Finds that the TaxpayerDid Not Act ‘Willfully.’ The district courtin Williams II issued its opinion in fa-vor of the taxpayer in September2010, basing its determination on twoprincipal factors. The court first indicated that the

government did not adequately dif-ferentiate between simply failing and“willfully failing” to disclose an interestin foreign accounts. In this regard, thecourt explained that, after examin-ing all the surrounding facts and cir-cumstances presented during the trialprocess, it was not persuaded that thetaxpayer was lying about his igno-rance of the law and the contents ofhis Form 1040. The court acknowl-edged that the box on Schedule B tothe taxpayer’s Form 1040 for 2000 waschecked “no” in response to the for-eign-account question, and furtherunderstood that the taxpayer did notinitially file an FBAR for 2000. How-ever, the court underscored that bothof these actions (or inactions) occurredafter the taxpayer discovered that theSwiss and U.S. authorities knew aboutthe ALQI accounts. Indeed, the FBARfiling deadline for accounts existing in2000 (i.e., 6/30/01) was approximatelyeight months after the interview withthe Swiss authorities and the resultingfreezing of the accounts. According tothe court, these “strongly indicate tothe Court that [the taxpayer] lackedany motivation to willfully conceal theaccounts from authorities after thatpoint.” The court also noted that sub-sequent disclosures by the taxpayer,through his representatives, corrobo-rated his lack of willfulness with re-spect to 2000. In particular, the courtidentified the disclosures made by thetaxpayer’s attorneys in their meetingwith the IRS attorneys in January 2002and the revelations made in the courseof applying for the OVCI in February2003. These disclosures, noted thecourt, indicate the taxpayer’s “con-sciousness of guilt for evading incometaxes, which he never equated withthe foreign banking disclosure.” The court next stressed that a guilty

plea to certain charges in a previous



criminal trial does not necessarilysupport all civil penalties in a subse-quent matter. It held the following onthis score:

The Government argues that Williams’guilty plea should estop him from argu-ing that he did not willfully violate § 5314for the tax year 2000. However, the evi-dence introduced at trial established thatthe scope of the facts established byWilliams’ 2003 guilty plea are not as broadas the Government suggests, and thereremains a factual incongruence betweenthose facts necessary to his guilty plea totax evasion and those establishing a will-ful violation of § 5314. That Williams in-tentionally failed to report income in aneffort to evade income taxes is a separatematter from whether Williams specificallyfailed to comply with disclosure require-ments contained in § 5314 applicable tothe ALQI accounts for the year 2000. AsWilliams put it in his testimony at trial, “Iwas prosecuted for failing to disclose in-come. To the best of my knowledge Iwasn’t prosecuted for failing to check thatbox.”29

Williams III—Court of Appeals Finds WillfulnessThe government, dissatisfied with thetaxpayer-favorable decision by thedistrict court, filed a notice of appealin November 2010, followed by itsopening brief with the Fourth Circuit.

The Government’s Arguments on Ap-peal. The government raised just twoissues in its brief. First, the governmentasked the appellate court to determinewhether the taxpayer, after makingvarious admissions in his prior crim-inal case, was estopped (judicially, col-laterally, or both) from arguing in thesubsequent civil case that his failureto file an FBAR for 2000 was not will-ful. Second, assuming that the tax-payer was not estopped from raisingsuch arguments, the governmenturged the appellate court to decidethat the district court erred in rulingthat the taxpayer did not act will-fully.30 Given the nature of its analysisand holding, the Fourth Circuit neveraddressed the government’s first issue.This article follows suit, focusingsolely on the “willfulness” issue. The government’s position on ap-

peal was that the district court erred,as a matter of law, in determiningwhich elements must be present toprove “willfulness” in the context of a

civil FBAR violation, as opposed to acriminal one.31 Citing various decisionsfrom the Supreme Court and appellatecourts, the government maintainedthat, where willfulness is a conditionof civil liability, (1) the concept of will-fulness is broad enough to cover bothreckless and knowing violations, (2) itis not necessary to prove that the tax-payer had an improper motive or badpurpose to show willfulness, and (3)evidence of a taxpayer’s actions toconceal income, in conjunction withthe taxpayer’s failure to seek informa-tion about foreign account reportingrequirements, suffices to show will-fulness.32 The government argued thatthe District Court arrived at its con-clusion that the taxpayer did not will-fully violate the FBAR rules becauseof its belief that the taxpayer lacked“motivation to willfully conceal” theforeign accounts after November2000, i.e., after the time that the Swissauthorities had interviewed the tax-payer and frozen the ALQI accountsat the request of the U.S. government.According to the government, the is-sue of whether the taxpayer had animproper motive for not filing atimely FBAR for 2000 is not determi-native of the willfulness question, sothe District Court erred in basing itsfindings on the supposed absence ofimproper motivation.33

After suggesting that the districtcourt applied the wrong legal stan-dard, the government attacked thefacts on which the district court ren-dered its decision. The governmentbegan by emphasizing that the tax-payer’s plea in his earlier criminal casewas a strong indication of willfulnesson the FBAR matter, which the districtcourt wrongly elected to downplay.34

The government seized on the follow-ing language from the taxpayer’s al-locution:

I also knew that I had the obligation toreport to the IRS and/or the Departmentof the Treasury the existence of the Swissaccounts, but not for the calendar yeartax returns 1993 through 2000, I chosenot to in order to assist in hiding my trueincome from the IRS and evade taxesthereon, until I filed my 2001 tax return.

The government essentially arguedthat a Form 1040 goes to the IRS, while

an FBAR gets sent to a special office ofthe Treasury Department. Thus, con-tended the government, when the tax-payer previously acknowledged in thecriminal case that he knew of his ob-ligation to report the existence of theSwiss accounts “to the Department ofthe Treasury,” logic dictates that he wasreferring to the FBAR.35

The government next argued that,even if the taxpayer’s motivationwere the proper standard in deter-mining willfulness in the civil FBARcontext, the district court failed to rec-ognize that the taxpayer had a signif-icant reason for not disclosing theforeign accounts; that is, to hide themillions of pre-tax dollars depositedinto the foreign accounts and to hidethe passive income generated by suchaccounts.36

Interestingly, the government thensuggested that, despite all the publicfanfare to the contrary, the IRS maynot be all that effective at identifyingforeign accountholders. The taxpayerindicated at various stages of the casethat he had no reason whatsoever toconceal anything from the IRS afterhe met with Swiss authorities aboutthe accounts and his accounts werefrozen by the Swiss authorities inNovember 2000 at the insistence ofthe U.S. government. Stated morecolloquially, the taxpayer professedthat he had no reason to further hideanything from the IRS once the jigwas up. The government, in its open-ing brief, strained to suggest that (1)because the taxpayer was using anominee to hold the account, ALQI,“there was no guaranty that the IRSwould be able to connect the dots,”and (2) there was no specific evi-dence in the record as to whether thetaxpayer admitted to the Swiss au-thorities in November 2000 that theALQI accounts belonged to him or

29 note 16 supra at p. 2010-6154. 30 Williams, supra note 17, opening Brief for u.S. Govern-

ment, filed 2/25/11, at pp 2-3. 31 Id., at p, 33. 32 Id., at pp. 34-35. 33 Id., at pp. 35-36. 34 Id., at p. 36. 35 Id., at pp. 36-37. 36 Id., at p. 38.

NOTES

whether he continued to distancehimself from such accounts.37

The government then argued thatthe district court’s conclusion that thetaxpayer had no motive to furtherconceal the foreign accounts after No-vember 2000 cannot be reconciledwith his interactions with his ac-countant. In particular, the govern-ment pointed out that, the taxpayer’saccountant sent him in January 2001,the tax questionnaire/organizer re-lated to the Form 1040 for 2000 (i.e.,two months after the meeting inSwitzerland and the freezing of the ac-counts), yet the taxpayer checked the“no” box in response to the questionabout foreign accounts. This, arguedthe government, shows the taxpayer’songoing intent to hide the accounts.38

The taxpayer’s high level of sophis-tication was the next target for the gov-ernment. It noted that the taxpayer wasa well-educated attorney and interna-tional businessman, who had practicedlaw at a prominent New York law firm,worked as a high-level oil executive,and enjoyed multiple opportunities tolearn about the duty to file annualFBARs.39 Against this backdrop, thegovernment suggested that it was“highly improbable” that the taxpayerwas unaware of his FBAR duties.40

Finally, the government tried todownplay some taxpayer behaviorsand highlight others, depending onwhether they hurt or helped the government’s case. Certain actions bythe taxpayer in later years could beviewed as favorable to the taxpayer.These included meeting with IRS rep-resentatives, applying for the OVCI,filing Forms 1040X for past years, andultimately filing FBARs as part of theexamination process. The governmenttried to completely disregard suchevents, underscoring that the case in-volved the duty to file an FBAR onlyas of 6/30/01, and that “disclosures in2002 and 2003 have no bearing onthat question.”41

Rebuttal by the Taxpayer. The tax-payer was remarkably brief in his re-buttal to the government’s main ar-guments. Regarding the government’scontention that the district court erred,as a matter of law, in determining thata taxpayer’s motivation is a factor ingauging willfulness, the taxpayer dis-missed this as meritless.42 Citing vari-ous legal authorities, the taxpayer rea-soned that, while willfulness does notrequire the taxpayer to have an im-proper motive, a taxpayer’s incentivesto conceal or disclose information tothe IRS are indeed relevant to deter-mining his subjective intent.43

The government’s secondary argu-ment was that, even if the districtcourt used the correct legal standard,its decision not to uphold the FBARpenalty was clearly erroneous as afactual matter for various reasons. Thetaxpayer countered this argument asfollows. He first explained that his ac-tions in later years (i.e., hiring rep-utable attorneys and accountants,meeting with IRS attorneys, applyingfor the OVCI, filing Forms 1040X, etc.)should factor into the analysis. Thetaxpayer’s attorney framed his argu-ment as a rhetorical question:

If, as the government postulates, [the tax-payer] knew of the FBAR requirement inJune 2001 and willfully failed to complywith it, why did he not backfile FBAR re-ports in the succeeding two years whenhe and his advisors executed every otherconceivable government disclosure, in-cluding an amnesty application? Onlyone reason makes sense: [The taxpayer]had no knowledge of the FBAR require-ment, and his advisors never informedhim of it.44

Next, the taxpayer suggested thathis allocution in the criminal casenearly a decade earlier, in 2003, neverspecifically mentioned the FBAR filingduty or his knowledge thereof. Con-sequently, it cannot be, as the govern-ment contends, highly probative ofhis willfulness.45

The taxpayer then challenged thenotion that his denial of the existence

of foreign accounts in the tax ques-tionnaire/organizer given to his ac-countant in January 2001 constitutesevidence of his willfulness to concealthe accounts, even after the Swiss au-thorities interviewed him, and evenafter the U.S. authorities had frozenhis Swiss accounts. The taxpayer hadalready retained new tax attorneys atthe time his accountant was preparingthe Form 1040 for 2000 and he un-derstood that he should not discussthe foreign account matters with any-one other than the attorneys.46 Thetaxpayer also suggested that, at thattime, he was already assembling ateam to rectify all issues concerningthe foreign accounts.47

Finally, the taxpayer took issue withthe government’s assertion that he hadsome reason for not disclosing the for-eign accounts after November 2000.The taxpayer pointed out that (1) theapplication and other documents re-lated to the accounts for ALQI specif-ically identified the taxpayer as thebeneficial owner of the accounts, (2)the Swiss authorities specifically sum-moned the taxpayer to Switzerland todiscuss the accounts, and (3) if the tax-payer were such an educated and so-phisticated person, as the governmentcontends, he certainly would haveknown that the U.S. governmentwould readily link him to ALQI andthe accounts held in its name.48

Decision by the Fourth Circuit. TheFourth Circuit began its analysis bycriticizing the legal standards onwhich the district court made its tax-payer-friendly decision. In particular,the Fourth Circuit indicated that thedistrict court should not have focusedon the taxpayer’s motivation for notfiling a timely FBAR for 2000, and,inasmuch as it did, the district courtmade an impermissible leap:

In making its determination, the districtcourt emphasized [the taxpayer’s] moti-vation rather than the relevant issue ofhis intent. To the extent the district courtfocused on motivation as proof of the


37 Id., at p. 39. 38 Id., at pp. 39-40. 39 Id., at pp. 42-43. 40 Id., at p. 43. 41 Id., at p. 41.

42 Williams, supra note 17, opening Brief for Taxpayer-Appellee, filed 4/28/11, at p. 35.

43 Id.44 Id., at pp. 37-38. 45 Id., at p. 38.

46 Id., at p. 39.

47 Id.

48 Id., at p. 40. The taxpayer raised some other minor ar-

guments in his opening Brief, which are not featured

in this article.

NOTES

lack of intent, it simply drew an unrea-sonable inference from the record. In No-vember 2000, Swiss authorities met with[the taxpayer] to discuss the ALQI ac-counts and thereafter froze them at therequest of the United States Government.Although the [U.S.] Government knew ofthe existence of the accounts, nothing inthe record indicates that, when the ac-counts were frozen, the [U.S.] Govern-ment knew the extent, control, or degreeof [the taxpayer’s] interest in the accountsor the total funds held in the accounts.As [the taxpayer] admitted in his allocu-tion [at the criminal trial], his decision notto report the accounts was part of his taxevasion scheme that continued until hefiled his 2001 tax return. Thus, his failureto disclose information about the ALQIaccounts on his 2000 tax return in May2001 was motivated by his desire not toadmit his interest in the accounts, evenafter authorities had been aware of themfor over six months. Rarely does a personwho knows he is under investigation bythe [U.S.] Government immediately dis-close his wrongdoing because he is notsure how much the [U.S.] Governmentknows about his role in that wrongdoing.Thus, without question, when [the tax-payer] filed in May of 2001, he was clearlymotivated not to admit his interest in theALQI accounts.49

Then, noting various judicial pre-cedents in the criminal arena, theFourth Circuit went on to explainwhat it considered the proper legalstandard to be applied. It explained

that (1) willfulness can be inferredfrom taxpayer conduct designed toconceal financial information, and (2)willfulness can also be inferred froma taxpayer’s conscious effort to avoidlearning about reporting require-ments, i.e., “willful blindness” existswhere a taxpayer knew of a highprobability of a tax liability yet inten-tionally avoided the pertinent facts.When willfulness is a condition forcivil liability, the Fourth Circuit indi-cated that this covers both knowingviolations and reckless violations of astandard. It then clarified that the tax-payer’s actions or inactions in thiscase constituted, at a minimum, “reck-

less conduct, which satisfies the proofrequirement [for civil FBAR violationsunder 31 U.S.C. 5314.]” Sparing no punches, the Fourth

Circuit stated that “the evidence as awhole leaves us with a definite andfirm conviction that the district courtclearly erred in finding that [the tax-payer] did not willfully violate [theFBAR rules for 2000].” The court sup-ported its decision on the followinggrounds. First, the court pointed out that the

taxpayer signed his Form 1040 for2000 under penalties of perjury,thereby swearing that he had exam-ined the Form 1040, as well as allSchedules and Statements attached tosuch Form 1040, and that all itemswere true, accurate, and complete. Thecourt then explained that taxpayerswho execute a tax return are deemedto have constructive knowledge ofsuch return, and the taxpayer in thiscase was no exception to that princi-ple. According to the court, the in-structions on Line 7a in Part III ofSchedule B to the 2000 Form 1040 (i.e.,“see instructions and exceptions andfiling requirements for Form TD F 90-22.1”) put the taxpayer on inquiry no-

tice of the FBAR duty. The taxpayertestified that he did not review his2000 Form 1040 in general or read theinformation in Schedule B in partic-ular. The court interpreted this inac-tion as conduct designed to concealfinancial information, a conscious ef-fort to avoid learning about reportingrequirements, and “willful blindness”to the FBAR requirement. Second, the court held that the tax-

payer’s allocution at the earlier crim-inal proceeding further confirms thathis failure to file a timely FBAR for2000 was willful. Seizing on one tinyportion of the taxpayer’s allocutionback in 2003, the court concluded that

the taxpayer admitted his knowledgeof the FBAR duty because he used thephrase “Department of the Treasury.”This tenuous line of reasoning is asfollows:

During that allocution, [the taxpayer]acknowledged that he willfully failed toreport the existence of the ALQI ac-counts to the IRS or Department of theTreasury as part of his larger scheme oftax evasion. This failure to report theALQI accounts is an admission of vio-lating [the FBAR rules] because a tax-payer complies with the [FBAR rules] byfiling an FBAR with the Department ofthe Treasury.

Why the WilliamsTrilogy Is NoteworthyThe Williams cases were long, fact-in-tensive, and featured some ambiguousreasoning from the courts. Moreover,as this article demonstrates, WilliamsIII turns out to be a groundbreakingcase, one in an ever-growing line ofvictories for the government involv-ing civil FBAR penalties. Given the im-portance of the Williams trilogy, a listof the significant (and often over-looked) issues is provided below.

Tax Court Lacks Jurisdiction over CivilFBAR Matters. In Williams I, the taxpayerattempted to dispute not only the taxissues under Title 26 of the U.S. Code(i.e., the federal income taxes, accu-racy-related penalties, and civil fraudpenalties for 1993 through 2000 iden-tified by the IRS in its Notice of Defi-ciency), but also the FBAR penalty for2000 under Title 31 of the U.S. Code.The Tax Court, ruling on this novelissue, held that it lacks authority tohear FBAR issues, both at the assess-ment stage and the collection stage.Simply put, “[t]he Tax Court has nojurisdiction to review the [IRS’s] de-termination as to [taxpayers’] liabilityfor FBAR penalties.”50

Appreciating Different Assessment Pe-riods. Although not unduly high-lighted in the Williams cases, theydemonstrate the importance of appre-ciating differing assessment periods.As explained above, the IRS con-ducted a civil audit and proposed ad-justments to income and various civil


49 note 17 supra, at footnote 5. 50 note 15 supra.

NOTES

The standards set by the courts can bedownright dispiriting to taxpayers withongoing FBAR problems, as well as to thetax representatives tasked withdefending them.

l


penalties with respect to 1993 through2000, including FBAR penalties. In thecase of false or fraudulent tax returns,the IRS faces no time constraints onassessment.51 Where FBAR violationsare concerned, however, the IRS mustassess the penalty within six years ofthe violation.52 Accordingly, while thetaxpayer in Williams might have “ad-mitted” his non-compliance by filingdelinquent FBARs for 1993 through2000 with the Revenue Agent in 2007,the IRS was able to assert an FBARpenalty for only one year, 2000, be-cause the six-year statute had alreadyexpired for the preceding years.

FBAR Penalties in Cases with Sub-Ac-counts. The taxpayer raised a varietyof arguments in its briefs in WilliamsII, one of which concerned the appro-priate number of FBAR penalties. Inparticular, the taxpayer argued thatthe maximum penalty should be$100,000 instead of $200,000 becausehe opened only one foreign account,which just happened to have been di-vided into sub-accounts later by thebank (one for cash and the other forequities) for administrative purposes.The taxpayer, in his words, had only“a single banking relationship.” In sup-port of this theory, the taxpayer citeda bank document called “GeneralConditions,” minutes from a meetingof the ALQI board of directors, andan ALQI corporate resolution, each ofwhich expressly mentions one ac-count. Given its decision in WilliamsII that the taxpayer did not act will-fully, the district court did not need toaddress the issue, and the taxpayer didnot seem to advance the sub-accountissue before the Fourth Circuit duringWilliams III. Thus, the issue of just howmany punishable unreported foreignaccounts exist in a sub-account sce-nario was unanswered.

Reasonable Reliance on Qualified TaxProfessionals. The reasonable-reliance-on-a-qualified-tax-professional de-

fense was unique in Williams II. Thegovernment presented evidence thatthe taxpayer never provided any in-formation whatsoever about the for-eign accounts or foreign-source in-come to his accountant from 1993through 2000. The government alsodemonstrated that the accountantsent the taxpayer a questionnaire/or-ganizer each year, which specificallyasked whether he had an interest inor authority over a foreign account.The taxpayer completed it for 2000,affirmatively checking the “no” box tothe foreign-account inquiry.53 Dis-tancing himself from this reality, thetaxpayer focused on the fact that hehired U.S. tax attorneys with a rep-utable national firm in early June2001, and they failed to advise him tofile an FBAR before 6/30/01. The district court did not address

the reliance issue in its decision inWilliams II, centering the discussioninstead on the taxpayer’s motivesand the distinction between not re-porting income on Forms 1040 andnot reporting foreign accounts onFBARs. The Fourth Circuit, however,made short order of the reliance de-fense in Williams III, underscoring thefollowing:

[T]o the extent [the taxpayer] asserts hewas unaware of the FBAR requirementbecause his attorneys or accountantsnever informed him, his ignorance alsoresulted from his own recklessness. [Thetaxpayer] concedes that from 1993-2000he never informed his accountant of theexistence of the foreign accounts even af-ter retaining counsel and with the knowl-edge that authorities were aware of theexistence of the accounts.54

Questioning the Amount of the FBARPenalty. The scope of FBAR “collectionactions” was examined and clarifiedin Williams II. The parties had diver-gent opinions on the role of the dis-trict court. On one hand, the govern-ment argued that the amount of theFBAR penalty asserted by the IRS isnot subject to judicial review, and that

there is no authority for the proposi-tion that a district court, hearing a“collection action” under 31 U.S.C. sec-tion 5321(b)(2), can review the IRS’sadministrative record or the factorsconsidered by the IRS in determin-ing the penalty amount. As summa-rized by the government on brief, “[a]sthis case simply concerns the UnitedStates’ effort to collect a debt, theCourt’s review is limited to determin-ing whether or not the FBAR penaltyis a valid debt.”55 In other words, thegovernment maintained that the dis-trict court’s sole job is to determinewhether a taxpayer “willfully” failedto file the FBAR. The taxpayer, on the other hand,

repeatedly argued that the court hadthe authority under the Administra-tive Procedures Act to review deci-sions by administrative agencies, suchas the IRS, for abuse of discretion andwith respect to arbitrary and capri-cious actions. The taxpayer furthersuggested that, if the court were tohold that he acted willfully, it shouldschedule a separate briefing to addressthe proper amount of the penalty.56

Because the district court held thatthe taxpayer did not “willfully” fail tofile the FBAR and no penalties werethus sustained, this issue was notspecifically addressed in Williams II.Moreover, the taxpayer did not seemto renew this issue in Williams III. Thisissue remains important for the fol-lowing reasons. Since the IRS was del-egated the authority to assert FBARpenalties back in 2003, it has alwayshad discretion about whether a par-ticular taxpayer should be penalized,as the relevant provision expresslystates that the IRS “may” (not “shall”or “must”) assert an FBAR penalty incertain cases.57 The IRS’s discretion hasexpanded in recent years, coveringboth the existence and amount of thepenalty. The relevant provision in ef-fect in 2000 penalized only “willful”violations, and the penalty amountwas the larger of $25,000 or the high-est balance in the unreported account(not to exceed $100,000).58 Under theJobs Act, which took effect in October2004, the IRS may use its discretionin determining the penalty amount in

51 Sections 6501(c)(1) and (2). 52 31 u.S.C. section 5321(b)(1). 53 Williams, supra note 16, united States Proposed

Findings of Fact and Conclusions of law filed4/26/10; united States Post-Trial Brief filed 7/1/10, atp. 10.

54 note 17 supra, at footnote 6.

55 Williams, supra note 16, united States’ Post-Trial Brief,filed 7/1/10, at p. 14.

56 Williams, supra note 16, Defendant Williams’ Re-sponse to Government’s Post-Trial Brief, filed 7/15/10,at pp. 8-10.

57 31 u.S.C. section 5321(a)(5)(A). 58 31 u.S.C. section 5321(a)(5) (in effect until 10/22/04).

NOTES

cases of non-willful violations. Lestthere be any doubt in this regard, theIRS’s own Internal Revenue Manualoutlines the following parameters forits agents: “Examiners are expected toexercise discretion, taking into accountthe facts and circumstances of eachcase, in determining whether penaltiesshould be asserted and the totalamount of penalties to be asserted.”59

This requires the IRS to decidewhether the FBAR violation was at-tributable to “reasonable cause,” whichlends itself to judicial review.60

Assessing the Weight of UnpublishedDecisions. Williams III, as the first deci-sion by a federal Court of Appeals to wrangle with tricky civil FBAR is-sues, is important. However, it was is-sued as an “unpublished” opinion, ex-pressly noting in the decision itselfthat “[u]npublished opinions are notbinding precedent in this circuit.”Many taxpayers and practitionerswould like nothing better than to ig-nore or demote the case on this basis,but doing so would be imprudent.This is because the potential use andvalue of “unpublished” decisions issurprisingly broad. Federal Rules of Appellate Proce-

dure Rule 32.1(a) generally providesthat a court may not prohibit or re-strict the citation of federal judicialopinions, orders, judgments, or otherwritten dispositions that have beendesignated as “unpublished,” “not forpublication,” “non-precedential,” “notprecedent,” or the like. Moreover, theAdvisory Committee Notes to Rule32.1 state the following:

Rule 32.1 is extremely limited. It does notrequire any court to issue an unpublishedopinion or forbid any court from doingso. It does not dictate the circumstancesunder which a court may choose to des-ignate an opinion as “unpublished” orspecify the procedure that a court mustfollow in making that determination. Itsays nothing about what effect a courtmust give to one of its unpublished opin-ions or to the unpublished opinions of

another court . . . Under Rule 32.1(a), acourt of appeals may not prohibit a partyfrom citing an unpublished opinion of afederal court for its persuasive value orfor any other reason. In addition, underRule 32.1(a), a court may not place anyrestriction on the citation of such opin-ions. For example, a court may not in-struct parties that the citation of unpub-lished opinions is discouraged, nor maya court forbid parties to cite unpublishedopinions when a published opinion ad-dresses the same issue.

The preceding procedural rule andrelated commentary create ambiguityregarding how much weight WilliamsIII will carry in the future. One thingis for sure, though, as the IRS contin-ues to assert large civil FBAR penalties,and as taxpayers keep challengingsuch penalties, the U.S. governmentwill be citing Williams III early and of-ten, as they say.

Varying Interpretations of Willfulness.Other cases have previously ad-dressed the concept of “willfulness” inthe context of criminal issues, includ-ing criminal FBAR violations. Thosecases stand for the proposition thatwillfulness means a “voluntary, inten-tional violation of a known legalduty.”61 Williams II and III are impor-tant because they are the first inwhich the courts have interpreted theconcept of “willfulness” in the civilFBAR context. The Fourth Circuit in Williams III

indicated that the taxpayer’s conduct(i.e., checking the “no” box in responseto the foreign-account question onSchedule B to his Form 1040 for 2000,not reviewing the Schedule B or itscross-references to the FBAR filing re-quirement, etc.) constituted “recklessconduct” and “willful blindness” to hisFBAR duty. Interestingly, the legalstandard applied by the Fourth Circuitin Williams III is significantly lowerthan that previously indicated by theIRS. In other words, even the IRS ini-tially believed that it had to reach amuch higher level in order to success-

fully assert and collect a civil FBARwillful penalty. This is evident fromthe following IRS materials.62

The IRS issued a legal memoran-dum in 2006, CCA 200603026, in con-nection with two of its internationalenforcement programs. One of the is-sues addressed was the proper inter-pretation of the “willfulness” standardin the context of civil FBAR penalties.The IRS’s directness on this point wasremarkable: “The first question iswhether the phrase ‘willful violation(or willfully causes any violation)’ hasthe same definition and interpretationunder 31 U.S.C. § 5321 (the civilpenalty) and § 5322 (the criminalpenalty). The answer is yes.” Lest anydoubt remain, CCA 200603026 goeson to state the following:

Both Section 5321(a)(5), providing for acivil penalty, and Section 5322(a), provid-ing for criminal penalties, contain a sim-ilar “willfulness” requirement . . . The sameword, willful, is used in both of these sec-tions. Statutory construction rules wouldsuggest that the same word used in re-lated sections should be consistently con-strued.

In referring to a dissenting opinionin the Supreme Court case Ratzlaf, theIRS then explained the following inCCA 200603026:

[W]e agree with his conclusion that in thecase of the FBAR penalty, in order forthere to be a voluntary intentional vio-lation of a known legal duty, the accoun-tholder would just have to have knowl-edge that he had a duty to file an FBAR,since knowledge of the duty to file anFBAR would entail knowledge that it isillegal not to file the FBAR. A corollary ofthis principle is that there is no willfulnessif the accountholder has no knowledgeof the duty to file the FBAR.

Similar to CCA 200603026, the IRSacknowledges in its own InternalRevenue Manual that, in the contextof willful FBAR penalties, the test iswhether “there was a voluntary, in-tentional violation of a known legalduty” and “willfulness is shown by theperson’s knowledge of the [FBAR] re-


59 iRm section 4.26.16.4 (7/1/07). 60 31 u.S.C. section 5321(a)(5) (in effect until 10/22/04); See,

e.g., Kansas City Southern Industr., Inc., 98 TC 242 (1992)(holding that “[i]n this case, as in others, the remedy forabuse of discretion is to disregard the consequencesof the Commissioner’s action or refusal to act, not toorder the Commissioner to perform the act.”)

61 Cheek, 498 u.S. 192 (1991); Sturman, 951 F.2d 1466 (CA-6, 1991); Bishop, 412 u.S. 346 (1973).

62 A number of articles explain how the legal standardfor “willfulness” developed by the Fourth Circuit inWilliams III would not only conflict with publishedguidance from the iRS on the civil FBAR issue, butalso with various court decisions. See, e.g., Skarlatos

and Sardar, “The Fourth Circuit Goes Too Far by im-posing a Willful FBAR Penalty on Reckless Conductin the Williams Case,” 14 Journal of Tax Practice &Procedure 15 (August-September 2012); Sardar,“What Constitutes ‘Willfulness’ for Purposes of theFBAR Failure-to-File Penalty?” 113 JTAx 183 (Septem-ber 2010).

NOTES

porting requirements and the person’sconscious choice not to comply withthe requirements.”63

SECOND CASE ADDRESSING‘WILLFUL’ FBAR CIVILPENALTIES—MCBRIDEWilliams III sparked much contro-versy and confusion, but the debateover its significance did not last longbecause the second case addressingcivil “willful” FBAR penalties, McBride,908 F. Supp. 2d 1186, 110 AFTR2d2012-6600 (DC Utah, 2012), was de-cided less than four months later bya district court in Utah.

The Key Facts64

Jon McBride, a U.S. citizen, was a part-ner in a domestic partnership calledthe Clip Company, LLC, which sold ac-cessories that allowed people to carrymobile phones on their belts. McBridewas in charge of the financial opera-tions of the Clip Company. As withmany products nowadays, the phoneaccessories were not made in theUnited States; they were produced byan outfit in Tawain (“Taiwanese Man-ufacturer”). Starting in 1999, the Clip Company

entered into various lucrative contractsfor the sale of its belt accessories to ma-jor mobile phone producers and re-tailers, including Ericsson, AT&T, BestBuy, and Motorola. McBride antici-pated that a significant increase in rev-enue (approximately $2 million) wouldresult from such contracts, so he beganseeking ways to reduce or defer taxesthat he, as half-owner of the Clip Com-pany, would normally be required topay. This effort led him in 1999 to Mer-rill Scott and Associates (MSA), whoseoperations he had seen advertised. MSA portrayed itself as a financial

management firm that allowed itsclients to achieve two main goals, tax

minimization and asset protection.McBride went to the offices of MSAin July 1999, where he was treated toa presentation about a potential strat-egy. MSA labeled the strategy the “Fi-nancial Master Plan.” With respect tothe goal of tax minimization, the pro-motional materials from MSA (1) sug-gested the creation of a “decontrolled”environment, achieved through theuse of sophisticated financial instru-ments, foreign entities, and foreign ac-counts, (2) stated that certain foreignentities “will be used as vehicles to cap-ture business income offshore and U.S.tax-free,” (3) explained that certainfunds sent to a foreign manufacturerwould be “captured offshore in [a for-eign entity] allowing for tax-freegrowth and accumulation,” and (4)claimed that “by redirecting taxable in-come into various expense centers,you are able to save on net taxes.” Ap-parently, after hearing the pitch aboutthe Financial Master Plan, McBrideannounced his initial impression thatit was tantamount to “tax evasion.” Therepresentatives of MSA, of course, re-futed his claims and assured him thatthe Financial Master Plan was legal. During the meeting in 1999, the

MSA representatives gave McBrideseveral pamphlets describing the Fi-nancial Master Plan, including how itaffected U.S. tax and reporting duties.One of the pamphlets stated the fol-lowing: “U.S. citizens are subject tospecific U.S. reporting requirementsfor interests in foreign corporations,trusts and bank accounts. U.S. citizensand others filing Internal RevenueService returns are not immune fromrequisite declaration of ownership in-terests in foreign entities.” The pam-phlet also contained this warning: “Asa U.S. taxpayer, the law requires youto report your financial interest in, orsignature authority over, any foreignbank account, securities account, or

other financial account [and] inten-tional failure to comply with the for-eign account reporting rule is a crimeand the IRS has means to discoversuch unreported assets.” In additionto the pamphlets, the folks at MSAalso gave McBride a written legalopinion about the Financial MasterPlan. The opinion was prepared bythe Estate Planning Institute, P.C.,which McBride learned within a weekof the meeting in July 1999 was an en-tity controlled by or related to MSA. McBride entered into a so-called

“implementation agreement” withMSA in July 1999, whereby he pur-chased the Financial Master Plan for$75,000 and obligated himself to payadditional monthly fees for ongoingservices from MSA. The memo fieldof the checks that McBride used tomake the initial payment to MSA in-dicated that the purpose of the pay-ments was “[b]ank account offshore.” In August 1999, Craig Taylor (“Ac-

countant Taylor”), the accountant forMcBride’s business partner, sentMcBride a memo expressing certainconcerns about the Financial MasterPlan and enclosing a newspaper arti-cle explaining that holding foreignbank accounts was often associatedwith tax evasion and fraudulent ac-tivity. This did not dissuade McBridefrom proceeding. The Financial Master Plan was

convoluted, presumably by design,and the factual findings by the districtcourt left various aspects rather am-biguous. Accordingly, what follows is a good-faith description of the ma-jor aspects of the Financial MasterPlan, including the main entities andmoney flow. Pursuant to the Financial Master

Plan, MSA either formed or madeavailable to McBride two foreign en-tities: Drehpunkt Ltd. (“Foreign EntityOne”) and Lombard & Associates, Ltd.


63 iRm section 4.26.16.4.5.3 (7/1/08); iRm section4.26.16.6.5.1 (11/6/15).

64 The facts, analysis, and holdings were derived prima-rily from McBride, 908 F. Supp. 2d 1186, 110 AFTR2d2012-6600 (DC utah, 2012). The author also obtainedand reviewed the following materials filed by the par-ties, which provided additional data: (1) Complaintdated 4/29/09, (2) Answer dated 6/18/09, (3) Plaintiff’smotion for Summary Judgment dated 10/15/100; (4)

Defendant’s memorandum in opposition of Plaintiff’smotion for Summary Judgment; (5) Plaintiff’s Replyto Defendant’s opposition to motion for SummaryJudgment; (6) order Denying motion for SummaryJudgment dated 2/24/11; (7) notice of SupplementalAuthority by Plaintiff dated 5/13/11; (8) Plaintiff’s TrialBrief dated 5/14/12; (9) Defendant’s Trial Brief dated5/14/12; (10) Transcript of Bench Trial Volumes i and iidated 7/2/12; (11) Plaintiff’s Proposed Findings of Fact

dated 7/23/12; and (12) Defendant’s Proposed Findingof Facts dated 8/22/12.

65 The materials filed with or issued by the district courtin McBride indicate that another entity in the Bahamas,Palisades & Associates, ltd., was formed or made avail-able to mcBride. it appears that no foreign accountswere opened under such entity and it was not other-wise pivotal to the case. Accordingly, Palisades & As-sociates ltd. is not further addressed in this article.

NOTES

i

(“Foreign Entity Two”).65 These entitieswere controlled, at least nominally, by individuals who were either em-ployed by or otherwise associatedwith MSA. Separate accounts werethen opened at the Royal Bank ofScotland, in the Bahamas, for ForeignEntity One and Foreign Entity Two.MSA also established two additionalentities, in Canada, at the request ofMcBride, Phoenix Overseas Advisors,Ltd. (“Foreign Entity Three”) andGlobal Securities Corporation (“For-eign Entity Four”). Foreign brokerageaccounts were then opened undereach of these two Canadian entities toenable McBride to engage in securitiestransactions. Also pursuant to the Financial Mas-

ter Plan, McBride, through the ClipCompany, entered into an agreementwith the Tawainese Manufacturer,whereby the Clip Company wouldpay the Taiwanese Manufacturer aninflated price for the phone accessories.This deliberate overpayment (whichthe Clip Company likely treated as acomponent of cost-of-goods-sold)would result in “excess funds” for theTaiwanese Manufacturer, which wouldnormally have been treated as taxableprofits to the Clip Company. TheTawainese Manufacturer then sent the“excess funds” by wire transfer to theBahamanian account of Foreign EntityOne. It is unclear whether the Tai-wanese Manufacturer received a fee forthis accomodation. A simplified, hypothetical example

will show how this might have func-tioned. Say the Taiwanese Manufac-turer produced and sold each phoneaccessory to the Clip Company for$10, and the Clip Company, in turn,could sell each accessory to the ulti-mate consumer for $30. This wouldnormally render a taxable profit forthe Clip Company of $20 per acces-sory. However, if the Taiwanese Man-ufacturer raised its price to $20 per ac-cessory, the Clip Company wouldshow a taxable profit of only $10 peraccessory. The key is what happens tothe extra $10 per accessory, i.e., the “ex-cess funds” on which the IRS focused. The next step was to get the un-

taxed “excess funds” back to McBride

and/or the Clip Company. This wasaccomplished in multiple ways, in-cluding, but not limited to, the use ofa “loan” arrangement. Apparently,funds were transferred from the Ba-hamanian account of Foreign EntityOne to another foreign companycontrolled by MSA. Then, this com-pany purportedly made a “loan” tothe Clip Company in the form of aline-of-credit. According to the districtcourt, this essentially allowed the ClipCompany to “borrow” its own (un-taxed) money. Whenever the ClipCompany reached its credit limit,MSA, through the foreign company,would simply raise the limit andhonor all additional requests forfunds by McBride. The district courtindicated that McBride instructedMSA on how, when, and where totransfer funds. Once the untaxed funds had been

repatriated, either through the “loan”arrangement or otherwise, they wereused for a variety of purposes. For ex-ample, they were used for payment ofregular business expenses for the ClipCompany, distributions in the form of“partner draws” to McBride, mortgagepayments for McBride’s former wife,purchase of Christmas presents forMcBride’s parents, airline travel, au-tomobile leases, investments in vari-ous entities, and satisfaction of out-standing legal fees. In early 2001, McBride stopped

receiving status reports from MSAabout the foreign asssets and interestpayments made on the line-of-credit.This halt of information triggered con-cern in McBride about the legitimacyof MSA. Therefore, in an attempt torecoup his funds, McBride persuadedMSA in March 2001 to further in-crease the line-of-credit for the ClipCompany by $665,000 and then im-mediately withdrew all such funds. During 2000 and 2001, approxi-

mately $2.7 million of otherwise tax-able business profits to the Clip Com-pany were ultimately routed toMcBride. The highest balances in theunreported foreign accounts arehighly relevant, too. The district court,looking to the documentation pre-sented by the U.S. Department of Jus-

tice, determined that McBride had areportable interest in four acccountsin each of 2000 and 2001, whose bal-ances ranged from $10,900 to $736,902. With respect to his Form 1040 for

2000, McBride worked with CraigStayner (“Accountant Stayner”), whoalso served as the accountant for theClip Company. McBride never dis-cussed with Accountant Stayner hisinvolvement with MSA, never pro-vided him with any documentationrelated to MSA, and never mentionedthat Accountant Taylor might havesome information or expertise regard-ing the Finacial Master Plan and in-ternational tax and reporting obliga-tions. Part I I I to Schedule B ofMcBride’s Form 1040 for 2000 had the“no” box checked in response to thequestion about the existence of for-eign accounts, and McBride did notfile an FBAR for 2000 with the Treas-ury Department by the deadline ofJune 30, 2001. Of course, McBridesigned and dated his Form 1040,thereby declaring under penalties ofperjury that he had examined theForm 1040, as well as all accompany-ing Schedules and Statements, and, tothe best of his knowledge, everythingwas true, correct, and complete. McBride made a switch the next

year, shifting his tax-related work toAccountant Taylor. His representativemay have changed, but his actions didnot: McBride checked the “no” box inPart III of Schedule B, thereby denyingthat he had a reportable interest inany foreign account, he neglected tofile an FBAR for 2001 with the Treas-ury Department by 6/30/02, and hesigned and dated his Form 1040, againswearing that he had reviewed andapproved the entire Form 1040 for2002, including all Schedules andStatements. The IRS began examining McBride

in 2004 for potential noncomplianceissues related to his participation inthe Financial Master Plan. He adopteda defensive position, refusing to pro-vide certain documents to the Rev-enue Agent, denying that he had usedthe Financial Master Plan, professingignorance of wire transfers from theforeign accounts of Foreign Entity


One and Foreign Entity Two, claimingthat the line-of-credit to the ClipCompany was a legitimate loan, andrefusing to complete and submitFBARs for 2000 and 2001. The Rev-enue Agent eventually asserted a civilFBAR penalty for each of 2000 and2001 “in the amount of $100,000($25,000 per account) for his willfulfailure to report his interest in the for-eign accounts.”66 In other words, theRevenue Agent asserted a total “will-ful” FBAR penalty of $200,000, i.e.,$100,000 for each year, which he pre-sumably believed was the maximumpenalty allowed under the law appli-cable to those two years.

Holdings by the District CourtThe distrct court made a number ofinteresting holdings.

Burden of Proof in Civil FBAR CollectionCases. The district court in McBride be-gan its analysis by addressing the bur-den-of-proof issue. It explained thatthe relevant statute, 31 U.S.C. section5321(b)(2), simply allows the U.S. gov-ernment to “commence a civil actionto recover a civil penalty assessed”under the relevant FBAR provisions,but does not specify the legal standardthat applies. The court then pointedout that only one federal court hasdirectly spoken to this issue, i.e., thedistrict court in Williams II. There, itwas determined that the burden-of-proof on the U.S. government is “thepreponderance of the evidence” on allissues, including the issue of whethera taxpayer’s failure to file an FBARwas “willful.” Wrapping itself in thelogic of Williams II, the district courtin McBride reasoned as follows:

The preponderance of the evidence stan-dard applied by the district court in[Williams II] is the correct standard. Aswith Government penalty enforcementand collection cases generally, absent astatute that prescribes the burden ofproof, imposition of a higher burden ofproof is warranted only where ‘particu-larly important individual interests orrights’ are at stake. Because the FBARpenalties at issue in this case only involve

money, it does not involve ‘particularlyimportant individual interests or rights’as that phrase is used in [the relevantcases].67

Analysis of Willfulness Issue. With theburden-of-proof issue resolved, thedistrict court turned to the elementsthat the U.S. government must estab-lish in order to collect a “willful” FBARpenalty. The majority of the elementswere undisputed, leaving the focussquarely on the question of whetherMcBride had “willfully” failed to fileFBARs for 2000 and 2001. Indeed, 18pages of the court’s 25-page legalanalysis were devoted solely to the“willfulness” issue. Breaking this intodigestible pieces is thus required.

Standard for Determining Willfulness inCivil FBAR Cases. Adhering to a line ofreasoning presented earlier by theFourth Circuit in Williams III, the districtcourt indicated that “willfulness” in thiscontext includes not only knowingFBAR violations, but also reckless ones.The district court, citing to precedentfrom the Supreme Court as well asWilliams III, then explained that “willfulblindness” satisfies the willfulness stan-dard in both criminal and civil con-texts. Finally, the district court notedthat willful intent can be proven bycircumstancial evidence, and reason-able inferences can be drawn from thefacts because direct proof of a tax-payer’s intent is rarely available.

Taxpayer Had Constructive Knowledge ofthe FBAR Requirement. The district courtnext turned to McBride’s level ofknowledge of the FBAR filing require-ment. Its ultimate conclusion on thisissue is remarkably clear, but thecourt’s analysis meandered some-what. The court cited the general rulethat all taxpayers are charged withknowledge, awareness, and responsi-bility for all tax returns executed un-der penalties of perjury and filed withthe IRS. The court then underscoredthat the only case thus far to examinewillfulness in the context of civil FBARpenalties is Williams III and summa-rized the government-favorable hold-ings in that case. The court next rec-ognized that several cases stand forthe proposition that the taxpayer’ssignature on a tax return does not, by

itself, prove that the taxpayer hadknowledge of the contents of the re-turn. The court distinguished suchcases, though, by emphasizing thatthe language therein about “knowl-edge of the contents of the return”refers to the taxpayer’s awarenessabout specific figures on the return.When dealing with the FBAR situa-tion, the court pointed out that“knowledge of what instructions arecontained within the form is directlyinferable from the contents of theform itself, even if it were blank.” For-tifying its position, the court went onto cite and quote various criminalcases, including a criminal FBAR case,where the courts attributed to the tax-payer knowledge of the contents of areturn based solely on the taxpayer’ssignature on the tax return. The court,eliminating any ambiguity about itsstance on constructive knowledge,rendered the following holding:

Knowledge of the law, including knowl-edge of the FBAR requirements, is im-puted to McBride. The knowledge of thelaw regarding the requirement to file anFBAR is sufficient to inform McBride thathe had a duty to file [an FBAR] for anyforeign account in which he had a finan-cial interest. McBride signed his federalincome tax returns for both the tax year2000 and 2001. Accordingly, McBride ischarged with having reviewed his tax re-turn and having understood that the fed-eral income tax return asked if at any timeduring the tax year he held any financialinterest in a foreign bank or financial ac-count. The federal income tax return con-tained a plain instruction informing in-dividuals that they have the duty toreport their interest in any foreign finan-cial or bank accounts held during the tax-able year. McBride is therefore chargedwith having had knowledge of the FBARrequirement to disclose his interest in anyforeign financial or bank accounts, as ev-idenced by his statement at the time hesigned the returns, under penalty of per-jury, that he read, reviewed, and signedhis own federal income tax returns forthe tax years 2000 and 2001, as indicatedby his signature on the federal incometax returns for both 2000 and 2001. As aresult, McBride’s willfulness is supportedby evidence of his false statements on histax returns for both the 2000 and the2001 tax years, and his signature, underpenalty of perjury, that those statementswere complete and accurate.68

Taxpayer Had Actual Knowledge of the FBAR Requirement. More impor-tantly, explained the court, McBride


66 McBride, 908 F. Supp. 2d 1186, 110 AFTR2d 2012-6600(DC utah, 2012).

67 internal citations omitted. 68 internal citations omitted.

NOTES

had actual knowledge of the FBARfiling requirement. The court identi-fied four items in support of this de-termination. First, McBride read thepamphlets and other promotionalmaterial provided by MSA, whichexplained the duty to report an in-terest in foreign financial accounts.Second, McBride testified at trial thatthe purpose of adopting the FinancialMaster Plan was to avoid disclosureof certain assets and the payment oftaxes thereon. Third, McBride en-gaged in an evasive course of conductwith the Revenue Agent during theaudit, lying about certain facts andwithholding information and docu-mentation. Finally, McBride madestatements at trial that contradictedhis earlier sworn statements duringthe discovery phase of the trial.

Taxpayer Acted with Reckless Disregardor Willful Blindness. The court identifieda long list of items that, together, sup-posedly demonstrate that McBride ei-ther willfully or recklessly disregardedthe obvious risk of tax-related prob-lems (including FBAR violations) be-cause of his participation in the Fi-nancial Master Plan. These itemsincluded the following: (1) McBridereviewed the memo and enclosed anewspaper article from AccountantTaylor in August 1999 expressingconcern about the validity of the Fi-nancial Master Plan; (2) McBride wasalready concerned about MSA inMarch 2001, well before he filed hisForm 1040 for 2000; (3) McBrideknew that the purpose of the Finan-cial Master Plan was to avoid taxationand certain reporting requirements;(4) McBride knew the Financial Mas-ter Plan involved the use of foreignentities held by nominees; (5) Mc-Bride’s initial impression of the Finan-cial Master Plan was that it consti-tuted “tax evasion;” (6) McBride didnot seek a legal opinion or guidancefrom outside, independent counsel; (7)Part III of Schedule B to Form 1040contained a “plain instruction” regard-ing disclosure of foreign accounts; and(8) McBride did not discuss with orprovide information to either of histwo accountants regarding the Finan-cial Master Plan.

Why McBride Is an Important Case. Theobvious reason that McBride is note-worthy is that it constitutes only thesecond case to wrangle with novel le-gal issues related to the collection of“willful” FBAR penalties. Another ap-parent reason is that it followed, to acertain degree, the government-favor-able holding in Williams III that a tax-payer’s constructive knowledge of theFBAR filing requirement suffices toprove willfulness. There are a numberof more obscure reasons why McBrideis significant, too. Some of these rea-sons, which likely went unnoticed bymany taxpayers and practitioners, areexamined below.

Government Reverses Course on Burdenof Proof. As explained above, the dis-trict court in McBride, adhering to thejudicial reasoning in Williams II, heldthat the proper legal standard inFBAR collection cases is preponder-ance of the evidence, because the rel-evant statute is silent on the issue andbecause the civil FBAR penalty in-volves only money, not “importantindividual interests or rights.” TheMcBride case is noteworthy because itshows (to those who are paying closeattention) how the IRS has radicallychanged its positon on this issue sincethe courts started rendering unex-pected, helpful decisions. In 2005, the IRS issued a legal mem-

orandum on offshore issues, coveringseveral items, including the burden onthe IRS in civil FBAR penalties. Thiswas the infamous CCA 200603026. TheIRS’s position at that time, looking intothe proverbial crystal ball, was that thecourts would obligate the IRS to reacha tougher threshold, clear and con-vincing evidence.

We expect that a court will find the bur-den in civil FBAR cases to be that of pro-viding “clear and convincing evidence,”rather than merely a “preponderance ofthe evidence.” The clear and convincingevidence standard is the same burden the[IRS] must meet with respect to civil taxfraud cases where the [IRS] also has toshow the intent of the taxpayer at the timeof the violation. Courts have traditionallyapplied the clear and convincing standardwith respect to fraud cases in general, notjust to tax fraud cases, because, just as it isdifficult to show intent, it is also difficultto show a lack of intent. The higher stan-dard of clear and convincing evidence of-

fers some protection for an individual whomay be wrongly accused of fraud . . . Be-cause the FBAR penalty is not a tax or atax penalty, the presumption of correct-ness with respect to tax assessmentswould not apply to an FBAR penalty as-sessment for a willful violation–anotherreason we believe that the [IRS] will needto meet the higher standard of clear andconvincing evidence.69

It is interesting to witness the IRS’sshift of position on the burden-of-proof issue during the McBride case.The government attorneys, anticipat-ing that counsel for McBride mightpoint to the IRS’s legal memorandumcited above, essentially explained tothe district court on brief that the IRS’s position back in 2005 was, well,wrong, and it should be ignored al-together. The following shows moreaccurately how the IRS tried to dis-tance itself from its earlier analysis:

Though McBride may attempt to assertthat the applicable burden of proof withrespect to the issue of willfulness is the“clear and convincing standard,” that as-sertion is wrong and unsupported by anylaw. Morever, McBride may not cite toInternal Revenue Service Legal Memo-randum [because] 26 U.S.C. § 6110specifically prohibits Chief Counsel Ad-vice memoranda like the one mentionedby counsel for McBride from being eitherused or cited as precedent. Therefore, thatmemorandum has no controlling effect,and moreover should not have any per-suasive value . . .70

It is equally interesting to see theIRS attempt to put a final spin on theburden-of-proof debate after the IRS-favorable holdings in Williams II andMcBride.High-ranking IRS attorneys atthe forefront of all things FBAR stated,in early 2013, that the issue has beenresolved, at least from their perspective.

[T]he IRS office of Chief Counsel initiallytook a conservative position when it ad-vised field agents on the standard ofproof the government must satisfy toshow willfulness for the FBAR penalty, inpart because the issue had not been liti-gated. But the courts have since agreedwith the IRS that preponderance of theevidence, rather than clear and convinc-ing evidence, is the correct standard toapply in the civil [FBAR] context.71


69 “Service Discusses Foreign Bank and Financial Ac-counts Report Penalty,” 2006 Tax notes Today 14-14,Doc. 2006-1196 (9/1/05); CCA 200603026.

70 McBride, supra note 66, Plaintiff’s Trial Brief, 5/14/12,pp. 8-9.

71 Coder, “Taxpayers Face hurdles and Risks When opt-ing-out of u.S. offshore Voluntary Disclosure Pro-gram,” 2013 Worldwide Tax Daily 12-4 (1/17/13).

NOTES

Unexpected Penalties and Interest Charges.Most people are familiar with interestcharges on tax underpayments andrelated penalties, but knowledge aboutinterest charges connected to FBAR vi-olations is less common. The McBridecase presents an opporunity to high-light this obscure, yet important, issue. This was a long affair; McBride

signed up for the Financial MasterPlan in 1999, he implemented it in2000 and 2001, the IRS began the au-dit in 2004, the Revenue Agent as-serted FBAR penalties in Summer2007, the Department of Justice filed aComplaint in district court in April2009, and the district court finally is-sued its decision in November 2012.Many things were occurring duringthis period, including the accrual ofinterest on the FBAR penalties. The relevant law, which is likely to

be alien to many tax practioners andtheir clients, generally provides thatthe head of an executive, judicial, orlegislative agency shall charge intereston an outstanding debt to the U.S.government.72 In terms of timing, thelaw states that interest starts to accruethe date on which demand for pay-ment is made.73 The law further pro-vides that, in addition to interestcharges, the government is empow-ered to assess on a debt that is morethan 90 days past due a penalty of upto 6% per year.74

In its Complaint filed with the dis-trict court, the U.S. governmentclaimed that McBride was liable notonly for the FBAR penalties, but alsointerest charges and another penaltyfor not paying the FBAR penaltieswithin 90 days of the assessment backin Summer 2007. The district courtupheld these claims, tacking on an-other $74,621.92 to McBride’s alreadysizable bill from Uncle Sam.

Confusion Created About the ReasonableReliance Defense. Most taxpayers facing

tax adjustments and/or penalties of-ten look outward to justify their trans-gressions, and McBride was no differ-ent. He maintained that he reaonablyrelied on three different persons, suchthat FBAR penalties should be miti-gated. McBride began by arguing that he

reasonably relied on AccountantStayner with respect to his Form 1040for 2000. The court quickly dispensedwith this argument because McBridedid not fully inform Accountant Stay-ner about his involvement with MSAand the Financial Master Plan. Thisruling raises no concerns. McBride then contended that he

relied on MSA and its attorneys, pre-sumably the ones that prepared thelegal opinion about the FinancialMaster Plan. The court also swiftly re-jected this position because such ad-visors lacked the necessary independ-ence. This ruling does not cause anyconcerns either. Lastly, McBride maintained that he

relied on Accountant Taylor with re-spect to his Form 1040 for 2001. Asexplained earlier, the court found that,in August 1999, Accountant Taylor sentMcBride a memo expressing concernsabout the Financial Master Plan andenclosing an article addressing legaland compliance issues related to for-eign bank accounts. The court cameto the following conclusion about thesupposed dependence on AccountantTaylor:

Even if [Accountant] Taylor was fullyaware of the [MSA] scheme yet failed toproperly advise McBride to report his in-terests in the foreign accounts, this wouldnot excuse McBride. The taxpayer, not thepreparer, has the ultimate responsibilityto file his or her return and to pay thetax due. This duty generally cannot beavoided by relying on an agent. McBrideknew, or at least made himself willfullyblind, about the need to report his inter-ests in the foreign accounts when hesigned his 2000 return. That [Accountant]Taylor may have further facilitatedMcBride’s willful blindness a year later[in 2001] by failing to dispense properadvice does not render McBride’s failureto report his interest in the foreign ac-counts any less willful.

This holding raises questions fortwo main reasons. First, the broadopening statement (i.e., that no rea-

sonable cause would exist even if Ac-countant Taylor were “fully aware” ofthe offshore issues and failed to prop-erly advise McBride) seems inconsis-tent with well-established law. Theregulations recognize that a taxpayer’sreasonable reliance on an independ-ent, informed, qualified tax profes-sional often reaches the level of rea-sonable cause.75 For purposes of thereasonable-reliance defense, the reg-ulations also broadly define the con-cept of “advice” to cover “any com-munication” from a qualified advisorand clarify that “[a]dvice does nothave to be in any particular form.”76

The Supreme Court, for its part, hasconcluded that the IRS must liberallyconstrue the reliance defense, statingthat “[w]hen an accountant or attor-ney advises a taxpayer on a matter oftax law . . . it is reasonable for the tax-payer to rely on that advice” and fur-ther acknowledging that “[m]ost tax-payers are not competent to discernerror in the substantive advice of anaccountant or attorney.”77

Second, in stating that McBridecould not rely on others to file a re-turn and pay the proper tax, the dis-trict court seems to blur the long lineof tax cases distinguishing betweenreliance on tax advice (which canconstitute “reasonable cause”) and re-liance on others to perform non-del-egable ministerial tasks (which cannotconstitute “reasonable cause”).78 TheTax Court has previously explainedthis distinction, which seemed to es-cape the district court in McBride:

In general, a taxpayer’s duty to file a re-turn when due is a personal, nondele-gable duty. Thus, reliance upon an ac-countant to file is ordinarily no excusefor filing a return beyond the due date.However, the Supreme Court has distin-guished between the case in which a tax-payer reasonably relies on the substantivetax advice of an accountant or attorneythat no return need be filed . . . Similarly,this Court has held that reasonable cause. . . can be shown by proof that the tax-payer supplied all relevant informationto a competent tax adviser and relied ingood faith on the incorrect advice of theadviser that no return was required to befiled.79

Edging Toward Strict Liability. TheMcBride case is also interesting becauseof the district court’s broad interpre-


72 31 u.S.C. section 3717(a)(1). 73 31 u.S.C. section 3717(a)(2). 74 31 u.S.C. section 3717(e)(2). 75 Reg. 1.6664-4(c)(1). 76 Reg. 1.6664-4(c)(2). 77 Boyle, 469 u.S. 241, 55 AFTR2d 85-1535 (1985). 78 McMahan, 114 F.3d 366, 79 AFTR2d 97-2808 (CA-2, 1997).

NOTES

tation of “willfulness” in the FBARcontext, which seemingly pushes theconcept toward one of strict liability.Although not entirely clear, it appearsthat McBride argued that he wasaware of the FBAR filing requirement,but decided not to comply because ofhis belief, based to a certain extent onthe analysis of Accountant Taylor, thathe did not possess a sufficient interestin the foreign accounts under the pe-culiar FBAR attribution rules. As theculimination to its 18-page analysisof the “willfulness” issue, the court ef-fectively concluded that, if a taxpayerexecutes and files his Form 1040, allfailures to file FBARs, regardless of thevalidity of the taxpayer’s rationale fornot filing, are willful and vulnerableto maximum sanctions.

[E]ven if the decision not to discloseMcBride’s interest in the foreign accountswas based on McBride’s belief that he didnot hold sufficient interest in those ac-counts to warrant disclosure, that failureto disclose those interests would consti-tute willfulness. Because McBride signedhis tax returns, he is charged with knowl-edge of the duty to comply with theFBAR requirements. Whether McBridebelieved [Accountant] Taylor had deter-mined that a disclosure was not requiredis irrelevant in light of [the applicablecase], which states that the only questionis whether the decision not to disclosewas voluntary, as opposed to accidental.The government does not dispute thatMcBride’s failure to comply with FBAR[sic.] was the result of his belief that hedid not have a reportable financial inter-est in the foreign accounts. However . . .the FBAR requirements did require thatMcBride disclose his interest in the foreignaccounts during both the 2000 and 2001tax years. As a result, McBride’s failure todo so was willful.80

This final ruling by the districtcourt in McBride is noteworthy be-cause it seems contrary to the posi-tion taken by the IRS, historically andrecently. For instance, in the portionof the Internal Revenue Manual dis-cussing the notion of “willful blind-ness,” the IRS indicates that “[t]hemere fact that a person checked thewrong box, or no box, on a ScheduleB is not sufficient, by itself, to establishthat the FBAR violation was attribut-able to willful blindness.”81 It goes onto explain that, even in situationswhere a taxpayer admits knowledgeabout the FBAR question on Sched-

ule B to Form 1040, willfulness existsonly when the taxpayer is incapableof providing the IRS a “reasonableexplanation” for not properly re-sponding to the question on ScheduleB and not filing an FBAR.82

THIRD CASE ADDRESSING ‘WILLFUL’ FBARCIVIL PENALTIES—BUSSELLThe third case involving civil willfulFBAR penalties, Bussell, 117 AFTR 2d2016-439 (DC Calif., 2015), featuresfewer facts and a shorter holding,much to the relief of the readers ofthis article.

Key FactsThe taxpayer is a dermatologist fromBeverly Hills, California with long-standing legal problems. For instance,she was convicted of bankruptcyfraud and tax evasion, and the TaxCourt upheld civil fraud penaltiesagainst her in another matter. Beforethe taxpayer claimed bankruptcy in1995, she and her late-husband or-ganized her medical practice in orderto conceal her ownership interest.They then “funneled” about $1.1 mil-lion in profits to a foreign accountheld in the name of a foreign entity.In 1996, the taxpayer transferred thefunds to a personal account at a dif-ferent foreign bank, a predecessor toUBS, in Switzerland. In 1997, the tax-payer and her late-husband openeda second account at UBS (“Subject Ac-count”), adding their son as a signa-tory. The taxpayer did not report theincome generated by the Subject Ac-count on her Form 1040 for 2006 anddid not file an FBAR for 2006. Thehighest balance during that year wasjust over $2.2 million. In October 2007,one week after filing the Form 1040for 2006, the son, using his signatureauthority over the Subject Account,sent a letter to UBS asking it to liqui-date the Subject Account and anotheraccount at UBS and transfer the fundsto accounts at another Swiss financialinstitution, Finter Bank. In June 2013, the IRS assessed an

FBAR penalty of approximately $1.1million for willfully not reporting the

Subject Account on an FBAR for 2006.In March 2015, within the relevanttwo-year period, the government fileda collection action in district court,seeking a judgment ordering the tax-payer to pay the FBAR penalty, alongwith a penalty for failure to pay theassessment within 90 days of demand,and interest.

Holding by District Court Regarding WillfulnessThe district court determined that theU.S. government was entitled to sum-mary judgment on the issue of thetaxpayer’s willfulness, as she stipu-lated and agreed not to dispute thecontentions that she willfully failedto file an FBAR reporting the SubjectAccount for 2006 and she willfullyfailed to report the existence of theSubject Account in Part III of Sched-ule B of Form 1040 for 2006. As if theconcession by the taxpayer were in-sufficient, the district court proceededto explain that the evidence in thiscase also confirms willfulness andthat, in the context of civil FBARpenalties, the concept of willfulnessencompasses “reckless disregard of astatutory duty:”

Moreover, the record demonstrates thatDefendant was willful in failing to reporther financial interest in the Subject Ac-count. Although § 5321(a)(5) does notdefine willfulness, courts adjudicating civiltax matters have held that an individualis willful where he/she exhibits a recklessdisregard of a statutory duty. See SafecoIns. Co. of Am. v. Burr, 551 U.S. 47, 57(2007). Here, Defendant clearly acted withreckless disregard. Defendant has beenconvicted of bankruptcy fraud and taxfraud for her failure to disclose offshoreaccounts, and Defendant has been sub-jected to civil penalties for her failure todisclose offshore bank accounts. Defen-dant is aware of her statutory duty to re-port offshore accounts. Nevertheless, De-fendant filed her 2006 tax return withoutreporting the Subject Account, and with-


79 Zabolotny, 97 TC 385 (1991) (internal citations omit-ted) (holding that reasonable cause existed wheretwo certified public accountants, fully informed ofthe facts, led the taxpayer to believe that no taxableevent was created by the relevant transactions forwhich any federal excise tax returns would be re-quired to be filed).

80 internal citations omitted. 81 iRm section 4.26.16.4.5.3 (7/1/08); iRm section

4.26.16.6.5.1 (11/6/15). 82 Id.

NOTES

out filing an FBAR Form. Instead of re-porting the Subject Account, Defendantliquidated the Subject Account shortly af-ter filing her tax returns [and moved themto yet another undisclosed foreign bank].Accordingly, the Government’s Motion isgranted to the extent that Defendant will-fully failed to report her interest in theSubject Account for 2006.

FOURTH CASE ADDRESSING‘WILLFUL’ FBAR CIVILPENALTIES—BOHANECThis brings us to the most recent caseinvolving willful civil FBAR penalties,Bohanec, which was decided in Decem-ber 2016. The facts of the case, as wellas the positions of the parties, havebeen cobbled together using varioussources.83

Key FactsAugust Bohanec was born in Sloveniain 1933. He attended public school inSlovenia, but was forced to miss hislast three years because of World WarII. He later trained as a tool-and-diemaker in Slovenia. He came to theUnited States in the 1960s and even-tually became a U.S. citizen. He is over80 years old now. Maria Bohanec, hiswife, was born in Mexico in 1943. Herhighest level of formal education wassixth grade, in Mexico. She also cameto the United States in the 1960s andlater became a U.S. citizen. She is cur-rently over 70 years old. August andMaria have been married approxi-mately 45 years. In the 1970s, the Bohanecs bought

a camera shop in California (“CameraShop”). At some point, they became adealer of Leica cameras, a Germanbrand. The Bohanecs initially got theirproduct from the exclusive Leica dis-tributor for the United States, who waslocated in New Jersey. Other cameraretailers complained about the dealsthat the Bohanecs were receiving, sothe exclusive U.S. distributor began re-stricting supply to them. The Bohanecssolved that problem by starting to buyinventory from Leitz Canada, a sub-

sidiary of Leica. The Bohanecs wereable to do this because they had pre-viously met the president of LeitzCanada, Walter Kluck, through deal-ings with the Camera Shop. The Camera Shop gained a world-

wide reputation over time for selling,repairing, and refurbishing Leica cam-era parts. It sold and shipped to cus-tomers around the globe, includingthose in the Philippines, England,South Korea, and Hong Kong. Presumably in return for the earlier

favor by Kluck, the Bohanecs, in the1980s, sales brokered transactions be-tween Leitz Canada and various cam-era retailers around the world. Theyreceived commissions for such sales,which they deposited into a joint ac-count that they held at UBS in Switzer-land. In addition to depositing the salescommissions, the Bohanecs also in-structed their foreign clients on occa-sion to send payments directly to theUBS account in Switzerland, instead ofto the Camera Shop in California. Kluck apparently opened the ac-

count for the Bohanecs and managedit while he was alive; UBS took overthereafter. From 1997 to 2007, thehighest balance in the UBS accountwas about $1.1 million. The Bohanecs did not provide

their U.S. address to UBS, did not tellanyone about the foreign account(other than their two children), didnot keep any records or use a book-keeper, did not discuss the potentialimplications of the UBS account withan accountant, attorney, or banker,did not file Forms 1040 after 1998, anddid not file FBARs declaring the UBSaccount or any other foreign account. The Bohanecs closed the Camera

Shop in the late 1980s, but they con-tinued to sell Lecia cameras and partson eBay, at least through 2009. The money in the UBS account did

not sit untouched. The Bohanecsmade various withdrawals from theaccount, including, but not limited to (1) a transfer of $10,000 to their

daughter, (2) transfers starting in 2003to a joint account in Austria, (3) trans-fers starting in 2006 to an account inMexico related to their constructionof a home there, and (4) transfers totheir domestic account in California.Transfers continued until 2010. The only item at issue in Bohanec

was the civil FBAR penalty for 2007.The balance of the unreported foreignaccounts as of the date of the viola-tion (i.e., 6/30/08) was $643,662. On 1/6/10, the Bohanecs filed an

application to participate in the 2009Offshore Voluntary Disclosure Pro-gram (OVDP). Among other things,they stated on their application, underpenalties of perjury, that all funds de-posited into the UBS account con-sisted of after-tax earnings from thecamera business. The IRS issued the“preliminary acceptance letter” shortlythereafter, on 1/19/10. After whatseems to be a significant delay, the Bo-hanecs filed with the IRS on 5/19/11,Forms 1040 for 2003 through 2008and FBARs for 2003 through 2008.The submissions by the Bohanecspursuant to the OVDP had someproblems, namely, (1) the statementabout the funds in the UBS accountall being after-tax amounts was un-true, (2) the Forms 1040 were inaccu-rate in that they did not include theincome earned by the Bohanecsthrough their eBay business or thepassive income generated by all for-eign accounts, and (3) the FBARs wereinaccurate in that they reported onlythe UBS account, not the Austrian ac-count and the Mexican account. As aresult, the IRS ultimately rejected theBohanecs from the 2009 OVDP andinitiated a standard audit. The results of the audit were pre-

dictable. First, the IRS issued a Noticeof Deficiency, asserting additional in-come taxes, delinquency penalties,and large civil fraud penalties for 2003through 2010. The Bohanecs neverfiled a Petition with the Tax Courtchallenging any aspect of the Notice


83 Complaint by u.S. Government to Reduce FBARPenalty to Judgment, filed 6/9/15; Answer by Taxpay-ers to Complaint to Reduce FBAR Penalty to Judg-ment, filed 7/27/15; memorandum of Contentions ofFact and law by u.S. Government, filed 10/3/16; mem-

orandum of Contentions of Fact and law by Taxpay-ers, filed 10/3/16; Trial Brief by u.S. Government, filed10/25/16; Proposed Findings of Fact and Conclusionsof law by u.S. Government, filed 10/25/16; Exhibit andWitness list by u.S. Government, filed 11/1/16; Proposed

Findings of Fact and Conclusions of law by Taxpay-ers, filed 11/7/16; Supplemental Proposed Findings ofFact and Conclusions of law by u.S. Government,filed 11/7/16; and Bohanec, 118 AFTR 2d 2016-5537 (DCCalif., 2016).

NOTES

i

of Deficiency. Accordingly, the IRS as-sessed these figures and presumablystarted collection actions. The liabilityhad reached $492,164 by September2016. Second, the IRS asserted a willfulFBAR penalty for 2007 against eachof August and Maria, seeking themaximum penalty, i.e., 50% of the bal-ance of the foreign accounts at thetime of the violation.

Positions Advanced by the PartiesThe legal/tax positions advanced bythe Bohanecs and the U.S. govern-ment did not contain any surprises,largely adhering to the argumentspreviously advanced in Williams andMcBride. For example, counsel for theBohanecs highlighted the followingpoints: (1) The taxpayers are elderlyand have little formal education; (2)They had never even heard of theFBAR filing requirement by 6/30/08;(3) Based primarily on CCA200603026, the relevant portion of theIRS’s own Internal Revenue Manual,and Sturman, the U.S. governmentmust prove, by clear and convincingevidence, and not by merely the pre-ponderance of the evidence, that theBohanecs committed a “voluntary, in-tentional violation of a known legalduty;” (4) Because the Bohanecs neverfiled any Forms 1040 after 1998 untilthey started participating in the OVDPmore than a decade later, they did notaffirmatively and inaccurately checkthe “no” box in response to the for-eign-account question in Part III ofSchedule B of the annual Form 1040,and they were not placed on sometype of constructive or inquiry noticeby way of the cross-reference in PartIII of Schedule B to the FBAR; (5)Williams III and McBridewere wronglydecided with respect to the properscope of “willfulness” in the contextof civil FBAR penalties; and (6) TheBohanecs did not “willfully” violatetheir FBAR duty for 2007. The district court largely accepted

the line of reasoning presented by theU.S. government, which is describedbelow. It appears that the U.S. gov-ernment seemed to appreciate that theevidence tending to show that the Bo-hanecs acted willfully regarding the

FBAR duty for 2007 was considerablyweaker than the proof of the impro-prieties of the taxpayers in Williams,McBride, and Bussell. Likely for this rea-son, the U.S. government did not at-tempt to argue that the Bohanecs hadactual knowledge of the FBAR dutyand deliberately chose to ignore it. Thegovernment argued, instead, that theBohanecs were “reckless” and “will-fully blind” about FBARs, stating thatthey “consciously avoided learning ofthe obligations of U.S. citizens con-cerning foreign accounts” and “[i]f theBohanecs did not understand theirobligations under the Bank SecrecyAct of 1970, it is because they chosenot to inquire about them and pre-ferred to remain in ignorance in cir-cumstances in which non-reckless in-dividuals would have at least inquiredas to the obligations of a U.S. citizenregarding foreign accounts.”

Decision by the District CourtThe district court first recited the ap-plicable statutes and regulations man-dating FBAR filing in certain circum-stances. It then underscored that therelevant authorities do not contain adefinition of “willfulness,” such thatone must look to court precedent andother sources. Next, the court quicklydispensed with the position advancedby the Bohanecs that willfulness en-compasses only intentional violationsof known legal duties, because nocourt has adopted this argument inthe civil FBAR penalty context, andbecause the Bohanecs cited in supportof their position only criminal cases(not civil penalty cases) wherein thedefendants must have so-called “spe-cific intent” to be convicted. Referenc-ing Williams III, McBride, and Bussell, aswell as the Supreme Court decision inSafeco Ins. Co. of Am. v. Burr, 551 U.S. 47(2007), the district court determinedthat the concept of “willfulness” forcivil FBAR penalty purposes extendsto reckless disregard of a statutoryduty. The court, in arriving at thisstandard, indicated that two itemscontaining language favorable to tax-payers, CCA 200603026 and the In-ternal Revenue Manual, did not haveany precedential value.

With respect to the burden ofproof, the district court, deferring toearlier decisions by the SupremeCourt, indicated that the higher level(i.e., clear and convincing evidence)applies only in civil matters involvingimportant individual interests orrights, such as parental rights, invol-untary commitment, and deportation,while the lower level (i.e., preponder-ance of the evidence) generally ap-plies, even in cases involving severecivil sanctions. As the district courtsuccinctly put it, the “monetary sanc-tions at issue here do not rise to thelevel of ‘particularly important indi-vidual interests or rights.’ Accordingly,the preponderance of the evidencestandard applies.” The court ultimately concluded

that the U.S. government had proved,by a preponderance of the evidence,that the Bohanecs were “at least reck-lessly indifferent to a statutory duty”for the following reasons: • They were reasonably sophisti-cated business people, as evi-denced by the fact that they nego-tiated highly favorable deals withthe exclusive U.S. distributor ofLeica products, they circumventedLeica’s supply limitations by mak-ing an arrangement with LeitzCanada, they developed a world-wide reputation and conductedbusiness with customers all overthe globe, they always used a re-turn preparer to complete the U.S.tax returns for the Camera Shop,they secured two patents withoutprofessional assistance, and theymanaged the construction of ahome in Mexico.

• They were at least reckless, if notwillfully blind, about their re-porting obligations related to theUBS account, as demonstrated bythe fact that they did not provideUBS with their home address inthe United States, never told any-one about the account (otherthan their children), never con-sulted an attorney, accountant, orbanker about potential require-ments related to the UBS ac-count, and never used a book-keeper or otherwise kept



organized books once the UBSaccount had been opened.

• Their claims that they were un-aware of or misunderstood theirFBAR duties lacked credibility,because Part III of Schedule B oftheir Form 1040 from 1998 putthem on notice that they neededto file an FBAR, they depositedpre-tax sales commissions intothe UBS account and directedcertain foreign customers to dothe same, and they made severaltransfers of funds from the UBSaccount to other foreign and do-mestic accounts.

• The Bohanecs made several mis-representations to the IRS in con-nection with the 2009 OVDP, in-cluding stating that all funds inthe UBS account were comprisedof after-tax amounts, filing “false”Forms 1040 for 2003 through2008 that omitted income fromeBay sales, and filing FBARs for2003 through 2008 that did notdeclare foreign accounts in Aus-tria and/or Mexico. Based on the preceding, the court

held that the FBAR violation for 2007was “willful,” such that the maximumpenalty, equal to the larger of $100,000or 50% of the highest aggregate bal-ance in the unreported foreign ac-counts as of 6/30/08, should apply.

Reasons Why Bohanec Is InterestingLike the other cases analyzed in thisarticle, Bohanec is interesting for anumber of reasons, many of whichare not overt. These reasons are dis-cussed below.

Burden of Proof and Definition of Will-fulness. Given the importance of theissues and the relative scarcity ofprecedent, Bohanec probably will bebest known for its holdings about theburden of proof that the U.S. govern-ment must meet and the definition of“willfulness” for civil FBAR penaltypurposes. The district court in Bohanec,largely following the earlier standards

established in Williams, McBride, andBussell, held that the U.S. governmentneeds to demonstrate its case by onlya preponderance of the evidence, andthat the definition of “willfulness,” atleast in the context of civil FBARpenalties, is sufficiently broad to cover“reckless disregard” of a legal duty. Two points are particularly inter-

esting in this regard. First, few may no-tice the leap that the IRS has made,and apparently the courts have ac-cepted, in terms of demonstrating constructive knowledge of the FBARfiling requirement. In both Williamsand McBride, the taxpayers filed annualForms 1040 for the years in dispute,and Schedule B to such Forms 1040specifically asked the foreign-accountquestion and cross-referenced theFBAR and its instructions. This, ex-plained the courts, sufficed to place thetaxpayers on constructive or inquirynotice about the FBAR. Compare thoseearlier cases to Bohanec, in which theIRS was pressing an FBAR penalty for2007, but the taxpayers had not filed aForm 1040 since 1998. The U.S. gov-ernment suggested to the district courtthat “[t]he Bohanecs were put on no-tice of the FBAR requirement [for 2007]through the filing of their 1998 federalincome tax return.”84

Second, the IRS has essentiallytried to retract its statement that theclear and convincing evidence stan-dard should apply to civil FBAR will-ful cases ever since it was published,a decade ago, in CCA 200603026. Theattempted retraction and recharacter-ization by the IRS continued in Bo-hanec, when the IRS maintained thatits previous analysis about the properburden of proof was nothing morethan an “overly cautious prediction,”with no precedential value, which hasbeen disproven by Williams and Mc-Bride.85 The district court in Bohanecagreed, at least with respect to thecomment about lacking precedentialvalue.

Fighting the U. S. Government on Multi-ple Fronts Simultaneously. The Bohanecsfound themselves fighting the U.S.government on two fronts at nearlythe same time. They were battling theIRS in an audit, initiated after the IRS

jettisoned the Bohanecs from theOVDP. The audit focused on federalincome tax issues and tax-relatedpenalties, including delinquencypenalties under Section 6651 and civilfraud penalties under Section 6663.This struggle was abnormally shortbecause the Bohanecs simply folded;they did not file a Petition challengingthe IRS after it issued a Notice of De-ficiency seeking more than $400,000.In many instances, this conflict willendure for many years, with taxpay-ers engaging in protracted Tax Courtlitigation. The second front on whichthe Bohanecs were skirmishing in-volved the FBAR penalty for 2007 andthe related collection lawsuit filed bythe U.S. government in district court. Absurd though it may sound,

some would argue that the Bohanecshad it easy in that they were busywith the IRS in only two ways, notthree or four. Taxpayers with unde-clared foreign accounts and unre-ported foreign income often findthemselves engaged in a multi-facetedwar of attrition against a rival, the U.S.government, with seemingly limitlessresources. A simple example showshow this frequently works. Assume that Steve Scofflaw held

foreign accounts during 2011, with anaggregate balance of approximately$2 million, which yielded a total of$100,000 in interest income annually.Further assume that Steve Scofflawdid not report the foreign-source in-come on his Form 1040 for 2011, didnot disclose the existence of the for-eign accounts by checking the “yes”box on Part III of Schedule B of theForm 1040, did not enclose a Form8938 with his Form 1040, and did notfile a separate FBAR by the deadlineof 6/30/12. After conducting an auditof 2011, the IRS might issue the fol-lowing items to Steve Scofflaw: (1) aNotice of Deficiency proposing in-creased taxes on the $100,000 of un-reported income, a 40% accuracy-re-lated penalty under Section 6662(b)(7)or civil fraud penalties under Section6663, and interest charges, (2) anFBAR 30-day letter (i.e., Letter 3709)and an FBAR Agreement to Assess-ment and Collection (i.e., Letter 13449)

84 Bohanec supra note 1, Supplemental Proposed Find-ings of Fact and Conclusions of law by Government,filed 11/7/16.

85 Bohanec supra note 1, Trial Brief by Government, filed10/25/16.

NOTES

asserting a penalty of $1 million,which constitutes the maximum sanc-tion of 50% of the highest aggregatebalance of the unreported foreign ac-counts,86 and (3) a Notice Letter (i.e.,Letter 4618) and/or Form 8278 (As-sessment and Abatement of Miscella-neous Civil Penalties) asserting apenalty of $10,000 for failure to file aForm 8938 and warning of increasedpenalties of up to $50,000 for contin-ued non-compliance.87

If Steve Scofflaw disputes all theproposed taxes and civil penalties, hewill become familiar with three dif-ferent venues, as well as the costs offighting in each. First, Steve Scofflawmay file a Petition with the Tax Courtto dispute the income taxes and tax-related penalties proposed in the No-tice of Deficiency.88 This could haveoccurred in Bohanec, but the taxpayersopted not to dispute the proposed ad-justments in the Notice of Deficiencyissued by the IRS concerning 2003through 2008. Second, because the FBAR penalty

derives from Title 31 of the U.S. Code(i.e., Money and Finance) as opposedto Title 26 of the U.S. Code (i.e., Inter-nal Revenue Code), it cannot be chal-lenged in Tax Court.89 Thus, after SteveScofflaw exhausts his administrativeappeal rights with the IRS, the U.S.government will bring a civil collec-tion against him in U.S. district court.90

This is precisely what happened in Bo-hanec.Third, given that penalties for not

filing Form 8938 are not related to atax deficiency, the IRS takes the posi-tion that they are not challengeable inTax Court. Specifically, the IRS’s inter-nal guidance states that “[d]eficiencyprocedures under Subchapter B ofChapter 63 (relating to deficiency pro-cedures for income, estate, gift, andcertain excise taxes) do not apply topenalties discussed in this section.”91

This guidance is consistent with the

CCA 201226028, which explains thefollowing:

The Section 6038D penalty is not itselfpart of a deficiency, so it cannot be subjectto deficiency procedures on that ground. . . [and] the Section 6038D penalty is notcalculated on the basis of a tax that is it-self subject to deficiency procedures; in-stead, the penalty is in specific amountsset forth in the statute. As a result, theSection 6038D penalty is assessable bythe [IRS] without following deficiencyprocedures first.

Because the Form 8938 sanction isan “assessable” penalty, taxpayers gen-erally find themselves challenging it inone or more of the following manners:(1) Filing a protest letter, essentially arequest for penalty abatement, in re-sponse to the first notice from the IRS;(2) Administratively appealing anynegative decision by the IRS ServiceCenter of the penalty-abatement re-quest; (3) Filing a request for, and par-ticipating in, a CDP hearing with theIRS, after the IRS issues its noticethreatening imminent levies of tax-payer property to satisfy the penalty;and/or (4) Paying the penalty underprotest and then initiating a refund ac-tion with the IRS. None of this oc-curred in Bohanec because that casesolely focused on an FBAR violationfor 2007; the requirement to file Form8938 was not introduced until 2011.

The IRS Seems to Go Lightly on FBARPenalties. There is some apparent in-congruity in Bohanec in that, on onehand, the IRS is seeking the maximumFBAR penalty for 2007 based on thetheory that the taxpayers “willfully”violated the law, while on the otherhand, the IRS seems to exhibit someleniency. For instance, the balance of the ac-

count at the time of the violation (i.e.,6/30/08) was at least $643,662. The ac-counts were jointly held, such thatAugust and Maria each had a duty tofile an FBAR. However, instead of as-sessing a penalty equal to 50% of thebalance against each, thereby entirely

draining the accounts, the IRS assesseda 25% penalty against only each ofAugust and Maria, for a total of 50%.Specifically, the IRS sought $160,916from each member of the couple. Thisis interesting because the IRS has typ-ically adopted a fairly harsh stance onthis issue, stating that “FBAR penaltiesare determined per account, not per unfiledFBAR, for each person required to file [and]penalties apply for each year of eachviolation.”92 The IRS followed this pol-icy in Williams, asserting two maxi-mum penalties of $100,000 per ac-count. By contrast, the IRS seems tobe taking a more tempered approachin Bohanec, presumably based on theportion of the Internal Revenue Man-ual that explains that (1) if an accountis co-owned by more than one per-son, then a penalty determinationmust be made separately for each co-owner, (2) the penalty against each co-owner will be based on his/her per-centage of ownership of the account,and (3) if the IRS cannot determineeach owner’s percentage of ownership,the highest balance will be dividedequally among each of the co-owners.93

It is also noteworthy that the IRSpenalized only the UBS account, de-spite the fact that the U.S. governmentproved at trial that other unreportedforeign accounts existed during therelevant years, in Austria and Mexico. Finally, it is interesting that the IRS

decided to limit the number of yearsfor FBAR penalties. The IRS assertedan FBAR penalty for only 2007, butone would assume that it could havedone so for other years, too, because(1) the district court noted that theforeign accounts (in Switzerland,Austria, and Mexico) remained openuntil 2010, and (2) under the OVDP,which covered 2003 through 2008,participating taxpayers are requiredto supply the IRS with Form 872 ex-tending the assessment-periods for


86 iRm section 4.26.17.3 (1/1/07). 87 iRm section 20.1.9.2 (4/22/11); iRm section 20.1.9.2.1

(4/22/11); iRm section 20.1.9.22 (4/22/11). Aside fromthese three civil lines of attack, the iRS might, depend-ing on the facts and circumstances, bring some typeof criminal charge, such as filing a false Form 1040,engaging in u.S. tax evasion, etc. The iRS often begins

the process with criminal charges and then proceedsto the related civil matters.

88 Section 6213(a). 89 See Sheppard, “Two more Blows to Foreign Account

holders: Tax Court lacks FBAR Jurisdiction and Bank-ruptcy offers no Relief from FBAR Penalties,” 11 Journalof Tax Practice & Procedure 27 (February-march 2009).

90 31 u.S.C. section 5321(b)(2). The government must ini-tiate this lawsuit within two years of assessing theFBAR penalty.

91 iRm section 20.1.9.2 (4/22/11) (emphasis added); iRmExhibit 20.1.9-4.

92 iRm section 4.26.16.4 (7/1/08) (emphasis added). 93 iRm section 4.26.16.6.5.3 (11/6/15).

NOTES

income taxes, as well as a so-called“Consent to Extend the Time to AssessCivil Penalties Provided by 31 U.S.C.§ 5321 for FBAR Violations.” In sum-mary, one would assume that the IRScould have asserted FBAR penaltiesfor years before 2007 (because theywere open as a result of the manda-tory extension granted by the Bo-hanecs as part of the OVDP) and foryears after 2007 (because they re-mained open under the normal six-year assessment-period).

A Cautionary Tale—The Truth WouldHave Been Cheaper. The Bohanecs firstapproached the IRS through the 2009OVDP, under which they could haveresolved all international tax non-compliance matters by, among otherthings, filing accurate Forms 1040 for2003 through 2008, paying the taxes,delinquency penalties, and interestcharges related to Forms 1040, filingFBARs for 2003 through 2008, andpaying an “offshore” penalty equal to20% of the highest aggregate value ofthe non-compliant foreign financialassets during the OVDP period.Moreover, the Bohanecs could havecited to the Frequently Asked Ques-tions (FAQs) issued by the IRS in con-nection with the OVDP to potentiallyreduce the “offshore” penalty, elimi-nating any accounts that were non-income-producing, dividing the ac-count balances evenly betweenco-owners, avoiding duplication ofpenalties on the same funds by ex-cluding inter-account transfers, etc.Thus, if the Bohanecs had simplycomplied with the rules and require-ments of the OVDP, they could havecapped their tax and penalty liabilities. It is interesting to note that their

failure to provide accurate Forms1040 and accurate FBARs as part ofthe OVDP, which resulted in themgetting removed from the OVDP, andwhich triggered the IRS audit, ulti-mately proved costly to the Bohanecs.In particular, instead of paying adelinquency penalty under Section6651 maxing out at 25% of the tax li-ability shown on the Forms 1040 for2003 through 2008, the Bohanecsended up paying civil fraud penaltiesunder Section 6663, which are equal

to 75% of the tax liability. Additionally,instead of paying a one-time “off-shore” penalty equal to 20%, theyended up paying 50% of the accountbalance in 2007, plus interest, addi-tional penalties, and costs since thetime that the FBAR penalty was as-sessed, approximately three years be-fore the decision by the district court.

Impact on Current Voluntary DisclosurePrograms. The recent taxpayer losses inWilliams III, McBride, Bussell, and Bohanecwill trigger additional uncertainty fortaxpayers who are participating in theOVDP and entertaining the idea of“opting-out” to seek reduced penalties,participating in the OVDP and con-sidering applying to transition to theStreamline Foreign Offshore Proce-dure (SFOP) or the Streamline Do-mestic Offshore Procedure (SDOP), orevaluating whether to initially ap-proach the IRS through the SFOP orSDOP.

OVDP Opt-Out Standards. Generallyspeaking, taxpayers participating in the2014 OVDP must (1) file Forms 1040or 1040X for the last eight years, (2)pay back taxes, 25% delinquencypenalties or 20% accuracy penalties (asapplicable), and interest charges withrespect to the Forms 1040 or 1040X,(3) file all appropriate international in-formation returns, including FBARs,for the last eight years, and (4) pay acatch-all “offshore” penalty equal to27.5% of the highest aggregate value ofthe non-compliant foreign financialassets during the eight-year period.The standard “offshore” penalty in-creases from 27.5% to 50% if any ofthe non-compliant foreign financialaccounts are held in one of the many“tainted” banks identified by the IRS. The IRS released a series of FAQs

to clarify common issues related tothe OVDP. FAQ #51 addresses optionsavailable to taxpayers who are dissat-isfied with the proposed “offshore”penalty. The main path for frustratedtaxpayers is to “opt-out” of the OVDPin order to seek reduced penalties, ap-plying the normal standards, ongrounds that the taxpayers not onlydid not willfully violate U.S. tax laws,but they also had “reasonable cause”for any missteps. Among the risks as-

sociated with “opting-out” of theOVDP are facing a full-blown auditfor all relevant years and the assess-ment of FBAR penalties higher thanthe general “offshore” penalty offeredwithin the OVDP.

SFOP and SDOP Standards.When theIRS announced the 2014 OVDP inJune 2014, it also introduced the SFOPand SDOP. Below is a high-level sum-mary of these two programs. In order to be eligible to participate

in the SFOP, a taxpayer (who is a U.S.citizen or Green Card holder) mustmeet the following criteria: (1) the tax-payer was physically outside theUnited States for at least 330 days inone or more of the past three years;(2) the taxpayer did not have an“abode” in the United States during therelevant year or years; (3) the taxpayereither failed to file annual Forms 1040with the IRS or filed annual Forms1040 that did not properly report allincome from everywhere in the world;(4) the taxpayer might have also failedto file with the IRS the proper inter-national information returns; (5) thefailure to report all income to the IRS,as well as the failure to file all properinternational information returns, wasthe result of “non-willful” conduct bythe taxpayer; (6) neither the IRS northe U.S. Department of Justice has ini-tiated a civil examination or criminalinvestigation of the taxpayer or a re-lated party; and (7) the taxpayer is anindividual (or the estate of an individ-ual) because the SFOP is not open tobusiness entities. The eligibility requirements for the

SDOP are quite similar, with the big-gest differences being that the tax-payer must have been living in theUnited States during the past threeyears (i.e., the taxpayer does not meetthe foreign-residency requirement forthe SFOP) and the taxpayer previ-ously filed timely, but inaccurate,Forms 1040 with the IRS for the pastthree years (i.e., the SDOP is not avail-able for serial non-filers). Under both the SFOP and the

SDOP, taxpayers are required to fileU.S. income tax returns for only thepast three years, U.S. international in-formation returns (other than FBARs)



for only the past three years, andFBARs for only the past six years. TheIRS does not impose any penaltieswhatsoever on those taxpayers whosuccessfully participate in the SFOP.However, the IRS asserts an “offshore”penalty on SDOP participants in theamount of 5% of the highest aggregatebalance of the non-compliant foreignfinancial assets during the past sixyears. As indicated above, one key eligi-

bility requirement for the SFOP andSDOP is that the taxpayer can dem-onstrate to the IRS that his violationswere “non-willful.” This, like manythings in life, is often easier said thandone. Taxpayers applying for theSFOP must complete and file a Form14653 (Certification by U.S. Person Re-siding Outside the United States forStreamlined Domestic Offshore Pro-cedures), while those seeking refugein the SDOP are obligated to providea Form 14654 (Certification by U.S.Person Residing in the United Statesfor Streamlined Domestic OffshoreProcedures). Each of these documentscontains a few passages that shouldbe of serious interest to taxpayers,particularly those whose facts and cir-cumstances are not terribly strong:

My failure to report all income, pay alltax, and submit all required informationreturns, including FBARs, was due tonon-willful conduct. I understand thatnon-willful conduct is conduct that isdue to negligence, inadvertence, or mis-take or conduct that is the result of agood faith misunderstanding of the re-quirements of the law. I recognize that if the Internal RevenueService receives or discovers evidence ofwillfulness, fraud, or criminal conduct, itmay open an examination or investiga-tion that could lead to civil fraud penal-ties, FBAR penalties, information returnpenalties, or even referral to Criminal In-vestigation. Under penalties of perjury, I declare thatI have examined this certification and allaccompanying schedules and statements,and to the best of my knowledge and be-lief, they are true, correct, and complete. Effect of Recent FBAR Cases. After the

taxpayer victory in Williams II, people

speculated that many taxpayerswould be emboldened to “opt-out” ofthe OVDP and roll the proverbial dicewith the IRS’s Examination Divisionand Appeals Office. As one article putit, a possible outcome of Williams IIwas that “some taxpayers will be en-couraged to opt out of the voluntarydisclosure initiative and take theirchances with the normal FBARpenalty regime.”94 However, the gov-ernment victories in Williams I I I ,McBride, Bussell, and Bohanec likely willchange this attitude, causing taxpayersto be more cautious, as well as betterprepared, before opting-out of theOVDP or applying for the SFOP orSDOP. Indeed, with each governmen-tal victory in FBAR penalty cases, andwith the passage of many years sincethe first OVDP was announced backin 2009, one would anticipate that theIRS will become less inclined to findinstances of “non-willfulness” and“reasonable cause.”

CONCLUSIONWhat is the true status of “willfulness”in the context of civil FBAR penalties?There are at least two sides to everystory. Some inevitably will conclude that

Williams III, McBride, Bussell, and Bo-hanec stand for the general propositionthat (1) the standard for asserting thehighest civil FBAR penalties is willful-ness, (2) the U.S. government is re-quired to prove willfulness by only apreponderance of the evidence, (3) thegovernment can establish willfulnessby showing that a taxpayer eitherknowingly or recklessly violated theFBAR duty, (4) recklessness might existwhen a taxpayer fails to inform hisaccountant, return preparer, or othertax advisor about foreign accounts,(5) recklessness might also exist whena taxpayer is “willfully blind,” whichoccurs when the taxpayer does notread and understand every aspect ofa Form 1040, including all Schedules

attached to the Form 1040 (includingSchedule B containing the foreign-ac-count question) and any separateforms referenced in the Schedules (in-cluding the FBAR), (6) the taxpayer’smotives for not filing an FBAR are ir-relevant, as nefarious, specific intentis not necessary to trigger the highestFBAR civil penalty, and (7) the factthat the IRS previously took the po-sition in published documents, suchas CCA 200603026 and the InternalRevenue Manual, that the IRS mustprove willfulness by clear and con-vincing evidence (instead of by merelya preponderance of the evidence) andwillfulness requires “a voluntary, in-tentional violation of a known legalduty,” is not relevant and not bindingon the IRS now. Others likely will take the position

that it is still challenging for the IRSto successfully assert and collect awillful FBAR penalty because eachcase is determined based on individ-ual facts in each case, the decisions inWilliams III, McBride, Bussell, and Bo-hanec are not representative situationsbecause they concern taxpayers in-volved in egregious behavior withabnormally strong signs of inten-tional wrongdoing, and the U.S. gov-ernment is reluctant to litigate anyFBAR penalty case that it could lose,as this could seriously undermine itsinternational tax enforcement effortsand voluntary disclosure programs. What is clear is that this issue is far

from resolved. As a case in point, thesame day that the district court ren-dered the decision upholding the will-ful FBAR penalty in Bohanec, counselfor the taxpayers announced that theyintended to appeal.95 This dispute willbe followed by countless others in thecoming years. l

94 Coder, “u.S. Government Position on FBAR PenaltiesCalled into Question,” 2010 Worldwide Tax Daily 174-4 (9/9/10).

95 Richman, “u.S. Court Decision on FBAR WillfulnessStandard Set for Appeal,” Tax notes Doc. 2016-24192(12/8/16).

NOTES

Documents

Government Wins Fourth Straight FBAR Penalty Case: Analyzing …€¦ · rent standards for “willfulness.” That is the aim of this article.1 Government Wins Fourth Straight FBAR