Cross posted from RenounceUScitizenship.
As you know, Mr. FBAR is a particularly nasty piece of work. Absent a showing of “reasonable cause”, Mr. FBAR opens the door to a sliding scale of penalties. In the past I have written about Mr. FBAR and the non-willfulness penalty structure. This post is about “willfulness.” Specifically, what constitutes “willfulness”? Conviction for the “willful” failure to file an FBAR comes with “unspeakably high penalties”. So, I won’t speak of them here. The non-willful penalties are bad enough. But, the penalties for “willfulness” clearly invite 8th amendment (“excessive fines”) scrutiny. This is certain to come. In fact, it may well be that the next step in the “Williams saga” will be just that.
The Williams Saga
A brief overview of the Williams saga may be found courtesy of Robert Wood here and Jack Townsend here (appellate decision) and here (initial trial decision). Before analyzing these decisions and considering what they may mean, it is important to understand that this is not a situation of the IRS attempting to target a taxpayer whose sole sin was a failure to file FBARs. Mr. Williams, by his own admission was a willful tax evader. In addition, he failed to file FBARs. What is interesting is that the IRS decided to go after him for FBAR violations as well. Why? I haven’t a clue. I am not sure if I see a purpose to it. But maybe the IRS simply lacks purpose …
The Story of Mr. Williams
The facts are detailed by Jack Townsend in his blog as follows:
In Williams v. United States (EDVA Civil Action No. 1:09-cv-437, decision dated 9/1/10), the court declined to find willfulness.
(Note the test for wilfullness is: The legal review standard is de novo, in which the Government must prove willfulness — in this context the intent to violate a known legal duty.
The opinion is relatively short, so I won’t rehash the opinion. Some significant facts from the case are:
1. “Between 1993 and 2000 Williams deposited more than $7,000,000 in assets in the accounts, earning more than $800,000 in income over that period.”
2. During the year in issue (2000, for which the FBAR was due 6/30/01), the Swiss were focusing on the accounts perhaps at the request of the U.S., the Swiss interviewed Williams about the accounts, the Swiss froze the accounts at the request of the U.S. and the U.S. was aware of the accounts (it is not stated whether that request was a tax driven request or some other law enforcement imperative request.) (The timing of some of these events were disputed by the Government, but the district judge would have none of that.)
3. On his 2000 1040, Williams failed to include the income from the accounts and, on Schedule B, failed to check the FBAR question.
4. Williams failed to file the FBAR by June 30, 2001.
5. Williams’ lawyers and accountants had advised him of the requirement to file the FBAR.
6. The Government had not proved that Williams willfully failed to file the 2000 FBAR.
7. “On October 15, 2002, Williams disclosed the accounts by filing his income tax return for the tax year 2001.”
8. On February 2003, Williams disclosed the accounts pursuant to an earlier version of the offshore voluntary account program (the OVCI program).
9. “On June 12, 2003, Williams pleaded guilty to one count of conspiracy to defraud the United States and to one count of criminal tax evasion in connection with funds held in the Swiss bank accounts during the years 1993 through 2000.” (Apparently, Williams’ attempt at voluntary disclosure did not work, presumably because the disclosure was not timely.)
10. “On January 18, 2007, Williams filed the TDF 90-22.1 form for all years going back to 1993, including tax year 2000.”
The key legal holdings are:
1. The legal review standard is de novo, in which the Government must prove willfulness — in this context the intent to violate a known legal duty.
2. The maximum penalty for the willful violation then was $100,000.
3. The court found on the facts presented that the Government had not proved that the defendant knew the legal duty in question. The Court reasoned:
In this case, the Government has failed to prove a “willful” violation. The Court finds that the Government’s case does not adequately account for the difference between failing and willfully failing to disclose an interest in a foreign bank account. n5 Further, the Government fails to differentiate tax evasion from failing to check the box admitting the existence of a foreign bank account.
n5. It is worth noting that Congress has since amended 31 U.S.C. § 5321 to allow the government to assess a civil penalty for FBAR violations regardless of whether the violation is willful. See 31 U.S.C. § 5321(a)(5), as amended by P.L. 108-357. Further, the statute now provides a “reasonable cause” exception. See 31 U.S.C. § 5321(a)(5)(B)(ii). While the issue of Williams’ liability under the statute as amended is not before the Court, the Court notes that Congress found it necessary to expand the coverage of § 5321 to address a class of conduct falling short of the “willful” standard solely accounted for under the old statute. Clearly, simply failing to file a Form TDF 90.22.1 was insufficient to subject an individual to liability for a civil penalty under the old statute.4. The court was not persuaded, on these facts, that Williams’ no answer to the foreign account question on his 2000 1040 Schedule B gave his the requirement knowledge of the legal duty.
5. Moreover, since the accounts were surely known by all, including the U.S. by June 30, 2001, it would make no sense for Williams not to disclose them by filing the FBAR.
6. Williams was not estopped by his evasion guilty plea.
The Government argues that Williams’ guilty plea should estop him from arguing that he did not willfully violate § 5314 for the tax year 2000. However, the evidence introduced at trial established that the scope of the facts established by Williams’ 2003 guilty plea are not as broad as the Government suggests, and there remains a factual incongruence between those facts necessary to his guilty plea to tax evasion and those establishing a willful violation of § 5314. That Williams intentionally failed to report income in an effort to evade income taxes is a separate matter from whether Williams specifically failed to comply with disclosure requirements contained in § 5314 applicable to the ALQI accounts for the year 2000. As Williams put it in his testimony at trial, “I was prosecuted for failing to disclose income. To the best of my knowledge I wasn’t prosecuted for failing to check that box.” Tr. at 34.I think the case illustrates the difficulty the Government will meet in establishing willfulness for the truly draconian FBAR penalty (in its present iteration). Perhaps this will encourage at least some taxpayers in the current voluntary disclosure initiative to opt out and be subject to the normal FBAR penalty regime. Assuming that the Government cannot meet the high standard (as illustrated by this case), the penalty costs could be a whole lot less than the program requires.
As you can see, Williams is what is known as a “bad actor”. That said, everybody is entitled to the presumption of innocence and to be convicted according to law. What is the relevant law?
The law is: Willfulness = the intent to violate a known legal duty
Let’s take this apart. To prove willfulness the government must prove three things:
2. a legal duty to file an FBAR
3. knowledge of that duty.
There is a clear legal duty to file an FBAR. Therefore the relevant factual considerations become:
Did Williams have knowledge of that legal duty; and
If Williams did have knowledge to that legal duty, did he intend to violate that duty?
Now all this is (I believe) a clear statement of the law. What it does NOT tell us is, what is the standard of proof that the government is required to demonstrate. I.e. how does the government, as a matter of law, prove knowledge and intent? How sure must the judge be? Must the government proves the elements of willfulness under a standard of:
A. A balance of probabilities (this is the civil standard of proof and should NOT be the standard adopted here);
B. Proof beyond a reasonable doubt (this is the general standard in criminal law).
Note Jack Townsend’s statement that:
I believe that, as to the factual issue of willfulness for the punitive FBAR penalty, the Government should have to prove willfulness by clear and convincing evidence.
(Let’s hope Jack is right.)
Once again, this is an accurate statement of the law. But, now the question becomes:
What is sufficient for the government to prove these elements?
Here is where the court of appeal decision becomes interesting, dangerous and full of implications that extend way beyond Mr. Williams and his stupid FBARs.
What did the court of appeal say?
The relevant part of the decision, where the court explains why Williams was willful, is as follows:
Here, the evidence as a whole leaves us with a definite and firm conviction that the district court clearly erred in finding that Williams did not willfully violate § 5314. Williams signed his 2000 federal tax return, thereby declaring under penalty of perjury that he had “examined this return and accompanying schedules and statements” and that, to the best of his knowledge, the return was “true, accurate, and complete.” “A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.” Greer v. Commissioner of Internal Revenue, 595 F.3d 338, 347 n. 4 (6th Cir. 2010); United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000) (same). Williams’s signature is prima facie evidence that he knew the contents of the return, United States v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991), and at a minimum line 7a’s directions to “[s]ee instructions for exceptions and filing requirements for Form TD F 90-22.1” put Williams on inquiry notice of the FBAR requirement.
Nothing in the record indicates that Williams ever consulted Form TD F 90-22.1 or its instructions. In fact, Williams testified that he did not read line 7a and “never paid any attention to any of the written words” on his federal tax return. J.A. 299. Thus, Williams made a “conscious effort to avoid learning about reporting requirements,” Sturman, 951 F.2d at 1476, and his false answers on both the tax organizer and his federal tax return evidence conduct that was “meant to conceal or mislead sources of income or other financial information,” id. (“It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms. Evidence of acts to conceal income and financial information, combined with the defendant’s failure to pursue knowledge of further reporting requirements as suggested on Schedule B, provide a sufficient basis to establish willfulness on the part of the defendant.”). This conduct constitutes willful blindness to the FBAR requirement. Poole, 640 F.3d at 122 (“[I]ntentional ignorance and actual knowledge are equally culpable under the law.”)
What the court is saying is:
If you sign a tax return you are admitting knowledge of the contents and and a failure to “follow up” on any directives in the return constitutes “willful blindness” which is sufficient to establish the requirement of “knowledge of the legal duty”. Once you have been deemed to have “knowledge of the legal duty”, the fact of non-compliance (in the absence of compelling evidence”) constitutes willfulness.
Absolutely frightening. If this is the case, could one argue that the requirement to sign a tax return could violate the 5th amendment?
One interesting feature of the decision is …
Apparently Williams was given (by his accountants) a check list to complete. When completing the “check list” he did NOT disclose to his accountants that he had Foreign account. The court seems to have put great weight on this fact!
Why did the court rule that William’s conduct was willful?
The answer is simple: they wanted to convict Williams. This decision is unbelievably unprincipled.
This is one more in a line of decisions that demonstrate that “mens rea” is not, in a factual sense, a requirement to convict under U.S. law. See a recent post that I wrote on the diminishing requirement of mens rea under U.S. law. This is frightening. Last week I was shown a tax return that exceeded 150 pages and was prepared by a high priced accountant. The taxpayer hired the accountant in to order to make a maximum effort to be in compliance with the law. The taxpayer signed the return without having a clue what was in it. According to this court decision, the signing of the return means that you are:
1. Deemed to have knowledge of the contents of the return (even though no human being could understand it); and
2. Any mistakes in relation to the return CAN and MAY (under certain undisclosed circumstances) lead to a finding of willfulness.
The trouble with the decision is that it is based on reasoning that can be extended (and as history shows) will be extended to every Tom, Dick and Harry (but not Timothy). In other words, the court has made the distinction between willfulness and non-willfulness very difficult to see! Where is the line? I am not sure that I see it. Do you?
Jack Townsend, in a similar view, in his post writes:
The basis for the holding, I think, is the notion that the Court repeats that defendant’s signature on the return puts him at criminal as to anything that was not correctly reported on the return. The notion is that, even if he did not know about the incorrect reporting and the leads that he might have found to the FBAR, he is willfully blind — and thus willful — as to the failure to file the FBAR. I think that is a dangerous and wrong notion that is not facially limited to just FBAR situations and very bad facts.
The problem, of course, is that the notions bantered about by the majority can present risks in cases where the facts are not bad.
Thank God for minorities …
Fortunately there is a minority decision that is much more reasonable and (without expressly saying so) exposes the majority decision for what it is – nothing more than a desire to convict Williams. As Jack Townsend notes:
I recommend the dissent as being a more nuanced reading of the tea leaves before the court. If a clearly erroneous review means anything, it should have resulted in affirmance of the district court’s holding on the fact issue of willfulness. In effect, the majority seems to turn the factual holding into a legal issue compelling the conclusion on the basis discussed above.
The court should have left the decision of the trial judge intact. Instead the court has sanctioned the newest stage of Form Nation Tyranny:
To be charged is to be convicted!
Imagine the possibilities open to the IRS with Form 8938? From the IRS perspective, Form 8938 is surely “Manna from heaven!” Form 8938 coupled with the decision of the Appellate court in Williams will provide an “penalty annuity” to the IRS.
Renounce U.S. citizenship. It’s just not worth the risk of exposure to endless variations of “Form Crime”.
@30 Year IRS Vet
I agree with that today, tomorrow, next week and probably next year, this decision will be of little consequence. The problem is that if this is left unchallenged, it will stand as an appellate court decision that creates “willfulness” where as a matter of simple fact and common sense there is not. Remember that FBAR began its career as a statute to attack money launderers and others. Look where we are today. It is being used to terrorize the innocent. Many people don’t even believe that this kind of terrorism is going on. If we could trust governments that we wouldn’t need a Bill of Rights or a Charter of Rights. If this decision is not appealed, the IRS will simple cite the reasoning, point out the reasoning is in no way dependent on bad facts, and us it convict people of willfulness (or worse terrorize them into plea bargains they should not make).I agree with you that the minority decision is more reasonable and makes more sense. But, the reason is that is called the dissent or minority, is that it is NOT the decision that carried the day.It is essential that this decision be appealed (if possible). Furthermore, the IRS has any integrity at all, it needs to make the public statement that to the effect that:
1. The IRS welcomes the finding of fact that Williams was willful; but that
2. The IRS does NOT accept the reasoning used in the majority decision to DEEM Williams as being willful.This is what the IRS needs to do. Now, you and I both know, that there is no chance (correct me if you think I am wrong) that the IRS will do this. Therefore, we are left with the worst of both worlds.
First, we have the decision itself (which is incredibly unprincipled); and
Second, (assuming the IRS does not make a public statement distancing itself from it) we are left with the perception that the IRS will use it. But, you are the one with the experience here. So, I would be interested in more of your thoughts on the future conduct of the IRS in relation to this. I would also be interested in the thoughts of Todundsteur on this issue.
Page 24 on last paragraph
[for $5000 suggestion, thanks IJ]
I am freaking stunned on this. This is so stupid. So so stupid.
I get it. The IRS wants everyone to know that they are incredible nasty on FBAR outside OVDI. But all people are going to remember is the nasty — not that you can overburden the system in attempting to negotiate an OVDI. You guys know I make money out of helping get OVDI’s though. And this decision will not help me. This is not going to get This is going to spook everyone. And I am not sure what is going to happen. October 15th account holders >50k who have not OVDI’d have a decision to make on Form 8938. File honest return (which will alert existence of offshore account) or not file fraudulent return, compounding the exposure when caught.
Here’s the link to my post on this: http://www.irsmedic.com/2012/07/26/fbar-and-irs-4-painful-lessons/
The only problem with renouncing is you got to be inc compliance when renouncing else you’re still a citizen.
It’s tougher to leave the US than the USSR.
@Anthony, thanks for your comment. In the case of renunciation and FATCA, here is the facts. I can show my CLN which is issued by the State Department to my FFI. All is well and good. I no longer have US status as far as the bank is concerned. They do no need to report my account under FATCA rules. Full stop!
Whether or not I check out with the IRS through compliance is irrelevant. I am no longer a US person for the purposes of FATCA. I don’t have to file FBARs, or 8854, or five years of 1040s. I’m done as far as FATCA is concerned.
Now as for Canadians who have all their wealth in Canada; well, it’s your country (the USA) that is going to lose out. Canadians are learning that the US is not an investor friendly country. We will be selling our condos in Florida, Myrtle Beach and south Texas. We will be investing anywhere but the US for our investment portfolios. This is FATCA Find AnoTher Country for your Assets. Then there will be no 30% withholdings. And Canada will not collect FBAR fines. So the IRS only has the ability to seize assets in the USA–not from my accounts in Canada.
‘Find AnoTher Country for your Assets’ LOL!
I would be curious to know what type of clients you’re advising and funelling into OVDI.
Is it mainly minnows who are not at risk of criminal exposure, or people who might be more at risk.
William pleaded guilty to tax evasion. The sums were considerable ($7 million if I recall). The initial court probably should have found him willful in the first place. Now I agree, that the result of the judgement make it sound that you’re willful if you just check no on the 1040 and that’s the scary part.
But I don’t know if we can generalize the judgement in the Williams case with the majority of minnow and expat cases.
By reading your comments on your website, you make it sound like there is no other option than OVDI and you’re scaring potential clients into it.
If I may comment on your posting:
1. The IRS is insanely aggressive in assessing FBAR penalties.
Williams is one of the few cases that have been publicized outside of the program.
“So people thinking about a so-called ‘quiet’ or ‘soft’ disclosure think twice. And any tax professional advising a course of action — understand the IRS will probably come after you if they catch wind that you profited from advising something other than compliance.”
Advising a quiet disclosure is not advising non compliance. This is a course of action available to fix past mistakes and it would be stupid for the IRS to prosecute honest quiet disclosure, because they would dry out. The money they get from them is free money.
And advising being compliant forward is also not advising non compliance either. These are options that should be considered based on the facts.
People should also made aware of the IRM penalty mitigation guidelines http://www.irs.gov/irm/part4/irm_04-026-016.html , which are dependent on the actual amount of the account. For a lot of minnows, even if they’re found willfull, it might still be worth it NOT to enter OVDI, unless there’s a risk of criminal prosecution.
Willfull penalties for accounts < 50K is “only” $1,000 per year.
For less than $250K, it is $5,000 per year.
Now assuming the person files correcly from now on, they will be non compliant for 5 years.
That’s $25,000, in most cases, what people end up spending just in attorney and accountant fees for getting into OVDI. And that’s assuming they’re audited the first year.
“So if you are outside the OVDI program, and get assessed FBAR penalties, do not expect the leniency available if you get into the OVDI program”
There is no leniency inside the program. You either pay the in lieu of penalty, or opt out, and in this case, the IRS said you’re subject to the same audit that you will get if you’re audited because you did a quiet disclosure or just comply forward.
4. Do not expect justice/commonsense/fairness if you do not make an OVDI disclosure.
How do you back this data up?? This cannot just be based on the Williams’ case. Maybe you could give us anonymous data of some of your customers that you chose to opt out of the program, or that you represented outside of OVDI. How did that work out for them? Did any of them get any FBAR penalty? If so, what were their facts?
The only couple public cases we know are the cases of Moby and Sally, who were treated fairly outside of OVDI after opting out. Just Me wasn’t, and we’ll never know if the $25K he paid in FBAR penalties would have been worse if he just got audited without entering the program.
We might get another data point with ij.
We just don’t have enough data to know how non tax evaders are treated outside of the program and that’s why it’s difficult to advise. Would you breach customer confidentiality by publishing data you have on opt outs (without revealing customer names)?
Respectfully submitted (as 30 year IRS vet would say 😉
Phil Hodgen(who is another lawyer and friend of the site) has a blog post discussing a perfectly legitimate way to extend the filing deadline to December 15th in certain cases you might want to take a look at.
I don’t think the real importance of this case is on the FBAR issue. The real importance is the statement that you are deemed to know of the contents of the return by virtue of signing it. That is the problem.
With respect to the FBAR issues in this case:
– remember that this is prior to 2004 when the FBAR law was changed. “Reasonable cause” is now a statutory defense.
But, I am really interested in this excerpt from your post:
“1. The IRS is insanely aggressive in assessing FBAR penalties. The
IRS threw everything that had at this case and there was no mercy even
though prudence would probably have called for it. So people thinking
about a so-called ‘quiet’ or ‘soft’ disclosure
think twice. And any tax professional advising a course of action —
understand the IRS will probably come after you if they catch wind that
you profited from advising something other than compliance.”
Would you please clarify. Are you saying that:
1. Compliance means entry into OVDP anything else is non-compliance?
2. A professional who advises any other than OVDP means that the IRS will come after them (to use your words). If so, could you refer me to the part of Circular 230 that says this. Also would be interested in your thoughts on the following post:
*Tim —hey thanks. I think he’s right.
1. The agency with the power and the guns said it is non-compliance. The law is less clear. But we live in rather lawless times. And I don’t want myself or a client to be the test case.
2. I know what you mean — I for a while was entertaining ‘soft’ ‘quiet’ disclosure, for a while ( I never, but when I first learned about the 2011 OVDI, my first response was, there’s got to be a better way). Right — advising a client to pay all past due taxes and submit any missing forms — how could that form the basis for anything other than a thank you letter from the IRS?
And yet, the IRS has said it does not want people doing this and will prosecute people who advise this.
So what to do? The legal foundation for the IRS’ stance isn’t exactly strong, but their power get closer to infinite every day (ObamaCare really driving that point home). And you know they will be going to court tes their theory. Why not? It is only going to cost them other’s people money. Now to be on theother end of that…I don’t care how good your facts are, how good your attorney, is, how well you are bankrolled, once that indictment falls, you are not going to feel confident. The process is a punishment in of itself, and don’t think they don’t know that.
We live in extra-legal times. I did criminal appeals for many many years and I lost my appetite for it. The last place to expect justice is a court of law. The very last place.
If someone does ‘soft’ disclosure. That’s their risk. As an attorney with a practice and a lot of obligations, I refuse to put myself in the sites of the DOJ. No one can pay me enough. I
As I think a better course of action is to get political. And before getting political there needs to be education. Americans have been raised on a staple of greed politics ..always measuring what their neighbor has in order to figure out how much they can take. And yet…all these things the taxes are supposed to solve only exacerbate and that is because the income tax is dehumanizing.
Now I wouldn’t give up on a legal strategy. But rather a reverse Cloward-Piven…I would love if every single person filed an OVDI right now who was required to do so. If that happened, the system would be overwhelmed it would halt. And then appeal if they are assessed any penalty. And then tax court. And then appeal.
Just so you know, right now the US tax court can handle 29,000 new petitions a year (and most of those get kicked out on a technicality because pro se litigants are unfamiliar with exhausting administrative remedies). So how many OVDIs could be filed? How many tax court cases would be initiative. There’s an awful to of ex pats and an awful lot of dual citizens and visa holders. The IRS routinely changes it policy depending on what its work demands are.
A bundle of sticks is much stronger than the sum of each stick. I’d really like to see taxpayers so similarly situated coming together.
“If someone does ‘soft’ disclosure. That’s their risk. As an attorney
with a practice and a lot of obligations, I refuse to put myself in the
sites of the DOJ. No one can pay me enough.”
Are there any circumstances under which you would NOT recommend OVDP? I find your position difficult to understand. The December 2011 FS was at least one statement from the IRS where they are providing an alternative to OVDP.
I would like to know exactly where this directive comes from that NOT doing OVDP is non-compliance.
I have the feeling that you are primarily concerned with keeping yourself in the good graces of the IRS (I suppose I would be too, if I were practising before the IRS). But, I just had the following thought:
If the fact that lawyer makes a living practising before the IRS (with all the Circular 230 rules, etc.), shouldn’t one avoid that kind of lawyer in making the initial decision for how to come into compliance? Perhaps it might be smarter to use a non-U.S. lawyer. If to use a U.S. lawyer means, the lawyer is subject to circular 230 and interprets it to mean that only entering OVDP is compliance, then shouldn’t a lawyer like that be avoided? Maybe if one decides that OVDP is the right way to go, then one retains a lawyer such as yourself. Does that make sense?
The simple fact is that there are a number of logical compliance options. How can one use a lawyer that one won’t explain them to the client?
I am very interested in your thoughts on this. There are probably millions of people who would like to come into compliance and just don’t know how.
The IRS has become the single biggest obstacle to compliance.
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A non US tax lawyer really can’t help you that much. If you go to lets say the best CANADIAN criminal tax lawyer here is what they will say. Under the rules of the Upper Canada Law Society they basically cannot give legal advice on a subject matter the have authorization to practice under(i.e. US Tax law) Being resident in Canada really doesn’t make a difference. Roy Berg is a US tax lawyer residing in Canada he can’t argue in front of Canadian court and still has to follow Circular 230. A Canadian criminal tax lawyer could advise basically of the following things:
1. The Assistance in Collection procedures in the US Canada tax treaty and how operational the CRA handles them.
2. Any matters regarding the obligations of the government of Canada under the US Canada mutual legal assisstance treaty(MLAT)
3. Any matters regarding extradition.
4. Also the exchange of information provision of the US Canada Tax Treaty and how the CRA deals with them operationally.
*I also recommend all attorney read the following document from the Canada Revenue Agency(This was not at ALL easy to find. Damn near impossible. You not find at any website).
What it basically says is that the FBAR is outside the scope of the US Canada Tax Treaty. Thus any request for collections or administrative assistance would have to occur outside the context of the tax treaty.
Set forth below is a hypothetical that I posed to you in another forum, followed by my own views. I think it would be informative for all concerned if I could induce you to comment:
Here’s a fact pattern that
might be fun to discuss.
Taxpayer and his family come from Country X.
Taxpayer had a bank account in Country X when he moved to the US, and became a
US resident (living in Florida), on 1/1/11. Taxpayer transferred the funds from
the foreign account to a US account, and closed the foreign account, on 4/1/11.
The max value of the account was $1,000,000.
The interest earned on the
account from 1/1/11 through 3/31/11 was not substantial and, moreover, was
subject to foreign withholding tax at a 30% rate. As it turns out, taxpayer
would not have owed any US tax for 2011 if the account had been properly
reported on his 2011 return (which was filed 4/15/12).
accountant knew that the client comes from Country X, knew that taxpayer had a
foreign account, but admits he “goofed” by neglecting to inform taxpayer about
his tax and FBAR obligations with respect to the account.
do you present to this client?
I’ll start. Under these
particular facts (and, yes, I admit I chose an extremely favorable fact
pattern), I’d suggest the following options be considered, in the following
1. Do nothing. The 2011 return was filed in good faith. There is
no legal obligation to amend. Sometimes it’s desirable as a tactical matter. but
I don’t see that here.
2. Amend the 2011 return and pay the immaterial
amount of tax due. This can be done with or without filing the late FBAR. I’d
lean towards not.
3. Make a voluntary disclosure and opt out. This is a
far distant third.
4. Make a voluntary disclosure without an opt out.
This is far, far distant fourth.
With respect to the possible downside
of not being in the safe, heartwarming confines of the program, a few
observations on these facts.
A. This is clearly not a criminal case. So,
we can focus solely on potential civil penalties.
B. The facts here
strongly indicate reasonable cause, so zero penalties should be owning. The
taxpayer is entitled to demonstrate his reasonable cause even if he makes a
quiet disclosure, or no disclosure at all.
C. Even if reasonable cause
is not allowed, it’s hard to find a much stronger case of not being willful. The
max penalty for a nonwillful violation is $10,000. Note that, here, there is
only one year of noncompliance, and only one account, so there is no potential
multiplication of penalties.
D. Even if we indulge the silly idea that
this taxpayer might be viewed as willful, the max penalty is $100,000 (the
greater of $100,000 and 50% of the balance of the account on the date of the
violation, i.e., 6/30/12 when the account had a zero balance). In the taxpayer’s
shoes, I think I’d risk a 0.000000000000001% chance of a $100,000 penalty.
Mark Nestmann has a post up on the Williams case now:
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Jack Townsend has just posted a blog about a Hale Shepard article that merits reading.
Hale Sheppard Article on Lessons from Williams
For those that follow what Hale Sheppard has said in the past on FBARs, know that he is considered a scholar on these matters.
Well worth your time to read and understand the ‘willful’ vs ‘nonwillful’ impacts of a simple check mark on a tax return.