FBAR & IRS: Painful lessons from the 4th Circuit’s US v Williams reversal

July 26, 2012 | FBAR Penalties, International Taxation, Miscellaneous, News, OVDI Offshore Voluntary Disclosure Initiative, Voluntary Disclosure

The 4th Circuit takes a hard line on FBAR penalties

Nearly two years ago, I commentated on the lone FBAR court decision, US v. Williams (4th Cir. Jul 20 2012). In this case, the IRS lost. But because the facts were so unique, so limited, it really wasn’t much of a loss for the IRS. After all:
“…Williams’ tax professionals did not advise him to the requirement to file an FBAR. He said he didn’t know he had to and no one made it clear to him that he needed to. Unlike a strict liability offense where state of mind in irrelevant, in order to be liable for willful failure to file penalties, ones must possess a willful state of mind. Ignorance is at best, negligent.
Second, and here’s what I think it most important — is that for tax year 2000, the due date to report the TDF 90-22.1 form was on June 30, 2001. But the thing is that the IRS already knew about the account — since November 2000 when the account was originally frozen!
So when Williams was required to disclose the accounts existence to the IRS on June 30, 2001, Williams already knew the IRS knew about the Credit Agricole. There is no possible way Williams failure to file the FBAR could have possibly helped him and he must have known that. The court reasoned that the failure to check the box and failure to file a TDF 90-22.1 form by the June 30th deadline could have only been an innocent mistake. There actually was no strategic reason for Williams to file an FBAR — thus, the court inferred that the failure to file was not willful.”
So after the district court ruled against the IRS in 2010, I figured the Williams matter to be pretty much over. The case wasn’t all that strong for the government, and the taxpayer had absolutely nothing to gain by not filing the FBAR. After all, he already plead guilty to tax evasion on income earned from the very bank accounts that the IRS assessed the FBAR penalties. I figured the IRS would move on to more fertile ground, and not appeal. I was wrong. The IRS appealed. And more surprising, this time, they won.
And these are the lessons…
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.
2. Reliance on tax professional is no defense to FBAR penalties. Williams hired counsel during this time to assist him in coming clean. Clearly they missed having him file an FBAR. And if I were in their shoes, I would probably do no different. I am not criticizing his counsel. Of course, in retrospect, they should have. But how were they to know? They attempted a voluntary disclosure. Shouldn’t the IRS have said ‘jeez, we want to process this voluntary disclosure, but it seems we are missing some FBARs.”
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. They will push this all the way (However, If you are in the OVDI program reliance on a tax professional is a legitimate reason). Think about it: If the IRS can and will assess FBAR penalties in this case, what case will they not?
3. Willful is a low, low threshold. The 4th circuit has now ruled that “willful” is tantamount to “I could not possibly benefit from non-compliance, I relied on professional advice, and honestly my failure is what 80% of taxpayers so similarly situated did.”
This is a pertinent fact missing form the decision: According to the IRS records, in 2002, no more than 20% of taxpayer who were required to file FBARs actually filed FBARs. The FBAR filing requirement has been in place since 1970, but because of massive confusion and the Treasury even admitting that it it not have the resource to process them. It was a requirement that was routinely ignored…by everyone.
4. Do not expect justice/commonsense/fairness if you do not make an OVDI disclosure. It will not happen. If you do not like the IRS, you must get political. (or wait until a member of congress get caught in an FBAR scandal. Then maybe we can expect some reasonableness to trickle down). If you want to be treated somewhat fairly, you must disclose) by filing an OVDI an aggressively seek a lower penalty amount.
Here’s the thing. Not everyone who failed to file and FBAR or did not report income earned overseas should be treated like a criminal. And in fact, the opposite the vast majority of noncompliance is from either ex-pats, dual citizens or VISA holders who were under the mistaken assumption that because they paid taxes on income earned in their home/host country, the did not need additionally be taxes by the IRS. As this is totally a reasonable position. Look at the 16th Amendment. Where does it say worldwide income? It doesn’t. It actually took a US Supreme Court case, US v Tait, to rule that yes, the IRS could tax you globally.