The IRS has set out the definition of “willfulness” and the standard of proof for establishing violations under the rules for submitting a Report of Foreign Bank and Financial Accounts (FBAR).
In Program Manager Technical Advice, the IRS has concluded that the standard for willfulness is the civil, rather than criminal, standard and that it includes not only knowing of violations of the FBAR requirements, but also willful blindness to and reckless violations of them.
A U.S. person must file an FBAR to disclose any foreign account with a balance exceeding $10,000 in which they have a financial interest. A nonwillful failure to file can result in a penalty of up to $10,000 for each failure. Where the failure is willful, the maximum penalty is increased to the greater of $100,000 or 50% of the balance in the account at the time of the violation.
As the Internal Revenue Code and regulations don’t define “willfulness,” the IRS leaned on court rulings to come to its conclusion.
The tax agency noted that, in the criminal case Safeco Ins. Co. of America. v. Burr, the U.S. Supreme Court interpreted the term “willful” or “willfully” narrowly, limiting liability to “knowing violations.” The Safeco court also noted that, where “willfulness” is a statutory condition of civil liability, the Supreme Court has generally interpreted it to not only include knowing violations of a standard, but reckless ones as well. And the U.S. District Court for the Eastern District of Pennsylvania, in the Bedrosian FBAR case, noted that every federal court to have considered the willfulness standard for civil FBAR violations has concluded that the civil standard applies and that the standard includes “willful blindness” and “recklessness.”
“Willful blindness is established when an individual takes deliberate actions to avoid confirming a high probability of wrongdoing and when he can almost be said to have actually known the critical facts,” the IRS said. The government can show willful blindness with evidence that the taxpayer made a conscious effort to avoid learning about reporting requirements.
Citing a 1989 employment tax case, the IRS stated that the recklessness standard is met “if the taxpayer 1) clearly ought to have known that 2) there was a grave risk that withholding taxes were not being paid and if 3) he was in a position to find out for certain very easily.” (Vespe, U.S. Court of Appeals for the Third Circuit)
Regarding the standard of proof, the IRS noted that the courts are uniform in their rulings in FBAR cases — the government bears the burden of proving liability by a preponderance of the evidence.
As the court in Bohanec noted, the Supreme Court has held that a heightened, clear and convincing burden of proof applies in civil matters “where particularly important individual interests or rights are at stake.” Important individual interests or rights include parental rights, involuntary commitment, and deportation. However, the preponderance of the evidence standard applies where “even severe civil sanctions that do not implicate such interests” are contemplated. The court in Bohanec held that civil FBAR penalties do not rise to the level of “particularly important individual interests or rights” and, accordingly, the preponderance of the evidence standard applies.
Questions about FBAR responsibilities? Consult with your B&V tax representative at 713-667-9147 or email@example.com.