Litigating FBAR Penalties: The Burden of Proof and the Meaning of Willfulness

In Bank Secrecy Act, Defenses, FBAR, Tax Litigation, White Collar, Willfulness by Jason FreemanLeave a Comment

The recent case of United States v. Bohanec, 2016 U.S. Dist. LEXIS 170149 (Dec. 8, 2016) provides the latest glimpse into the world of FBAR penalty litigation. Among other things, the case looks at two interesting and important procedural issues: the meaning of willfulness and the burden of proof necessary to prove it. In Bohanec, the government asserted a penalty against Mr. Bohanec, a foreign account holder, for willfully failing to report his foreign accounts and sued for a judgment. The district court found for the government and held that, in the context of willful FBAR penalties, the government need only prove a “willful” failure to file an FBAR by a preponderance of the evidence—not the heightened standard of clear and convincing evidence that the defense argued was applicable. The court also held that willfulness can be satisfied where there is a reckless disregard of the obligation to file an FBAR. The ruling continues a trend of cases that have, in effect, expanded the definition of “willful” conduct and that, at the same time, have established a relatively low burden of proof necessary to establish such conduct. In short, the case continues a trend that makes it easier for the government to establish a willful failure to file an FBAR—and thus to assert penalties for a willful failure to file an FBAR of up to half of the balance of unreported accounts at the time of the violation.

As background, U.S. persons who have an interest in a financial account in a foreign country are generally required to report that interest to the Treasury Department on an annual basis where the aggregate value of such accounts exceeds $10,000. See 31 U.S.C. § 5314; 31 C.F.R. § 103.24 (2009). That interest is reported on an FBAR. A willful failure to file an FBAR can give rise to draconian penalties – e.g., a penalty equal to the greater of $100,000 or fifty percent of the balance in the account at the time of violation. 31 U.S.C. §§ 5321(a)(5)(C), (D)(ii).

The issue in Bohanec was whether the Bohanec’s failure to file a FBAR disclosing their financial interest in their foreign accounts held during 2007 was willful. As the court noted, 31 U.S.C Section 5321(a)(5) doesn’t define “willfulness.” Traditionally, the concept of “willfulness”—as used under Title 31 at least—has been limited to intentional violations of known legal duties, and has not encompassed a mere reckless disregard of a duty. See Ratzlaf v. United States, 510 U.S. 135 (1994) (structuring); United States v. Eisenstein, 731 F.2d 1540 (11th Cir. 1984) (failure to file currency transaction reports). Several courts, however, have now edged away from that traditional understanding, holding that “willfulness” under 31 U.S.C. § 5321 can be satisfied by mere reckless disregard. See United States v Williams, 489 Fed.Appx. 655, 658 (4th Cir. 2012); United States v. Bussell, No. CV 15-02034 SJO(VBKx), 2015 WL 9957826 at *5 (C.D. Cal. Dec. 8, 2015); see also United States v. McBride, 908 F.Supp. 2d 1186, 1204, 1209 (D. Utah 2012). The court in Bohanec continued that trend.

The defendant argued that willfulness should be defined as traditionally understood: as requiring an intentional violation of a known legal duty. In support of his argument, he cited IRS Chief Counsel Advice 200603026 and the Internal Revenue Manual’s interpretation of “willfulness” under 31 U.S.C. Section 5321. Both of these sources—sources that are promulgated by the IRS, by the way—supported the defendant’s view. The I.R.M., for example, defines willfulness as “a voluntary, intentional violation of a known legal duty.” I.R.M. 4.26.16.6.5.1. The Chief Counsel Advice adopted the same definition.

The court, however, rejected these arguments, noting that a Chief Counsel Advice may not be cited as precedent (citing 26 U.S.C. § 6110(k)(3)) and that the Internal Revenue Manual does not have the force of law (citing Fargo v. Commissioner of Internal Revenue, 447 F.3d 706, 713 (9th Cir. 2006)).

The court also addressed whether the preponderance-of-the-evidence or the clear-and-convincing-evidence standard applies in the context of a willful-failure-to-file-an-FBAR penalty. The court’s analysis can be summarized in a brief excerpted paragraph:

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.” Herman & MacLean v. Huddleston, 459 U.S. 375, 389 (1983). Such interests include parental rights, involuntary commitment, and deportation. Id. The lower, more generally applicable preponderance of the evidence standard applies, however, where “even severe civil sanctions that do not implicate such interests” are contemplated. Id. at 390; see also Grogan v. Garner, 498 U.S. 279, 286 (1991). The monetary sanctions at issue here do not rise to the level of “particularly important individual interests or rights.” Accordingly, the preponderance of the evidence standard applies. See also McBride, 908 F.Supp.2d at 1214.

Again, the court’s conclusion—which follows a growing body of case law—runs contrary to the IRS’s prior views on the question. The following excerpt from the IRS’s Chief Counsel Advice shows its previous analysis and thinking on the issue:

[W]ith respect to the willfulness issue, [there is a question] whether the criteria for assertion of the civil FBAR penalty are the same as the burden of proof that the Service has when asserting the civil fraud penalty under IRC section 6663 (clear and convincing evidence).   Although there are no cases that address this issue with respect to the civil FBAR penalty, we expect the answer to be yes. This is because of the inherent difficulty of proving, or disproving, a state of mind (willfulness) at the time of a violation.
. . .
We expect that a court will find the burden in civil FBAR cases to be that of providing “clear and convincing evidence,” rather than merely a “preponderance of the evidence.” The clear and convincing evidence standard is the same burden the Service must meet with respect to civil tax fraud cases where the Service also has to show the intent of the taxpayer at the time of the violation. Courts have traditionally applied the clear and convincing standard with respect to fraud cases in general, not just to tax fraud cases, because, just as it is difficult to show intent, it is also difficult to show a lack of intent. The higher standard of clear and convincing evidence offers some protection for an individual who may be wrongly accused of fraud.
IRS Chief Counsel Advice 200603026.

So again, the court looked past the IRS’s own prior publications (though, of course they were not binding precedent in any respect) on the issue, and reached a government-friendly answer on the evidentiary standard question. Ultimately, taking the facts into account, the court concluded that the government indeed proved by a preponderance of the evidence that the defendants were at least recklessly indifferent to the applicable statutory duty, justifying the asserted FBAR penalty. The facts of the case, which were not focused on here, presented an interesting story in and of themselves, and perhaps I will follow up with a post soon taking a deeper look at the factual issues involved in the case that led the court to ultimately uphold the FBAR penalty.

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