By: Heather L. Marello, Esq.

The Bank Secrecy Act of 1970, Pub. L. 91-507, 84 Stat 114 (Oct. 26, 1970), addressed the government’s desire to monitor the use of foreign bank accounts for illegal activities by authorizing the Secretary of the Treasury to require U.S. citizens, residents, and others to “keep records, file reports, or keep records and file reports, when the resident, citizen or person makes a transaction or maintains a relation for any person with a foreign financial agency.” That report, filed annually on FinCEN Form 114, is commonly known as an “FBAR.”

Congress imposes a penalty regime for willful and non-willful (or negligent) violations of the FBAR statute.  For willful violations, the statute imposes a severe penalty of the greater of $100,000 or 50 percent of the aggregate balance of the account(s) at the time of the violation in any year wherein the taxpayer has been found to have willfully violated the statute.  For non-willful violations, the statute imposes a maximum penalty of $10,000 per account.  Moreover, the statute provides an exception to the non-willful penalty in cases where the individual establishes reasonable cause for the failure to report the account.

Over the past ten years, the IRS has implemented a number of disclosure programs for taxpayers wishing to come forward and voluntarily disclose their interests in foreign bank accounts and correct any omitted or erroneous filings.  As time goes on, IRS has become more suspicious of taxpayers coming forward, assuming that those taxpayers have known – or should have known –  of their FBAR obligations for quite some time, or that their accountants should have known to ask.  That notion, coupled with the unclear burden on the willfulness standard as described below, creates a difficult landscape for practitioners with clients whose facts even appear to be questionable.  Practitioners in these circumstances should bring in the assistance of legal counsel to advise on the best path of disclosure and assist in framing a taxpayer’s facts and circumstances in the best possible light.

Where a willful FBAR penalty is disputed in a court of law, it is undisputed that the burden to prove willfulness is on the government.  However, the statute is silent with respect to the level of proof that the government must meet to sustain its burden – i.e. by a preponderance of the evidence or by clear and convincing evidence.  Before the courts opined on the burden of proof, the Internal Revenue Service published its expected analysis of the standard:

A second question…is whether the criteria for the 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 IRS section 6663.  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.

 

The burden of proof for criminal cases for establishing willfulness is to provide proof “beyond a reasonable doubt.”  Although the same definition for willfulness applies (‘a voluntary intentional violation of a known legal duty’), the Service would have a lesser burden of proof to meet with respect to the civil FBAR penalty than the criminal penalty.  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 the 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…Because the FBAR penalty is not a tax or a tax penalty, the presumption of correctness with respect to tax assessments would not apply to an FBAR penalty assessment for a willful violation – another reason we believe that the Service will need to meet the higher standard of clear and convincing evidence.  Chief Counsel Memorandum 200603026 (Jan. 20, 2006).

The government’s analogy to civil tax fraud is appropriate, where civil tax fraud punishes intentional conduct intended to evade tax believed to be due and owing, and the willful FBAR penalty punishes an intentional failure to comply with known reporting requirements.  Each penalty relies largely on circumstantial evidence, as intent is difficult to prove, and thus requires a heightened burden of proof to protect taxpayers against erroneous accusations.

Despite the government’s published position, and despite the logic behind that position that rings true to practitioners, a survey of the case law that has developed since the issuance of the Chief Counsel Memorandum supports that the burden of proof is on the government to prove willfulness by a mere preponderance of the evidence.  See, e.g., United States v. Williams, No. 1:09-cv-437, 2010 WL 3473311 (E.D. Va. Sept. 1, 2010) rev’d United States v. Williams, 489 F. App’x 655 (4th Cir. 2012); United States v. McBride, 908 F. Supp. 2d 1186 (D. Utah 2012); United States v. Bohanec, No. 2:15-CV-4347, 2016 WL 7167860 (C.D. Cal. Dec. 8, 2016).  If the government expected a higher standard, and if practitioners uniformly want the heightened standard, how did the courts find otherwise?

The lower court in Williams was the first recent case to opine on the willful FBAR penalty.  Although it is often cited for determining that a preponderance of the evidence standard applied, the case provides no meaningful explanation as to how it came up with that standard.  In fact, the phrase “preponderance of the evidence” appears only twice in the opinion, the first time in passing reference in a discussion on whether the Court had the authority to review the FBAR penalty assessment de novo, and the second in holding that the government failed to meet the preponderance standard.  The Williams court provides no rationale or discussion for this standard, nor did it need to in light of its holding that the government did not meet even the lowest possible burden with respect to the willfulness element.  The Fourth Circuit, in reversing for the Government in an unpublished, split decision, made no reference whatsoever to the standard.

Since Williams, each subsequent opinion merely cites back to the lower court’s opinion as persuasive authority that the “preponderance of the evidence” standard was correct. To that end, the district court in McBride noted that the Williams court was the “one district court that has directly addressed the question of the burden of proof in a civil FBAR penalty case,” and followed the Williams court’s lead on the preponderance of the evidence standard. And thus, the preponderance of the evidence standard was “established.”

Although there has yet to be a decision on the issue with widespread, precedential effect, with each new opinion citing to Williams and its progeny, it becomes more difficult for practitioners to convince the government, or the courts, that the clear and convincing evidence standard is proper – and necessary – to protect taxpayers against erroneous assertions of willfulness.  Andreozzi Bluestein has extensive experience assisting taxpayers with offshore voluntary disclosures and defense against willful and non-willful FBAR penalties.  Should you wish to speak with an attorney regarding whether you or your client’s circumstances warrant disclosure or whether you are able to challenge the imposition of FBAR penalties against you, you may call the attorneys at Andreozzi Bluestein at any time without obligation.