Tuesday, July 24, 2012

4th DCA Reverses DC - Intent to Evade Taxes Does Not Makes sequent Violations of FBAR Rules Willful - Willful Blindness Does.

United States v. J.Bryan Williams; No. 10-2230
Decided: July 20, 2012 Reversed by unpublished opinion. Judge Shedd wrote the majority opinion, in which Judge Motz concurred. Judge Agee wrote a dissenting opinion. Unpublished opinions are not binding precedent in this circuit.  

The parties agree that Williams violated § 5314 by failing to timely file an FBAR for tax year 2000. The only question is whether the violation was willful.
The district court found that:
(1) Williams "lacked any motivation to willfully conceal the accounts from authorities" because they were already aware of the accounts and
(2) his failure to disclose the accounts "was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred."5 J.A. 378-79. Therefore, the district court found that Williams's violation of § 5314 was not willful.
"Willfulness may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information," and it "can be inferred from a conscious effort to avoid learning about reporting requirements." United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991) (internal citations omitted) (noting willfulness standard in criminal conviction for failure to file an FBAR).
Similarly, "willful blindness" may be inferred where "a defendant was subjectively aware of a high probability of the existence of a tax liability, and purposefully avoided learning the facts point to such liability." United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011) (affirming criminal conviction for willful tax fraud where tax preparer "closed his eyes to" large accounting discrepancies).
Importantly, in cases "where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard, but reckless ones as well." Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007) (emphasis added).Whether a person has willfully failed to comply with a tax reporting requirement is a question of fact. Rykoff v. United States, 40 F.3d 305, 307 (9th Cir. 1994); accord United States v. Gormley, 201 F.3d 290, 294 (4th Cir. 2000) ("[T]he question of willfulness is essentially a finding of fact.").
The opinion points out that there is evidence supporting the conclusion that Williams' failure to file the FBAR was willful, particularly where a "willful violation" can include "willful blindness to the FBAR requirement" or "intentional ignorance." Maj. Op. at 12.

  • "Thus, we are convinced that, at a minimum, Williams's undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314. Safeco Ins., 551 U.S. at 57. 
  • Accordingly, we conclude that the district court clearly erred in finding that willfulness had not been established. For the foregoing reasons, we reverse the judgment of the district court and remand this case for proceedings consistent with this opinion."


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6 comments:

  1. What did you think of the court's reasoning? The court seems to say that failing to read the "FBAR question" at the bottom of Schedule B constitutes willful blindness. Assuming one believes Mr. Williams' assertion that he never read it, I have trouble seeing the willful component. Don't you need to know something about a given requirement before willful blindness can apply? I realize, of course, that Mr. Williams is a blatant tax cheat, and hardly qualifies for any sympathy, but I find the precedent very troubling.
    Posted by Michael J. Miller

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  2. District court's decision. Following a bench trial, the district court entered judgment in favor of Williams, finding that the government failed to establish that Williams willfully failed to timely file an FBAR for 2000. The court found that: (i) Williams “lacked any motivation to willfully conceal the accounts from authorities,” since the authorities already knew of the accounts; and (ii) his failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.”
    Fourth Circuit reverses. The Court of Appeals for the Fourth Circuit, in a 2-1 opinion, found the district court's decision clearly erroneous.
    The Fourth Circuit found it significant that, on Williams' 2000 return, he signed under penalty of perjury that he had “examined this return and accompanying schedules and statements” and that such were true to the best of his knowledge—which constitutes prima facie evidence that he knew the contents of the return. He also admitted to never paying attention “to any of the written words” on his return, which the Court likened to willful blindness. This, combined with the fact that he gave false answers both on the tax organizer and on his return, reflected conduct “meant to conceal or mislead sources of income or other financial information.”
    Willams' guilty plea further confirmed that his failure to timely file an FBAR for 2000 was willful. He acknowledged in his plea that his failure to report the ALQI accounts was part of a larger tax evasion scheme. The Court found that Williams couldn't now claim that he was unaware of or somehow lacked the motivation to willfully disregard the FBAR reporting requirement.
    Dissent. The dissenting judge found that, although the majority opinion stated the correct standard of review (clear error), it failed to adhere to that standard and instead substituted its judgment for that of the district court. The district judge was in a better position to evaluate the credibility of Williams' testimony, and the district judge also found it significant that Williams had no “objective incentive” to conceal the ALQU account in June of 2001. Accordingly, the dissenting judge would have affirmed the district court.

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  3. 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.” 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. 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.

    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. 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.

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  4. The Second Circuit found that the instructions to line 7a of Form 1040, which cross referenced the FBAR requirement, put the taxpayer on “inquiry notice” of the FBAR filing requirement.

    Such notice, combined with the taxpayer’s admission that he never read his tax return nor consulted the FBAR form, resulted in a “conscious effort to avoiding learning about reporting requirements... meant to conceal or mislead sources of income or other financial information... that constitutes willful blindness to the FBAR requirements.”

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  5. Appeal Courts Destroys FBAR Penalty Exceptions for Voluntary Disclosure and Plea Bargins

    What a difference one court case makes. Gone is the believe that it was almost impossible for the IRS to get the BIG FBAR penalty (of half the value of the offshore bank account for each and every unreported year). United States Court Of Appeals for The Fourth Circuit reversed a district court opinion in favor of the taxpayer.

    Here is what happened.

    The Government brought its action seeking to enforce civil penalties assessed against J. Bryan Williams for his failure to report his interest in two foreign bank accounts for tax year 2000, in violation of 31 U.S.C. § 5314. Following a bench trial, the district court entered judgment in favor of Williams.

    The Government appealed. Because the Court of Appeals concluded that the district court clearly erred in finding that the Government failed to prove that Williams willfully violated § 5314, it reversed the non-guilty verdict.

    You will read, below, that the key evidence is the CPA’s tax organizer and the plea bargain statement.

    Relevant to this appeal, Williams completed a “tax organizer” in January 2001, which had been provided to him by his accountant in connection with the preparation of his 2000 federal tax return. In response to the question in the tax organizer regarding whether Williams had “an interest in or a signature or other authority over a bank account, or other financial account in a foreign country,” Williams answered “No.” J.A. 111.

    Thus, we are convinced that, at a minimum, Williams’s undisputed actions establish reckless conduct, which satisfies the proof requirement under § 5314. Safeco Ins., 551 U.S. at 57. Accordingly, we conclude that the district court clearly erred in finding that willfulness had not been established.

    For the foregoing reasons, we reverse the judgment of the district court and remand this case for proceedings consistent with this opinion. REVERSED

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  6. IRS VICTORY IN FBAR WILFULNESS PENALTY CASE

    In an unpublished opinion, the Fourth Circuit Court of Appeals in U.S. v. Williams, reversed the district court’s holding that the taxpayer’s failure to file Form TD F 90-22.1 (“FBAR”) was not willful and in so holding, gave the IRS a boost in its efforts to combat offshore noncompliance. A case out of the District Court of the Eastern District of Virginia, Williams had been one of the few sources of precedent for how willful FBAR penalties will be enforced. The District Court held in favor of the taxpayer, finding, in part, that mere failure to check “yes” as to whether the filer held an interest in a foreign account on Schedule B of Form 1040 was insufficient, alone, to prove willfulness, and the facts and circumstances had to be
    examined to determine willfulness. The Fourth Circuit reversed the lower court’s holding as being clearly erroneous.

    Significantly, without examining the facts and circumstances, the Fourth Circuit found that
    the taxpayer’s signature on his return was “prima facie evidence that he knew the contents of the return.” Moreover, the Second Circuit found that the instructions to line 7a of Form 1040, which cross referenced the FBAR requirement, put the taxpayer on “inquiry notice” of the FBAR filing requirement.
    Such notice, combined with the taxpayer’s admission that he never read his tax return nor consulted the FBAR form, resulted in a “conscious effort to avoiding learning about reporting requirements... meant to
    conceal or mislead sources of income or other financial information... that constitutes willful blindness to the FBAR requirements.” (emphasis added). The Fourth Circuit therefore held that the taxpayer willfully failed to file FBARs and found him liable for willful penalties under 31 USC § 5314.

    By Mitchell Goldberg

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