Definition of ‘Willful’ Is Unclear in FBAR Case in District Court

The U.S. District Court for the Eastern District of Pennsylvania denied summary judgment to both the IRS and a taxpayer with regard to his Swiss bank account. In the case, the IRS slapped the maximum penalty on the taxpayer for willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR).

The Court concluded that whether the taxpayer willfully failed to submit an accurate FBAR was an inherently factual question and that genuine disputes existed as to what the taxpayer knew about his reporting requirements and when he knew it.

Case background and facts

Each U.S. person who has a financial interest in (or signature or other authority over) financial accounts in a foreign country with an aggregate value that exceeds $10,000 at any time during the calendar year must report that relationship each calendar year by filing an FBAR with the Department of the Treasury. Civil penalties can range up to $10,000 for each non-willful violation. Generally, the penalties for willful violations can be the greater of $100,000 or 50% of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years in prison — or both. Civil and criminal penalties may be imposed together.

In the case at hand, a U.S. citizen who had a successful career in the pharmaceutical industry over the past several decades, including as Chief Executive Officer of a maker and distributor of generic medications, opened two savings accounts in Switzerland.

Throughout the years he maintained the accounts, his accountant prepared his tax returns. The taxpayer didn’t tell his accountant about the bank accounts until the 1990s, because, he stated, the accountant never asked about them. His accountant then told the taxpayer he’d been breaking the law for 20 years by not reporting the accounts. According to the taxpayer’s testimony, the accountant also said that:

• The damage was already done,

• Nothing could be done about it, and

• The issue would be resolved on the man’s death when the assets in the accounts would be repatriated as part of his estate, and taxes would be paid on them then.

New accountant steps in

Based on this advice, as well as fear that he would be penalized for his years of noncompliance, the taxpayer didn’t report the accounts on his tax returns until 2007, when the accountant died and he hired a new accountant.

His 2007 tax return reflected the Swiss assets for the first time. He also filed his first FBAR in 2007. But he only reported the existence of one of his Swiss accounts, which had assets totaling approximately $240,000. The unreported account had assets of about $2.3 million. He didn’t report any of the income that he’d earned on either Swiss account.

Sometime after 2008, the Swiss bank told the man it would be providing his account information to the U.S. government. Around this time, he hired an attorney to look into his reporting obligations for the Swiss accounts and, in August 2010, he filed an amended 2007 federal return on which he reported the approximately $220,000 of income he had earned from the Swiss accounts. He also filed an amended FBAR for 2007, on which he reported both bank accounts. Although the taxpayer took this corrective action before the government began its audit, he didn’t do it until after the IRS learned of the accounts.

Focus on 2008

The IRS began its investigation in April 2011, with a focus on tax year 2008. The taxpayer cooperated with the IRS and provided it with all documentation requested. The investigation culminated in a case panel of IRS agents recommending that the taxpayer be penalized for non-willful violations of the FBAR reporting requirement and that the case be closed. For reasons unclear in the record, the case wasn’t closed but was reassigned to another IRS agent, who conducted her own review and concluded that the taxpayer’s violations had been willful.

On July 18, 2013, the IRS sent a letter telling the taxpayer it was imposing a penalty of $975,789, 50% of the maximum value of the account ($1,951,578), the largest penalty possible under the regulations.

The taxpayer sued in district court, alleging that an unwarranted penalty was imposed on him. The IRS counterclaimed for full payment of the penalty, as well as accrued interest on the penalty, a late payment penalty, and other statutory additions to the penalty. Both parties sought summary judgment.

The issue of intent

The district court denied both parties’ request for summary judgment. It found that the key question was whether either party had pointed to a lack of genuine dispute of material fact on their claims. The answer was “no.”

The Court reasoned that the determinative issue for both claims was the taxpayer’s intent. Whether he’d willfully failed to submit an accurate FBAR for 2007 was an inherently factual question and one that couldn’t be resolved at this stage. Genuine disputes existed as to what the man knew regarding his reporting requirements and when he knew it. This was especially true as these issues related to his relationship with his accountant.

Although the Court acknowledged that there was no good cause exception for willful violations of the FBAR filing requirements, it found that the taxpayer’s testimony on the information provided to him by his first accountant and what exactly he did with that information, if anything, would be relevant to a determination of his intent.

As various federal courts, the Internal Revenue Manual and the IRS Office of Chief Counsel had reached different conclusions about the level of intent necessary to satisfy the willfulness requirement, the Court noted that precisely what “willful” means in context of the FBAR civil penalty provision wasn’t settled. It concluded that it didn’t need to determine what the appropriate standard of willfulness was at this juncture in the case. However, the Court did note that the jurisprudential trend was toward one that would encompass reckless violations of the FBAR filing requirement.

For additional information or questions, please feel free to contact Rob Trammell, CPA, Principal.

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