Until just recently, not much has come out of the Courts defining that line between nonwillful and willful when it comes to not filing Foreign Bank and Financial Accounts Reports (“FBAR”). But now we have a recent U.S. District Court case out of California which has vast repercussions on anyone who has undisclosed foreign bank accounts regardless of whether they came forward in a Voluntary Disclosure Program or the Streamlined Procedures.
U.S. v. Bohanec
Weeks ago a Federal District Court in California in the case of U.S. v. Bohanec, 2016 WL 7167869, 118 AFTR 2d ¶ 2016-5537(DC CA 12/8/2016)determined that the taxpayers’ failure to timely file a Foreign Bank and Financial Accounts Report (“FBAR”) was willful. The tax law provides that U.S. citizens with accounts outside the U.S. must disclose those accounts on an FBAR if the aggregate amount is at least $10,000. 31 U.S.C. 5314. The reason the term “willful” is important is that if the failure is not willful, the penalty is set at $10,000 per violation but if the failure to disclose is considered “willful”, the penalty goes up to the greater of $100,000 or 50% of the highest account value for the year.
In 2010 the Bohanecs entered into the Offshore Voluntary Disclosure Program For Undisclosed Foreign Bank Accounts (“OVDP”). The Bohanecs’ submission was submitted under penalty of perjury, representing that the only undisclosed foreign bank accounts were in Switzerland and the source of funds deposited were after-tax earnings from a camera business operated by the taxpayers. However, the IRS discovered that they did not even disclose all of their foreign accounts – leaving out accounts in Mexico and Austria. The IRS also discovered that the taxpayers’ statements that the funds were all from income duly reported and on which taxes were paid was untruthful.The Bohanecs were ultimately rejected by IRS for the OVDP and their case ultimate went to Federal Court where the only issue before the Court was whether the Bohanecs’ failure to file a 2007 FBAR was willful.
The Bohanecs asserted that “willfulness” encompasses only intentional violations of known legal duties, and not reckless disregard of statutory duties. The only cases the Bohanecs cited to support their argument that “willful” means that a defendant must have knowledge and specific intent Ratzlaf v. United States, (S Ct 1994) 510 U.S. 135 (structuring) and United States v. Eisenstein, (CA 11 1984) 731 F.2d 1540 (felonious failure to file currency transaction reports). But the Court distinguished these criminal cases in that the Bohanecs case was a civil matter.
The courtnoted that 31 USC 5321(a)(5) does not define willfulness but rejected the Bohanecs’ argument, concluded that the term “willful” included “reckless” for purposes of FBAR.The court said that, where willfulness is an element of civil liability, the Supreme Court generally understands the term as covering “not only knowing violations of a standard, but reckless ones as well.” (Safeco Ins. Co. of America v. Burr, (S Ct 2007) 551 U.S. 47) “Recklessness” is an objective standard that looks to whether conduct entails “an unjustifiably high risk of harm that is either known or so obvious that it should be known.” (Safeco) Several other courts, citing Safeco, have held that “willfulness” under 31 USC 5321 includes reckless disregard of a statutory duty. See Williams, (CA 4 2012) 110 AFTR 2d 2012-5298 and Bussell, (DC CA 2015) 117 AFTR 2d 2016-439.
The court then went on to consider the issue of standard of proof. It said that 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, (S Ct 1983) 459 U.S. 375) Such interests include parental rights, involuntary commitment, and deportation. 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. (Herman) The court here said that the monetary sanctions at issue here did not rise to the level of “particularly important individual interests or rights.” Accordingly, the court said, the preponderance of the evidence standard applied.
Following what I consider to be a strict liability approach, the Court concluded that IRS proved by a preponderance of the evidence that the Bohanecs were at least recklessly indifferent to a statutory duty, for the following reasons:
The Bohanecs were reasonably sophisticated businesspeople as an exclusive Leica camera dealer with customers around the world.
The Bohanecs were at least reckless, if not willfully blind, in their conduct with respect to their Swiss UBS account and their reporting obligations regarding the account. The Bohanecs never provided UBS with their home address, and never told anyone other than their children of the existence of the UBS account, including the tax preparers the Bohanecs hired to help them file tax returns. The Bohanecs never asked a lawyer, accountant, or banker about requirements regarding the UBS account and never used a bookkeeper or kept any books once the UBS account was opened.
The Bohanecs’ representations that they were unaware of or did not understand their obligations were not credible. The Bohanecs directed customers to deposit payment into the Swiss account and made several transfers and withdrawals from the Swiss account to other foreign accounts.
The Bohanecs’ credibility was further undermined by their conduct with respect to their application to participate in the OVDP when they made several misrepresentations under penalty of perjury.
What Should You Do?
Should the taxpayers appeal this case, who knows how the 9th Circuit will rule. It will also take years before the Appeals Court disposes of such an appeal but for now we have much clearer guidance of the “strict liability approach” the Court seems to follow. Taxpayers who have entered into the Streamlined Program whose case is weak on showing nonwilfullness have a huge risk of being picked by IRS and losing the favorable status offered by the Streamlined Procedures where the IRS feels that the non-willful standard is not met. Such taxpayers will not then be able to enter into OVDP and can face the same battle as the Bohanec’s. Likewise, anyone who has not come forward in voluntary disclosure and the issue of nonwilfullness is questionable would still have the opportunity to come forward under OVDP. Keep in mind that any submission must be complete or else like the Bohanecs, the IRS will reject the settlement and look to assess the full penalties provided by law.You should talk with your counsel and be proactive with the IRS for any original submission or amendment so that you have the lowest risk possible to secure or keep the benefits you sought in Voluntary Disclosure.