Opting Out of Opting Out – New Ruling on Willfulness and FBAR Violations

Opting Out of Opting Out – New Ruling on Willfulness and FBAR Violations


Recently The Fourth Circuit Court of Appeals made a controversial decision regarding willfulness as it applies to FBAR obligations. United States v. Williams, No. 10-2230 (4th Cir. July 20, 2012). This ruling may add risk to opting out of the Offshore Voluntary Disclosure Program or disclosing foreign bank accounts late without entering into the Offshore Voluntary Disclosure Program (OVDP).

The question that remains however: Exactly how big of a blow is the new decision to taxpayers? For starters, it is an unpublished opinion, but it is a post January 1, 2007 unpublished opinion which means it can be cited to in briefs in all circuit courts. It may not be binding, but it could be persuasive. This article offers a more in-debt look at the highly contested case.

Mr. Williams is a taxpayer who plead guilty in a criminal offshore tax evasion case. During his sentencing he admitted willfully evading tax and willfully using foreign accounts to do so from 1993 through 2000. In a later civil case, the government brought an action to collect civil penalties against Williams for willfully failing to file an FBAR for the year 2000. Mr. Williams claimed his failure to file an FBAR was not willful. Williams made the following statement in his criminal trial during sentencing.

I also knew that I had the obligation to report to the IRS and/or the Department of the Treasury the existence of the Swiss accounts, but for the calendar year tax returns 1993 through 2000, I chose not to in order to assist in hiding my true income from the IRS and evade taxes thereon.

The district court in Mr. Williams’ civil trial for FBAR penalties ruled that the government did not meet its burden of proving that Williams’ failure to file the FBAR was willful for the tax year 2000 (FBAR should have been filed by June 30, 2001). The district court made a distinction between Mr. Williams’s admission that he intentionally failed to report income in an effort to evade income taxes versus whether he willfully failed to comply with the FBAR disclosure requirements in Title 31 U.S.C. § 5314. They also found credible Mr. Williams’ testimony that he didn’t know about the contents of his tax returns and that he believed the offshore accounts were disclosed to the IRS when his Swiss accounts were frozen in June 2001.

However, the Fourth Circuit Appellate Court reversed the lower district court’s decision relying heavily on the notion of purposefully remaining ignorant of the FBAR requirements in their reasoning for their decision. The appellate court quoted United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991), where “[w]illfulness 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.” The appellate court stated, “[i]t is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms. Evidence of acts to conceal income and financial information, combined with the defendant’s failure to pursue knowledge of further reporting requirements as suggested on Schedule B, provide a sufficient basis to establish willfulness on the part of the defendant.”

The appellate court ruled that Mr. Williams’s failure to pursue further knowledge of further reporting requirements as suggested on Schedule B, must be combined with evidence of acts to conceal income and financial information. In Williams, the court stated, “his (Williams) false answers on both the tax organizer and his federal tax return evidence conduct that was ‘meant to conceal or mislead sources of income or other financial information.’” The court put heavy emphasis on Williams’s allocution (statement to the judge during sentencing), claiming that it was clear error for the lower court to find that there was no willfulness.

The appellate court claimed that, “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… we are convinced that, at a minimum, Williams’ undisputed actions establish reckless conduct, which satisfies the proof requirement under §5314.”

However, in criminal tax cases, the general standard of willfulness is said to be an intentional violation of a known legal duty, meaning that the taxpayer must know his exact legal obligation and must know that his action is illegal. In other words, ignorance of the law which in most criminal cases is not an excuse, works for criminal tax cases. In Ratzlaf, the Supreme Court ruled that this special standard of intent applied in cases under the Bank Secrecy Act. Ratzlaf v. United States, 510 U.S. 135 (U.S. 1994)

Many tax practitioners have claimed that Ratzlaf is inconsistent with Williams and therefore Williams was wrongly decided. The defendant’s conviction for willfully violating the anti-structuring provisions which are part of the Bank Secrecy Act was reversed by the Supreme Court in Ratzlaf. The Court Ruled that the Bank Secrecy Act required banks to report cash transactions in excess of $10,000, but the Currency Transaction Reporting section had anti-structuring provisions that made it illegal to willfully cause such a report NOT to be filed. The court said in order to prove willfulness, the provision required “proof that the defendant knew not only of the bank’s duty to report cash transactions in excess of $10,000, but also of his duty not to avoid triggering such a report.”

Congress responded by amending and taking the word willful out of the anti-structuring provision in 31 U.S.C. § 5324. However, they did not take the word willful out of the parts of the law leading with civil and criminal FBAR penalties which still require willfulness. Tax practitioners have suggested that the government must prove that a taxpayer knew of the FBAR filing requirement in order to justify a finding of willfulness and that Williams was decided wrongly.

At Abajian Law, we must caution that we can see a court stretching to distinguish Williams and Ratzlaf. Ratzlaf mandates that the taxpayer know that his affirmative action is illegal and that the taxpayer’s action will cause a third party bank not to report a transaction to the government that the bank otherwise should have. FBAR cases are different because the duty is on the taxpayer to act affirmatively and not to know that their affirmative action is illegal. We can foresee an attempt to distinguish the willfulness required in Ratzlaf’s from that of a taxpayer who knows they have an obligation to report the existence of a foreign account.

Assuming the taxpayer never knew that their account had been frozen, they would have known that their inaction was illegal and that they had to somehow report their foreign account to the IRS in one way or another. However, we believe the Williams decision is hard to reconcile given Ratzlaf, we agree with other tax practitioners that since the word willful wasn’t removed from the FBAR provisions of 31 USC § 5314, the court in Williams erred by using the reckless terminology and that it should have made a clear finding that Williams knew of his duty to report his foreign accounts by specifically filling an FBAR.

We encourage taxpayers to consult the expertise of a tax professional before making decisions related to foreign bank accounts and FBAR filing violations. In addition to expertise, an attorney can provide attorney-client privilege and confidentiality.

Vic Abajian, a former IRS tax attorney, continues to assist taxpayers with foreign account and asset issues before the IRS and Franchise Tax Board. He currently represents dozens of clients with foreign accounts both within the IRS offshore voluntary disclosure initiate (OVDI) and those that are involved in civil audits. He also represents several clients who have received grand jury subpoenas requesting information related to offshore bank accounts. To learn more about options and how to make a voluntary disclosure of an offshore bank account, please contact FBAR Tax Attorney Vic Abajian at 818-396-5059. We have offices in Irvine and Glendale, California and represent taxpayers throughout the nation and those located in foreign countries.

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