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District Court Broadens Scope Of Willful Requirement In Applying Enhanced FBAR Penalities



A new U.S. District court case has added to the recent upswing in cases tackling the issue of defining “willful” for purposes of applying the more severe penalties for failure to file the FBAR.

In U.S. v. Garrity, 2018 U.S. Dist. LEXIS 56888 (D. Conn. 2018), a United States District Court of Connecticut judge ordered that in moving to the next phase of trial, the IRS must prove the elements of its FBAR penalty claim only by a preponderance of the evidence, and the IRS can satisfy its burden to prove willfulness by evidencing reckless conduct by the taxpayer.

The FBAR Requirement – A Quick Background

The Bank Secrecy Act (BSA) gives the Department of Treasury the authority to collect information from United States persons, including expats, who have financial interests in or signature authority over financial accounts maintained with financial institutions located outside of the United States.

The BSA requires that a FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), be filed if the maximum values of the foreign financial accounts exceed $10,000 in the aggregate at any time during the calendar year.

The FBAR form (FinCEN Form 114) must be filed electronically using the BSA E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The FBAR due date is April 15th, with an automatic extension of 6 months.

FBAR Penalties

A “non-willful”’ failure to report foreign bank accounts can result in a penalty of up to $10,000 per account per year, subject to inflation.

A “willful” failure to file may be subject to civil penalties equal to the greater of $100,000, subject to inflation, or 50% of the balance in each unreported account. In addition, criminal penalties of up to $250,000 or 5 years in jail (or both) may apply in the case of willful conduct.

Due to inflation, for penalties assessed after January 15, 2017, the FBAR penalty for a non-willful failure increases to $12,921, and the civil penalty for a willful failure increases to $129,210. The IRS has stated that these penalties represent maximum amounts and lower penalties may be appropriate depending on the circumstances.

Defining The Term “Willful”

Currently, the Internal Revenue Code and Treasury regulations do not provide guidance for distinguishing willful versus non-willful FBAR filing violations.

In the IRS’s Internal Revenue Manual, the IRS suggests that the term “willful” should carry the same meaning as in the criminal context. It states that, “the test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.” It explains that willfulness is shown by a taxpayer’s knowledge of the FBAR filing requirements and the person’s deliberate choice not to comply with the requirements.

The Internal Revenue Manual also suggests that so-called “willful blindness” may be enough to meet the “willful” standard. The Manual explains that “willfulness may be attributed to a person who has made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements.”

Courts, however, have generally rejected the stricter “intentional violation” threshold used in the criminal context, and instead employed a broader “reckless violation” threshold for FBAR violations.

The Garrity Case

In the Garrity case, the Government filed an action in district court to collect an outstanding civil FBAR penalty from the estate of Mr. Garrity, Sr., who died in 2008. We note quickly that the death of Mr. Garrity did not stop the IRS from attempting to impose an FBAR penalty on him, even going so far as suing his estate.

In a preliminary decision, the Court held that in moving forward with the case, the IRS will only need to prove Mr. Garrity failed to timely file his 2015 FBAR by a preponderance of the evidence rather than by the higher, clear and convincing evidence standard. The Court also held, in line with the more recent FBAR rulings, that in order to show willfulness on Mr. Garrity’s part, the IRS will not need to prove that he committed an intentional violation, rather a showing of reckless conduct will suffice.

These broader interpretations by the District Court are certainly an unwelcome development for future delinquent taxpayers facing potential FBAR penalties.

Failing To File Your FBAR Is A Serious Matter

For FBAR delinquent taxpayers, programs are provided by the IRS to prevent potentially disastrous outcomes that could otherwise result from nondisclosure. However, depending on the facts and circumstances, a taxpayer may fail one or more of the program’s eligibility requirements and have to look at other potential solutions.

Have a question? Contact Ephraim Moss.

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Mr. Moss is a Tax partner in a boutique U.S. tax firm specializing in the areas of international taxation and expatriate taxation. The practice focuses on servicing U.S. individuals and small business located outside the U.S. with their U.S. and international tax matters and includes both tax planning as well as annual tax compliance (tax return preparation). He has extensive experience with filing delinquent returns under the IRS Streamlined procedure, FBARs, FATCA reporting (Form 8938), reporting interests in foreign corporations (Form 5471) and partnerships (Form 8865) as well as foreign trust reporting (Form 3520 and Form 3520/A). He works very closely with clients utilizing the various international tax treaties in order to maximize benefits through smart tax planning. Previously he held a senior position in the international tax practice of Ernst & Young. He is an attorney licensed in the State of New York.