Recently, “Tax Notes Today” published an article by Andrew Velarde entitled, Streamlined Program Non-Willful Certification Can Be Hazardous, 2014 TNT 143-4 (7/25/14). The article summarizes comments made by three tax practitioners on a Bloomberg-sponsored webcast relating to the certification of non-willfulness. The practitioners were Robert F. Katzberg, of Kaplan & Katzberg; Alan Granwell of Sharp Partners; and Bill Sharp of Sharp Partners.
If there was a recurring theme to the article it was that certification of non-willfulness is risky business and not for the “do-it-yourselfer.” Very simply, false certifications can lead to steeper penalties (even greater than the onerous OVDP penalty), not to mention criminal prosecution for perjury.
I agree with many of the points made in this article, but I disagree with one. In order to understand why I disagree, some background information relating to willfulness is needed. That pestilent word has been bantered around so much lately that it has become as much a part of the English dictionary as an everyday household item. But what does it mean?
The “legal standard” for willfulness is synonymous with its definition. It’s an “intentional violation of a known legal duty.” If you think that it is easy to interpret, you’re sadly mistaken. Indeed, courts have been struggling to interpret this phrase for decades.
No bigger struggle to interpret this phrase exists than in the criminal context. It is here that I want to focus on the legal standard for willfulness as it applies to two specific violations: (1) a violation of Title 26, the Bank Secrecy Act and (2) a violation of Title 31, the Internal Revenue Code.
As a preliminary matter, the legal standard for willfulness for Title 26 violations is the same as it is for Title 31 violations: an intentional violation of a known legal duty. So is the level of proof. In both cases it’s “beyond a reasonable doubt.” However, that is where the similarities end and the differences begin. For example, the way in which courts interpret the standard varies depending on whether it is used in connection with the prosecution of a Bank Secrecy Act crime or the prosecution of a tax crime under the Internal Revenue Code.
Commenting on willfulness in the context of currency transaction reporting, Mr. Granwell cited Cheek v. United States, 498 U.S. 192 (1991), for the well-established rule that willfulness requires awareness of a legal duty, but does not go so far as to require the person to know that there is a law prohibiting such conduct. Indeed, a person need not know that an act is unlawful in order to be found willful.
A simple example will help illustrate this point. A person who knows that it is wrong to prevent a bank from fulfilling its reporting obligations, but does not know, or claims not to know, that there is a law on the books prohibiting such conduct – in this case, a law prohibiting currency structuring – would still be found guilty of structuring to avoid the bank’s reporting requirements. In other words, ignorance of the law is not a defense to the crime of structuring.
Only in criminal tax cases, where the tax laws are complex, is the legal standard for “willfulness” heightened – indeed, the taxpayer must have known that he had a legal duty. For this reason, it is more difficult to establish an intentional violation of a known legal duty under foreign bank account reporting requirements (Title 31) than under Bank Secrecy Act reporting requirements (Title 26). If there is any doubt that this is so, one need look no further than Justice Blackmun’s scathing dissent in Ratzlaf, where he said that the reporting requirements of the Bank Secrecy Act were “perhaps among the simplest in the United States Code.”
Notwithstanding the heightened standard for willfulness as it applies to violations of the Internal Revenue Code, Mr. Sharp claimed that it could be more difficult to show an intentional disregard of a known legal duty under Title 26 (Bank Secrecy Act) than under Title 31 (Internal Revenue Code). Mr. Sharp based his opinion on the case of United States v. McBride, where the federal court held that a taxpayer’s signature on the return constituted knowledge of a duty to comply with FBAR requirements. In other words, Mr. Sharp cites McBride for the proposition that signing a return, in which the Schedule B question is answered “no,” is alone sufficient to establish a violation of a known legal duty as to the FBAR.
Before going any further, it should be noted that McBride was a civil case. A careful distinction must be made between the level of proof that is required to establish willfulness in a civil penalty case and the level of proof that is required to establish willfulness in a criminal prosecution.
While the standard for willfulness in a civil penalty case is identical to the standard for willfulness in a criminal tax case – i.e., an intentional violation of a known legal duty – the level of proof isn’t. The level of proof required for willfulness in the criminal context is “beyond a reasonable doubt.” But the level of proof required to establish willfulness in the civil context is “preponderance of the evidence.”
That brings me full circle to the source of my disagreement. My disagreement with Mr. Sharp is in his interpretation of the McBride holding. Very simply, I believe that it is far too literal.
Practically speaking, results in cases such as McBride are determined by the totality of the circumstances. Unfortunately for Mr. McBride, there were bad facts on the issue of intentional violation of a known legal duty. And while none of these facts alone were conclusive, taken together they were enough to give rise to an inference that permitted the court to hold – by a preponderance of the evidence – that Mr. McBride was liable for the willful FBAR civil penalty. Therefore, I disagree with the assertion that the Court held that merely signing a return, in which the taxpayer answered the Schedule B question “no,” was prima facie evidence that the taxpayer violated a known legal duty as to the FBAR.
In fairness to Mr. Sharp, this confusion was caused by something beyond his control – the McBride court’s interpretation – or perhaps, misinterpretation – of the Williams holding. The McBride court misinterpreted Williams as holding that merely signing a return with the Schedule B question answered “no” was enough to establish willfulness, at least under the concept of willful blindness. This created enough panic in the tax community to cause the IRS to issue an official statement and to set the record straight.
Key IRS personnel assuaged taxpayers’ concerns by reinforcing the IRS’s official position on what does not rise to the level of willfulness for purposes of making out an FBAR violation: the combination of a signature on a tax return along with the Schedule B question answered “no” is not enough to put a taxpayer on “inquiry notice” of the filing requirement. Moreover, based on my personal experience in handling a number of opt outs, I have yet to see a return that omitted income and that had the “no” box checked off on Schedule B result in a willful FBAR penalty. Therefore, I disagree with the article’s interpretation of McBride, and, by reference, Williams.
Finally, it’s hard to imagine that the IRS would assert – or DOJ Tax would defend/prosecute — the willful FBAR civil penalty when the only bad fact is a signed return where the Schedule B question is answered “no.” Similarly, its strains credulity to believe that a court or jury would approve the penalty under the same circumstances.
Of course, all of that could change with the addition of one bad fact. That one bad fact could change an innocent oversight into an inference of intent to violate a known legal duty. What is that bad fact? That the taxpayer knew of the account when he signed the return. But absent knowledge of the account, a signed return cannot be prima facie evidence that the taxpayer was cognizant of – and understood – the FBAR filing requirements.
Having said all of that, certifications of nonwillfulness should not be taken lightly. As a general rule of thumb, they should not be done without consulting with an attorney, even if they appear to fall on the nonwillful side of the spectrum of willfulness. More often than not, these cases are close calls. Far from being “slam dunks” for nonwillfulness, most fall within the gray area, making the nonwillfulness certification process susceptible to a high level of risk. Very simply, one wrong move could cause the house to come tumbling down. This is why it is critical to have an experienced tax attorney review your case and make a recommendation that is customized to your individual circumstances before making a decision. To the extent that the taxpayer certifies nonwillfulness when the needle is pointing at the opposite end of the spectrum (i.e., willfulness), he might just as well be “willfully blind” as to the consequences (no pun intended!).
There is one comment to the article on the Tax Notes site. I will close on this comment:
Martin S July 25, 2014 at 8:21 AM
I have worked on a number of OVDP and streamlined matters. In an alarming number of cases, new and previously undisclosed accounts percolate to the surface, usually quite late in the process and after multiple inquiries of the client. A very cautious approach must be taken to ensure that the taxpayer is not later determined to be willful in part because of the omission of an account during, late, or after the disclosures have been made. CPAs and other non-attorney practitioners should always insist that competent legal consul be consulted by the client. If the client refuses to consult with legal counsel then a CPA should, in my opinion, consider withdrawing from the engagement. If not and the client is later found to be willful or the disclosure otherwise goes south the client could turn on the CPA and IRS OPR might take an interest. I think this is just too much risk for a CPA to take. The authors make very good points and we should take heed.
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