IRS Provides Guidance on Definition of Willfulness and Standard of Proof in FBAR Penalty Context
In a Technical Advice Memorandum, PTMA 2018-013 (found at PTMA 2018-013), the IRS provides guidance on the definition of "Willfulness" in the context FBAR penalties.
Generally, the FBAR regime requires that every United States person that has a financial interest in, or signature authority over a financial account in a foreign country must report the account to the IRS annually on a Report of Foreign Bank and Financial Accounts (FBAR). This includes the reporting of interests in foreign bank accounts. The filing is done using Form Fincin 114.
The penalty for violating the FBAR requirement is set forth in 31 U.S.C. 5321(a)(5). The maximum amount of the penalty depends on whether the violation was non-willful or willful. The maximum penalty amount for a nonwillful violation of the FBAR requirements is $10,000. The maximum penalty amount for a willful violation is the greater of $100,000 or fifty-percent of the balance in the account at the time of the violation. 31 U.S.C. 5321(a)(5)(C) & (D).
Importantly, the statute and the regulations do not define willfulness. Because of this, the term "willfulness" has been interpreted by case law. The recent IRS guidance attempts to provide a summary of cases related to the issue. Importantly, the IRS guidance also provides the IRS position on the definition of willfulness in the context of FBAR penalties for nondisclosure of foreign bank accounts.
Definition of Willfulness for FBAR Penalty
The recent guidance provides the IRS position that a different standard should apply to the definition of willfulness depending on whether the foreign bank account case is a criminal or civil penalty case. In the criminal context, the IRS provides that the definition of “willful” or “willfully” should be narrowly interpreted in the context of FBAR violations, limiting liability to knowing violations. The IRS cites the Supreme Court case Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007) for this proposition.
However, in civil FBAR penalty context, the IRS makes a much broader interpretation of willfulness. In the civil context, the IRS provides that the definition of willfulness includes knowing violations, but also includes both willful blindness and recklessness.
Generally, “willful blindness” is established when an individual “takes deliberate actions to avoid confirming a high probability of wrongdoing and [when he] can almost be said to have actually known the critical facts.” Prior cases have found that in the tax reporting context, the government can show willful blindness by evidence that the taxpayer made “a conscious effort to avoid learning about reporting requirements.” The Internal Revenue Manual also provides that the failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved, may lead to a conclusion that the violation was due to willful blindness. See IRM 18.104.22.168.5.1.
Citing United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989), the IRS guidance provides that the definition of recklessness in the context of FBAR penalties. For FBAR purposes, the a taxpayer may be deemed reckless, “if the taxpayer (1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily.”
Burden of Proof in FBAR Penalty Cases
The IRS further provides the burden of proof that should apply in the context of FBAR penalties, and the determination the lower preponderance of evidence standard should apply. This position appears to abandon prior IRS guidance found in CCA 200603026, that the clear and convincing standard should apply.
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