What Do Willful Violations of FBAR Reporting Requirements Look Like?

The difference between penalties for willful violations of FBAR reporting requirements and non-willful violations could be hundreds of thousands of dollars, federal criminal charges, and prison time. But it can be hard for taxpayers to know what to expect; are their behaviors willful or non-willful? A recently released decision from the United States Court of Federal Claims gives a glimpse at what willful violations of FBAR reporting requirements look like and what not to do as a witness in your own defense.

Own or Control $10,000 in Foreign Assets? You Have FBAR Reporting Requirements

Many U.S. taxpayers who receive inheritances or otherwise come into foreign assets don't realize the federal reporting requirements that come with them. They unintentionally omit their foreign assets from the tax returns and fail to file Foreign Bank Account Reports (FBARs). For others, violating the Bank Secrecy Act's mandate to disclose assets held at foreign financial institutions is a calculated risk, designed to avoid paying taxes on money held overseas.

The Bank Secrecy Act requires every U.S. taxpayer (even those not living in the U.S.) to disclose their foreign-held assets on their tax returns. If their foreign financial accounts have a cumulative value of $10,000 or more at any time during the year, they must also file a separate Financial Crimes Enforcement Network (FinCEN) 114 form by April 15 of the following year. Failure to file the forms on time results in FBAR penalties. The amount of those penalties depend on whether the violation was willful or non-willful:

• Up to $10,000 for non-willful penalties
• Up to $100,000 or 50% of the balance of the highest aggregate balance for willful penalties

Willful violators are also disqualified from voluntary disclosure programs designed to minimize penalties in exchange for cooperation with the IRS.

Norman v United States: What Willful Violations of FBAR Reporting Requirements Look Like

On July 31, 2018, the United States Court of Federal Claims published a tax law decision in the case Norman v United States, No. 1:15-cv-00872. The case provides a clear example of what willful violations of FBAR reporting requirements look like.

Mindy P. Norman was a schoolteacher, with a 40-year career teaching 7 subjects including economics and government. She maintained an account at Union Bank Switzerland (UBS) from 1999 until 2008. Every year, she met with her Swiss banker Hans Thomann to discuss the account. In 2000, she signed a waiver of her right to invest in U.S. securities, apparently to conceal the assets from the IRS. In 2002, she withdrew $100,000 from the account. In 2004, 2005, and 2006, she signed management agreements with the bank choosing different investment strategies for the money. However, she closed the account after UBS told her that it would be adopting a new business model and working with the U.S. government to identify U.S. clients who had engaged in tax fraud.

Despite this careful management of her foreign financial accounts, Ms. Norman did not list the account on her tax returns or file any FBARs until 2009, when she said she learned of the reporting requirement from her mother. Even then, she and her Swiss accountant filed a "quiet disclosure" -- filing amended tax returns and FBARs and paying related taxes and interest without notifying the IRS of the FBAR violation -- rather than applying for the Offshore Voluntary Disclosure Program (OVDP) or other voluntary reporting program. When the IRS discovered the quiet disclosure, it assessed a penalty of $803,530.00 (50% of the balance of the UBS account) for willful violations of FBAR reporting requirements connected to Norman's 2007 tax return.

While the Bank Secrecy Act does not define "willful", the court has traditionally applied it to both knowing and reckless violations of the FBAR reporting requirements. If the risk of violation is either known or so obvious that the taxpayer should have known about it, the court will uphold a finding by the IRS that a willful violation of FBAR reporting requirements has occurred. The court determined that Ms. Norman's conduct demonstrated an intent to hide the assets from the IRS, and affirmed the finding that the violation was willful.

Poor Memory and Unsupported Claims That Taxpayer "Didn't Know" Won't Stop Willful Violation Finding

Norman is also a good example of bad testimony by a taxpayer. Because the IRS often takes many years to discover, audit, and impose penalties for FBAR violations, certain details could easily be lost to a clouded memory. But simply claiming a taxpayer "didn't know" or universally "doesn't remember" will often not be enough to support a non-willful filing. For example, Ms. Norman testified under oath that she didn't remember:

• Whether she opened the UBS account or inherited it
• Meeting with a UBS representative to open the account
• Traveling to Zurich to open the account
• When the account was opened
• How much she withdrew
• When that withdrawal happened

She also claimed she did not:

• Recognize her account number
• Know if UBS assigned account numbers at all
• Know what an account number was
• Recognize documents used to open the account
• Recognize management agreements related to the account
• Recognize her banker's stamped signature
• Know what the "Closing my USB account" note she signed was
• Recognize her accountant's invoice for the quiet disclsoure

Her statements related to the foreign financial account also changed over time. At first, she said the account was never hers and she didn't know about it until 2009. The court said:

"As more evidence came to light, however, she slowly amended and eroded her statements until she reached her current testimony: that she knew the account and money was hers, and that she had met with bank representatives to manage it, and that she had withdrawn money."

Even then, she claimed she "really didn't have, you know, control over it" and that "none of the money in the account was mine" because she "didn't make deposits."

There are many appropriate defenses to a finding of willful violations of FBAR reporting requirements. However, federal trial court judges are not required to take witnesses at their word. When, as with Ms. Norman, a plaintiff's testimony "strain[s] credulity", the court is likely to uphold the higher FBAR penalty, finding the violation willful. If the IRS has assessed willful FBAR penalties, it will take the help of an experienced tax attorney to prepare a credible defense and demonstrate that the penalty was wrongfully assessed.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding willful violation of FBAR requirements, contact Joe Viola to schedule a free consultation.