Willful Blindness Leads to Willful FBAR Penalties After Doctor Hides Assets

Wooden judge gavel closeup.

Taxpayers can’t turn a blind eye to their IRS filing requirements and expect to avoid willful FBAR penalties. A recent decision from the United States District Court for the Eastern District of Michigan shows that when an anesthesiologist tried to hide his money overseas to avoid criminal fines, his willful blindness was enough to support the penalties assessed against him.

Criminal Search Warrant Sends Doctor’s Money Overseas

James Kelly was a board-certified anesthesiologist living near Detroit, Michigan. In November 2007, police searched his home. When it looked like he might face criminal charges, Dr. Kelly liquidated his domestic bank accounts in early 2008, and traveled to Zurich, Switzerland, where he opened an account at Finter Bank with an opening balance of $1.85 million. Dr. Kelly then evaded arrest, remaining abroad until he was extradited in April 2008.

When Dr. Kelly opened his Finter Bank account, he opted for a “numbered account,” and asked the bank to retain all account-related correspondence. The bank asked him to complete a Form W-9 and warned that 30% would be withheld from income related to US securities. Dr. Kelly skipped the form and divested himself of US securities to avoid US income tax withholdings.

In December 2008, Dr. Kelly pleaded guilty to federal criminal charges, the sentence for which could have included fines of up to $250,000. But all Dr. Kelly’s money was overseas and invisible to the criminal court. It waived his criminal financial penalties based on his supposed inability to pay. He was incarcerated until 2010.

Disclosed Federal Bank Account Leads to FBAR Investigation

In 2011, Dr. Kelly’s ex-wife reported his Finter Account to the IRS. Only then did Dr. Kelly ask the bank to provide his information to the IRS. Instead, the account was temporarily closed because Dr. Kelly had never provided his tax information. The account was reopened in December 2012 as a “mandatory high risk.” A year later, Finter notified Dr. Kelly it would be disclosing the account through the IRS’s Swiss Bank Program. That letter asked Dr. Kelly to submit proof he had complied with U.S. tax laws, including sending copies of FBAR forms he had never filled out. It recommended that Dr. Kelly “promptly contact a qualified U.S. tax specialist” to determine his tax consequences and complete any outstanding tax filings. The bank also recommended Dr. Kelly participate in the now-closed Offshore Voluntary Disclosure Program (OVDP) to avoid willful FBAR penalties. Dr. Kelly applied for the program in April 2014, and he was provisionally accepted on January 8, 2015. However that acceptance depended on a truthful and complete disclosure, full cooperation with the IRS’s investigation, and good faith arrangements to pay tax, interests, and penalties.

Dr. Kelly didn’t file an FBAR until December 2016, and then only for 2013. He never filed FBAR forms for 2014 or 2015, despite his OVDP investigation continuing.

Instead, in September 2015, Dr. Kelly closed his Finter Account, with a final balance of $1.5 million. He then hired a financial investment expert who opened a new account on his behalf with Bank Alpinum AG in Liechtenstein. He never reported this new account to the IRS, and signed a request for installment agreement listing only his domestic bank account holding less than $1000. Unsurprisingly, Dr. Kelly was removed from the OVDP in April 2018 for failure to cooperate and failure to disclose how his foreign funds had been disposed of.

IRS Imposes Willful FBAR Penalties

After expelling Dr. Kelly from the OVDP, the IRS concluded that he had willfully failed to disclose his foreign financial interests through the timely filing of FBAR forms in 2013, 2014, and 2015. It issued a total penalty of $769,126 for all three years. Despite having more than $1.2 million in his Bank Alpinum account, Dr. Kelly refused to pay, and never filed FBARs again through 2020. The IRS then took him to court to collect its penalties.

Willful Blindness Supports Willful FBAR Penalties, Court Says

Both parties filed motions for summary judgment, which the Michigan District Court ruled on in May 2023. It found the IRS had properly assessed willful FBAR penalties based on:

  • Active concealment
  • Recklessness
  • Willful blindness

The Court said to prove Dr. Kelly was liable for the FBAR penalties, the IRS had to prove that:

  • Dr. Kelly was a citizen
  • He had a financial interest or signatory authority over the foreign financial accounts
  • The account balance was $10,000 or more each year
  • Dr. Kelly failed to disclose the account to the IRS
  • The failure was knowing or reckless
  • The amount of the penalty was proper.

The main issue on appeal was whether Dr. Kelly’s conduct was willful. The Court, like many others before it, held that willfulness could be based on knowing violations of the reporting standard, or by a reckless disregard for the need to file the forms. Here, the Court found “an unmistakable pattern of concealment along with a reckless disregard of his federal reporting requirements.” However, the Court took time to most fully address his willful blindness.

Dr. Kelly admitted to having “limited knowledge of banking” but despite large international money transfers, never hired an accountant or tax attorney or even inquired about his tax reporting obligations because he “didn’t see a need” and “had no questions about it.” The Court found Dr. Kelly had actual knowledge of his FBAR reporting obligations by December 2013 at the latest, based on the letter Finter Bank sent him. However, even after applying for and being provisionally accepted in the OVDP program, he failed to do anything to timely file his 2013 - 2015 FBAR reports. The Court criticized the doctor’s “blasé attitude about his federal reporting obligations” given that he is well-educated and knew enough to seek out a financial investment expert to maximize his investments.

The Court didn’t accept Dr. Kelly’s argument that his participation in the OVDP meant “there cannot possibly be willfulness” and that failed participation excused him from all prior and future FBAR penalties related to his Finter Account. The Court called this “objectively unreasonable” since the OVDP required full participation, and even if he had successfully completed the program it would not have excused his non-filing for 2014 and 2015, after his acceptance in the program. Indeed, Dr. Kelly continued to conceal his foreign funds even while requesting installment payments on his assessments, which resulted in his removal from the program, and exclusion from any reduction in penalties it may have allowed him.

Dr. Kelly’s case is a perfect example of how willful blindness leads to willful FBAR penalties. It shows that taxpayers can’t simply ignore their tax filing requirements and hope to fix it through their eventual cooperation with IRS disclosure programs that may not always be available, or applicable. Rather than trusting in willful ignorance, work with tax preparers and tax attorneys familiar with foreign financial account reporting requirements so that you don’t end up facing willful FBAR penalties in years to come.

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.

Categories: FBAR