FBAR Negligence or Willfulness? Court Says Jury Must Decide
There have been a lot of cases in the last several years defining willfulness in the context of failures to file FBAR forms with the IRS. But a recent decision from the Northern District of California addresses the issue slightly differently. Instead of distinguishing willful and reckless failure to file, the Court said that the question of whether the defendant’s actions were negligence or willfulness was a question the jury must decide.
Turkish National Fails to File FBARs for U.S. Taxes
Tuncay Saydam was born in Turkey in the 1930s. He worked as a professor there before moving to the United States in 1980 to teach computer science at the University of Delaware. While he continued to take yearly trips to Turkey, he became a U.S. citizen in 1988 or 1989. Around the same time, until the 1990s, Mr. Saydam also worked in Switzerland.
As is often the case, Mr. Saydam opened bank accounts in each country where he worked, maintaining accounts at Akbank T.A.S. in Turkey since the 1980s, Zuercher Kantonalbank (ZKB) in Switzerland prior to 2009, and M&T Bank in America before 2012. In 2012, ZKB terminated Mr. Saydam’s accounts as part of the tightening U.S. regulations. He opened a new account at Denizbank A.S. and transferred over $500,000 in savings from Switzerland to Turkey.
Between 2013 and 2017, Mr. Saydam filled out his U.S. tax returns with the help of H&R Block. It was undisputed that he did not tell H&R Block about his foreign bank accounts, disclose the accounts on Schedule B of his tax returns, or file FBARs. He was required to do so because each year he had a total balance of more than $10,000 in overseas accounts.
Government Claims the Failure to File is Reckless
The IRS assessed penalties against Mr. Saydam for what they said was a willful failure to file FBARs for 2013 through 2017. The case came to the United States District Court for the Northern District of California on the Government’s motion for summary judgment. The parties mostly agreed on the facts of the case, but disputed whether what Mr. Saydam had done was sufficient to demonstrate a willful failure to file.
The Court provided a useful summary of the law related to willful FBAR penalties. It noted that the Ninth Circuit Court – the court of appeals whose decisions are binding on the federal trial courts in California – had not defined willfulness in the FBAR context. However, as this blog has reported before, several other courts have defined willfulness as including “both knowing and reckless violations” of the statute. The Fourth Circuit defined reckless in the FBAR context as the defendant “(1) clearly ought to have known that (2) there was a grave risk that an accurate FBAR was not being filed and if (3) he was in a position to find out for certain very easily.” Meanwhile, the Ninth Circuit defined reckless defendant in a different context as someone who “knows of a substantial and unjustified risk of such wrongdoing.” The Court here recognized that some courts have gone so far as to include “willful blindness” where the person believed there was a high probability that a fact existed, but took steps to deliberately avoid learning that fact. The Government in this case asserted all three, knowing, reckless, and willfully blind violations of the statute were enough to impose willful FBAR violations.
Negligence, Recklessness, or Willfulness? Jury Must Decide
The Court said it didn’t need to decide whether recklessness applies to California residents’ failure to file FBAR requests. Instead, it said even civil recklessness required something more than mere negligence. The Court defined negligence as where “the defendant ‘should have known’ or had ‘constructive knowledge’ of wrongdoing.” However, civil recklessness required something more: “‘[the] high risk of harm, objectively assessed.”
The Court said that under the Ninth Circuit’s standard for negligence and recklessness, Mr. Saydam’s signature on his tax return was not enough on its own to establish willfulness. Instead, that signature would only establish constructive knowledge, which is mere negligence. The Court said that distinguishing between negligence and recklessness would require an assessment of the defendant’s subjective state of mind, which usually cannot be decided on summary judgment because it involves questions of fact reserved for the jury.
The Court distinguished this case from others finding recklessness where a defendant signed a tax return failing to disclose foreign bank accounts. It noted that Mr. Saydam had never signed up for numbered accounts at the foreign banks (a tactic used in willful tax evasion schemes), and he had provided a W-9 to ZKB, which would allow the bank to report his holdings to the IRS. When the government began its audit, Mr. Saydam immediately reported some of his foreign accounts and admitted he had failed to file FBARs, though he didn’t report other accounts right away. That put far more weight on his signature alone, enough that the Court did not believe summary judgment was appropriate.
In this case, the Court said that a question of fact existed around the conversations Mr. Saydam had with the H&R Block employees. Those employees said that they asked him if he had foreign bank accounts, but he said they didn’t. The Court noted that the employees were testifying about their normal procedure and had no memory of Mr. Saydam’s interviews specifically. They were also not qualified to prepare tax returns related to foreign income. Mr. Saydam said that the interviews were “at most 20 minutes” long and he only briefly reviewed the tax return for the “numbers that we owed.” Since the Court was not allowed to weigh evidence or resolve disputes on underlying facts, the Court said it would be up to a jury to decide whether Mr. Saydam’s actions were negligence or willfulness and whether he had to pay willful FBAR penalties.
Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions about FBAR filing failures, contact Joe Viola to schedule a free consultation.
