Can an IRS Case History Prove Non-Willfulness?

When you are facing willful FBAR penalties, you need all the help you can get to prove that your failure to file reports of foreign financial accounts was not intentional or reckless. But could the IRS's own records help you win your case? Can an IRS Case History be used to prove non-willfulness?

IRS Case History Provides Facts of the Case

An IRS Case History is a complete record of the investigation of an audit or other tax investigation. It can include financial documents, disclosures, forms and statements provided by the taxpayer or their banks and financial institutions. And it can also include notes by the IRS investigator, reports to her superiors, and memoranda about how the case should proceed. Many of those notes show how the IRS determines whether to impose willful or non-willful penalties for FBAR violations.

Determining Willful FBAR Penalties Depends on All the Facts

Any U.S. taxpayer with more than $10,000 in a foreign financial account has the legal duty to disclose those assets on his or her tax return, and with a separate Foreign Bank Account Report (FBAR). This form is designed to help the IRS locate foreign accounts and be certain those controlling them pay the required tax.

Any failure to file FBARs on time can result in penalties. But the amount of those penalties varies depending on whether the failure to file was willful (resulting in up to $100,000 or 50% of the highest aggregate balance in all financial accounts in a given year) or non-willful (a maximum penalty of $10,000 per account per year). Determining whether to impose willful or non-willful penalties can often be a matter of IRS discretion.

German Survivor's Safe Family Funds Raise FBAR Concerns for Estate

For example, the IRS imposed willful FBAR penalties against the estate of Walter Moser. Moser was born to Jewish parents in Germany in 1928. As a child, he and his immediate family fled the country, arriving in the United States in 1938. Moser's parents left everything behind when they fled, including family members who did not survive the persecution and genocide of the Jewish people.

Moser's family and personal history affected him deeply, causing him to keep safe family funds in an account held overseas for much of his life. These funds were earmarked so that the family would have money to survive, should they have to flee again. He shared this account with a South African cousin, and it appears transferred the remaining balance to that cousin in 2009.

Two years later, the IRS audited Moser's estate after he died. Revenue Agent Hina Talavia conducted the audit of both Moser's tax returns and foreign financial accounts to determine if there were FBAR violations, and whether those violations were willful. Moser also demonstrated a deep distrust of government entities, which the family's tax attorney attributed to his history. However, before Moser had a chance to hire an attorney, Talavia cornered him and his accountant, demanding answers about his foreign account. When he was not immediately forthcoming, Talavia labelled his failure to file FBARs willful.

Discovery of IRS Case History and Related Documents Can Provide Essential Proof in Tough Cases

The case against Moser was further complicated by the age of everyone involved. Moser himself died before the willful FBAR penalty was imposed. His accountant lived long enough to be deposed in the case, but then passed away as well. Moser's wife survived him, but had dementia and was not able to testify about the case. His children were very young with the account was formed and had little knowledge of it other than knowing it existed.

That meant that most information regarding the Swiss account lay in the hands of the IRS. The IRS Case History provided perhaps the only evidence about Moser's state of mind when filing his tax returns. But when the family's tax attorney requested a copy in a process known as discovery, the IRS refused, claiming the documents were protected by "deliberative privilege."

Does Deliberative Privilege Apply to an IRS Case History?

"Deliberative privilege" allows government agencies to hold back documents and other evidence which include deliberations about a the agency's decisions and policies, in order to protect the quality of administrative decisions made within that office. Where deliberative privilege applies, it prevents a taxpayer or other party against the government from receiving documents or evidence as part of discovery that fall within the scope of protection.

But for the deliberative privilege to apply, the government's attorneys have to do more than just refuse to release the documents. First, there are the procedural requirements:

1. The head of the department with control over the matter has to make a formal and specific claim of privilege after reviewing the matter
2. The agency official responsible must state precise and certain reasons why the privilege applies to the specific information or documents requested
3. The government attorneys must identify and describe the information sought.

Once the government takes all three steps to assert deliberative privilege, the trial court must decide if there is a basis for the privilege to apply. That means the protected information must be a communication related to the consultative process and come before any final decision is made by the agency. Communications after the decision is reached are not protected.

This is a highly specific consideration. The facts going into a deliberation are not protected, nor are an agent's opinions regarding those facts. Only the deliberation about how the facts should be applied to agency policy or law fall within the exception to the broad discovery rules. If the facts can be separated from the deliberation, the Court can require the agency to disclose one while protecting the other.

Even if, the documents are deliberative, the court can still order that the government produce them if the party's need for the document outweighs the agency's need for confidentiality. This is a balance of several factors:

1. The relevance of the evidence
2. The availability of other evidence
3. The seriousness of the issues involved
4. The role the government plays in the case
5. The risk that disclosure will affect candor among government employees in the future

Could Moser's IRS Case History Be Discovered?

After the IRS refused to disclose the complete IRS Case History in United States v Moser, the family's tax attorney issued a memorandum requesting the court to order the documents be produced. According to the family's attorney, the IRS did not follow the procedure for asserting deliberative privilege. Also, much of the information requested is fact-based, rather than asking for the reasoning behind the willful determination. Because Moser and his accountant had passed away, there were few other sources for the information, which could go directly to whether Moser was trying to hide assets, or was simply worried what the government would do with the information provided. All of this could affect whether the court believes he willfully violated FBAR reporting requirements and whether the willful FBAR penalties are appropriate.

Tax audits and the litigation that follow them are highly complex, full of legal details that can trip up even a sophisticated businessperson. When the IRS targets an estate or an elderly taxpayer, the problems challenging a willful FBAR violation can mount quickly. That's why it is important to retain a tax attorney experienced with foreign reporting requirements as soon as you learn you are subject to an IRS audit. The difference could save your family thousands of dollars.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you are are facing willful FBAR penalties, contact Joe Viola to schedule a free consultation.