Tax Law’s Two Definitions of Willfulness, and Why They are Different

Tax Law’s Two Definitio…

The definitions of words in the U.S. tax code can be the difference between criminal convictions and financial consequences. Most taxpayers would assume that one word in that code would have one meaning. But when it comes to the definitions of willfulness, context is everything.

“Willfulness” is what turns a fine for FBAR violations from thousands to millions of dollars. It is also a necessary part of criminal tax charges for crimes including tax fraud and wire fraud. But the boundaries around what is willful or non-willful are different depending on whether a U.S. taxpayer is facing civil or criminal consequences for their actions.

Willful FBAR Violations Don’t Always Need to Be Intentional

As this blog has explained many times, willfulness does not always require a U.S. taxpayer to mean to violate the U.S. Tax Code. When it comes to failure to file reports of foreign financial accounts (FBARs) or tax returns, willful conduct can sometimes be a mistake.

That is because in the civil courts and tax courts, the definition of willfulness includes a reckless disregard for a legal duty. In other words, if you should have been aware of your obligation to file FBARs or tax returns, you can still be found to have willfully violated the requirement to do so.

Within the FBAR context, finding that a taxpayer’s failure to file was willful can increase the cost of that missing report from $10,000 per account per year, to up to 50% of the balance of the account. In some cases, that can add up to millions of dollars in civil penalties.

Tax Crime Cases Use Tighter Definition of Willfulness

But when there are federal tax crimes involved, the definition of willfulness gets tighter. Within the criminal context, government prosecutors must show that the defendant acted “with the intent to do something the Defendant knew the law forbids.” That doesn’t necessarily mean that the defendant must be aware of the law he or she is violating, but they must have had the specific intent to violate some known legal duty.

In the unpublished case of United States v Severino, that something was preparing over 350 tax returns claiming American Opportunity Credits when the taxpayer wasn’t a student, or on behalf of a dependent who should not have been included on the return. Manuel Severino was an immigrant from the Dominican Republic and a naturalized citizen. He assisted hundreds of people in his community in preparing and filing their tax returns, even when he did not sign them as a preparer. However, the IRS found that out of the 452 tax returns filed from Serevino’s home IP address, 338 claimed the American Opportunity Credit, available to offset the educational expenses of students and their families. In all but 14 cases, the returns were missing a 1098-T from the corresponding college or university. Further investigation revealed that on at least two occasions, Serevino had included dependents without the taxpayer’s knowledge or consent.

The IRS charged Serevino with 13 counts of aiding and assisting in the preparation of false tax returns, 2 counts of wire fraud, and 2 counts of aggravated identity theft (for the dependents). After a jury convicted him of all 17 criminal tax crimes, he appealed, claiming that the jury had used the wrong definition of willfulness. The U.S. Court of Appeals reiterated the standard, saying willfulness means the act “was committed voluntarily and purposefully with the intent to do something the law forbids; that is, with the bad purpose to disobey or disregard the law.” Even within the criminal context, Serevino didn’t need to know the complex statute forbidding what he had done.

Different Definitions of Willfulness Tie to Consequences and Convictions

So why have two definitions for willfulness within U.S. tax law? The difference is between civil penalties and criminal prison sentences. They also pair with the different standards by which the IRS’s attorneys need to prove their case.

In the civil court, the broader definition of willfulness has a lower standard. IRS attorneys merely need to show that the tax law violations are true “by the preponderance of the evidence” – that it is more likely true than not. That is because the consequence if the jury gets it wrong is limited to financial loss. Even when a willful FBAR penalty comes to millions of dollars, the taxpayer will not lose his or her freedom.

But when criminal tax charges come into play, the stakes are higher. Severino was sent to a federal prison for 41 months plus two years. That is on top of the financial penalties for his tax fraud. Because his freedom, and not just his finances were on the line, prosecutors had to use the tighter definition of willfulness, and they had to prove his guilt beyond a reasonable doubt.

No matter whether you are facing civil penalties or criminal tax charges, when a jury finds that you have willfully violated the U.S. tax code, the consequences can be dire. When the IRS begins investigating your tax returns or missing tax forms, you need an experienced attorney who understands the definitions and standards that will apply in your specific case. Without a strong defense, you could find yourself like Severino, facing years in a federal prison or a tax debt you can’t begin to repay.

Attorney Joseph R. Viola is a tax attorney in Philadelphia, Pennsylvania with over 30 years experience. If you have questions regarding the criminal tax fraud or FBAR violations, contact Joe Viola to schedule a free consultation.​

Categories: Tax / IRS Penalties