IRS Win in Appellate Case Portends Bigger FBAR crackdown

Aug 13, 2012   
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On July 20, 2012, the U.S. Court of Appeals for the Fourth Circuit concluded that the district court clearly erred in finding that the Government failed to prove that J. Bryan Williams willfully violated 31 U.S.C. § 5314 by failing to report his interest in two foreign bank accounts for the tax year 2000 and reversed the district courts opinion.  United States v. J. Bryan Williams, case no. 10-2230 (4th Cir. 2012), an unpublished opinion, is available here.

The matter was before the Fourth Circuit following the Governments appeal of the decision of the U.S. District Court for the Eastern District of Virginia, available here, which had ruled that the IRS lacked evidence to prove Williams willful violation of the FBAR filing requirement.

The background and facts are incorporated in the opinion.  Pursuant to § 5314, taxpayers are required to report annually to the Internal Revenue Service (IRS) any financial interests the taxpayer has in any bank, securities, or other financial accounts in a foreign country.  The report is made by filing and completing form TD F 90-22.1, otherwise known as “FBAR.”  Section 5314 is available here. The FBAR must be filed on or before June 30th of each calendar year and the Secretary of Treasury may impose civil money penalties on any person who fails to timely file the report.  Under 31 U.S.C. § 5321, the Secretary may impose a maximum penalty of up to $100,000 or 50% of the balance in the account at the time of such violation if the taxpayer “willfully” fails to file the FBAR, which was the issue in the Williams case. 

The controversy began in 1993 when Williams opened two Swiss bank accounts in the name of ALQI Holdings, Ltd.  From 1993 through 2000, Williams deposited more than $7,000,000 into the ALQI accounts, earning more than $800,000 in income on the deposits.  Williams, in violation of § 5314, did not report to the IRS the income from the ALQI accounts or his interest in the accounts.  By late 2000, the Swiss and U.S. authorities became aware of the assets in the ALQI accounts, and froze the accounts after meeting Williams and his attorneys.

In January 2001, Williams completed a tax organizer, which had been provided to him by his accountant in connection with the preparation of his 2000 tax return.  The tax organizer included a question regarding whether Williams had “an interest in or a signature or other authority over a bank account, or other financial account in a foreign country.”  Williams answered “No.”  Williams 2000 Form 1040, line 7(a), asked the identical question and included instructions for exceptions and filing requirements for the FBAR.  Williams once again checked “No” and did not file an FBAR by the June 30, 2001 deadline. 

In January 2002, upon the advice of his attorneys and accountants, Williams fully disclosed the ALQI accounts to an IRS agent.  In October 2002, he filed his 2001 tax return that acknowledged his interest in the ALQI accounts. In 2003, Williams amended his 1999 and 2000 tax returns, which disclosed details about his ALQI accounts.

In June 2003, Williams pled guilty to conspiracy to defraud the IRS, in violation of 18 U.S.C. § 371, and criminal tax evasion, in violation of 26 U.S.C. § 7201, available here, for his connection with the ALQI accounts from 1993 to 2000.  Williams submitted an allocution, however, and received a three-level reduction under the Sentencing Guidelines for the acceptance of responsibility. In his allocution, Williams admitted to: (1) choosing not to report the income from the ALQI accounts until he filed his 2001 tax return; (2) knowing that he had an obligation to report to the IRS and/or the Department of Treasury the existence of the Swiss accounts but chose to hide his true income and evade taxes; and (3) knowing that what he was doing was wrong and unlawful and therefore admitting guilt of evading the payment of taxes for the tax years 1993 through 2000. 

In January 2007, Williams finally filed FBARs for each tax year from 1993 through 2000.  The IRS assessed two $100,000 civil penalties against him pursuant to § 5321(5), available here, for his failure to file an FBAR for the tax year 2000.  The IRS only assessed penalties for the tax year 2000 because the statute of limitations for assessing penalties for the other tax years had expired.  Williams subsequently failed to pay these penalties and the Government brought this enforcement action to collect them. 

All parties agree that Williams violated § 5314 by failing to timely file an FBAR for tax year 2000.  Thus, the only question is whether the violation was willful.  In holding that Williams violation was not willful, the district court explained that (1) Williams lacked any motivation to willfully conceal the accounts because the authorities were already aware of such accounts and (2) his failure to disclose the accounts “was not an act undertaken intentionally or in deliberate disregard for the law, but instead constituted an understandable omission given the context in which it occurred.”

In analyzing whether Williams conduct was willful, the opinion explains that willfulness “may be proven through inference from conduct meant to conceal or mislead sources of income or other financial information,” and it “can be inferred from a conscious effort to avoid learning about reporting requirements.”  United States v. Sturman, 951 F.2d 1466, 1476 (6th Cir. 1991).  Likewise, “willful blindness” may be inferred where “a defendant was subjectively aware of high probability of the existence of a tax liability, and purposefully avoided learning the fats point to such liability.”  United States v. Poole, 640 F.3d 114, 122 (4th Cir. 2011).  Importantly, in cases “where willfulness is a statutory condition of civil liability, [courts] have generally taken it to cover not only knowing violations of a standard but reckless ones as well.”  Safeco Ins. Co. of America v. Burr, 551 U.S. 47, 57 (2007).  Whether a person failed to comply with a tax reporting requirement is a question of fact.  Rycoff v. U.S., 40 F.3d 305, 307 (9th Cir. 1994); accord U.S. v. Gormley, 201 f.3d 290, 294 (4th Cir. 2000). 

The Courts review of the district courts decision is narrow under the clearly erroneous standard set forth in Federal Rule of Civil Procedure 52(a).  If the district courts account of the evidence is plausible, the court of appeals may not reverse even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.  However, the district courts findings are not conclusive if they are plainly wrong and the appellate court is allowed to engage in meaningful appellate review.  The dissenting opinion points out that there was evidence to support the district courts ruling, and therefore the circuit court should not reverse. 

Nonetheless, the majority opinion did in fact believe, with a definite and firm conviction, that the district court clearly erred in finding that Williams did not willfully violate § 5314.  In support thereof, the Court explained that Williams signed his 2000 tax return, thereby declaring under penalty of perjury that he had examined this return and accompanying schedules and statements and that, to the best of his knowledge, the return was true, accurate, and complete.  His signature was prima facie evidence that he knew the contents of his return and at minimum, line 7(a)s directions for the FBAR requirements put Williams on inquiry notice of the FBAR requirement. 

As the Fourth Circuit wrote, nothing in the record indicated that Williams ever consulted the FBAR or its instructions. Williams testified that he did not read line 7(a) or paid attention to any of the written words on his tax return.  According to Sturman, Williams made a conscious effort to avoid learning about reporting requirements.  Thus, according to the Fourth Circuit, Williamss false answers on both the tax organizer and his tax return further indicated conduct that was meant to conceal or mislead sources of income or other financial information.  Struman, 951 F.2d at 1476.  This conduct also constituted willful blindness to the FBAR requirement.  Poole, 640 F.3d at 122.

Moreover, the Fourth Circuit held that Williamss guilty plea allocation confirmed that his violation of § 5314 was willful.  Williams acknowledged that he willfully failed to report the existence of the ALQI accounts to the IRS or Department of the Treasury as part of his larger scheme of tax evasion.  Thus, the Court held that that acknowledgement was itself an admission of violation § 5314, because a taxpayer complies with § 5314 by filing an FBAR with the Department of Treasury.  Accordingly, Williams could not claim that he was unaware of, inadvertently ignored, or otherwise lacked motivation to disregard the FBAR reporting requirement.

In conclusion, the Fourth Circuits majority was convinced that, at a minimum, Williamss actions established reckless conduct, which satisfied the proof requirement under § 5314.  Safeco Ins., 551 U.S. at 57.  Thus, the Court ruled that the district court clearly erred in finding that willfulness had not been established. 

The attorneys at Fuerst Ittleman, PL have extensive civil and criminal tax litigation experience before the U.S. District Courts, the U.S. Tax Court, and the U.S. Circuit Courts of Appeal.  You can contact us by calling 305.350.5690, or by emailing us at