Updated July 22, 2016 – almost four years to the day of the original post
I am updating this post to appear in the “Looking For Mr. FBAR” series of posts. A previous post confirmed that to impose a “willful FBAR penalty”, the government must prove that the failure to file the FBAR was the result of “the intentional violation of a known legal duty. Clearly this is a question of fact. The post was and is to explore the extent to which knowledge of the FBAR requirement can be inferred from Schedule B and other facts surrounding the preparation of the tax return.
I have updated this post to include third commentary on the impact of the Williams case. This post is now divided into two parts.
Part A – The original 2012 post
Part B – The 2016 updates: The third party commentary on Williams
Part A – The original 2012 post
As you know, Mr. FBAR is a particularly nasty piece of work. Absent a showing of “reasonable cause”, Mr. FBAR opens the door to a sliding scale of penalties. In the past I have written about Mr. FBAR and the non-willfulness penalty structure. This post is about “willfulness.” Specifically, what constitutes “willfulness”? Conviction for the “willful” failure to file an FBAR comes with “unspeakably high penalties”. So, I won’t speak of them here. The non-willful penalties are bad enough. But, the penalties for “willfulness” clearly invite 8th amendment (“excessive fines”) scrutiny. This is certain to come. In fact, it may well be that the next step in the “Williams saga” will be just that.
The Williams Saga
A brief overview of the Williams saga may be found courtesy of Robert Wood here and Jack Townsend here (appellate decision) and here (initial trial decision). Before analyzing these decisions and considering what they may mean, it is important to understand that this is not a situation of the IRS attempting to target a taxpayer whose sole sin was a failure to file FBARs. Mr. Williams, by his own admission was a willful tax evader. In addition, he failed to file FBARs. What is interesting is that the IRS decided to go after him for FBAR violations as well. Why? I haven’t a clue. I am not sure if I see a purpose to it. But maybe the IRS simply lacks purpose …
The Story of Mr. Williams
The facts are detailed by Jack Townsend in his blog as follows:
In Williams v. United States (EDVA Civil Action No. 1:09-cv-437, decision dated 9/1/10), the court declined to find willfulness.
(Note the test for willfullness is: The legal review standard is de novo, in which the Government must prove willfulness — in this context the intent to violate a known legal duty.
The opinion is relatively short, so I won’t rehash the opinion. Some significant facts from the case are:
1. “Between 1993 and 2000 Williams deposited more than $7,000,000 in assets in the accounts, earning more than $800,000 in income over that period.”
2. During the year in issue (2000, for which the FBAR was due 6/30/01), the Swiss were focusing on the accounts perhaps at the request of the U.S., the Swiss interviewed Williams about the accounts, the Swiss froze the accounts at the request of the U.S. and the U.S. was aware of the accounts (it is not stated whether that request was a tax driven request or some other law enforcement imperative request.) (The timing of some of these events were disputed by the Government, but the district judge would have none of that.)
3. On his 2000 1040, Williams failed to include the income from the accounts and, on Schedule B, failed to check the FBAR question.
4. Williams failed to file the FBAR by June 30, 2001.
5. Williams’ lawyers and accountants had advised him of the requirement to file the FBAR.
6. The Government had not proved that Williams willfully failed to file the 2000 FBAR.
7. “On October 15, 2002, Williams disclosed the accounts by filing his income tax return for the tax year 2001.”
8. On February 2003, Williams disclosed the accounts pursuant to an earlier version of the offshore voluntary account program (the OVCI program).
9. “On June 12, 2003, Williams pleaded guilty to one count of conspiracy to defraud the United States and to one count of criminal tax evasion in connection with funds held in the Swiss bank accounts during the years 1993 through 2000.” (Apparently, Williams’ attempt at voluntary disclosure did not work, presumably because the disclosure was not timely.)
10. “On January 18, 2007, Williams filed the TDF 90-22.1 form for all years going back to 1993, including tax year 2000.”
The key legal holdings are:
1. The legal review standard is de novo, in which the Government must prove willfulness — in this context the intent to violate a known legal duty.
2. The maximum penalty for the willful violation then was $100,000.
3. The court found on the facts presented that the Government had not proved that the defendant knew the legal duty in question. The Court reasoned:
In this case, the Government has failed to prove a “willful” violation. The Court finds that the Government’s case does not adequately account for the difference between failing and willfully failing to disclose an interest in a foreign bank account. n5 Further, the Government fails to differentiate tax evasion from failing to check the box admitting the existence of a foreign bank account.
n5. It is worth noting that Congress has since amended 31 U.S.C. § 5321 to allow the government to assess a civil penalty for FBAR violations regardless of whether the violation is willful. See 31 U.S.C. § 5321(a)(5), as amended by P.L. 108-357. Further, the statute now provides a “reasonable cause” exception. See 31 U.S.C. § 5321(a)(5)(B)(ii). While the issue of Williams’ liability under the statute as amended is not before the Court, the Court notes that Congress found it necessary to expand the coverage of § 5321 to address a class of conduct falling short of the “willful” standard solely accounted for under the old statute. Clearly, simply failing to file a Form TDF 90.22.1 was insufficient to subject an individual to liability for a civil penalty under the old statute.4. The court was not persuaded, on these facts, that Williams’ no answer to the foreign account question on his 2000 1040 Schedule B gave his the requirement knowledge of the legal duty.
5. Moreover, since the accounts were surely known by all, including the U.S. by June 30, 2001, it would make no sense for Williams not to disclose them by filing the FBAR.
6. Williams was not estopped by his evasion guilty plea.
The Government argues that Williams’ guilty plea should estop him from arguing that he did not willfully violate § 5314 for the tax year 2000. However, the evidence introduced at trial established that the scope of the facts established by Williams’ 2003 guilty plea are not as broad as the Government suggests, and there remains a factual incongruence between those facts necessary to his guilty plea to tax evasion and those establishing a willful violation of § 5314. That Williams intentionally failed to report income in an effort to evade income taxes is a separate matter from whether Williams specifically failed to comply with disclosure requirements contained in § 5314 applicable to the ALQI accounts for the year 2000. As Williams put it in his testimony at trial, “I was prosecuted for failing to disclose income. To the best of my knowledge I wasn’t prosecuted for failing to check that box.” Tr. at 34.I think the case illustrates the difficulty the Government will meet in establishing willfulness for the truly draconian FBAR penalty (in its present iteration). Perhaps this will encourage at least some taxpayers in the current voluntary disclosure initiative to opt out and be subject to the normal FBAR penalty regime. Assuming that the Government cannot meet the high standard (as illustrated by this case), the penalty costs could be a whole lot less than the program requires.
As you can see, Williams is what is known as a “bad actor”. That said, everybody is entitled to the presumption of innocence and to be convicted according to law. What is the relevant law?
The law is: Willfulness = the intent to violate a known legal duty
Let’s take this apart. To prove willfulness the government must prove three things:
2. a legal duty to file an FBAR
3. knowledge of that duty.
There is a clear legal duty to file an FBAR. Therefore the relevant factual considerations become:
Did Williams have knowledge of that legal duty; and
If Williams did have knowledge to that legal duty, did he intend to violate that duty?
Now all this is (I believe) a clear statement of the law. What it does NOT tell us is, what is the standard of proof that the government is required to demonstrate. I.e. how does the government, as a matter of law, prove knowledge and intent? How sure must the judge be? Must the government proves the elements of willfulness under a standard of:
A. A balance of probabilities (this is the civil standard of proof and should NOT be the standard adopted here);
B. Proof beyond a reasonable doubt (this is the general standard in criminal law).
Note Jack Townsend’s statement that:
I believe that, as to the factual issue of willfulness for the punitive FBAR penalty, the Government should have to prove willfulness by clear and convincing evidence.
(Let’s hope Jack is right.)
Once again, this is an accurate statement of the law. But, now the question becomes:
What is sufficient for the government to prove these elements?
Here is where the court of appeal decision becomes interesting, dangerous and full of implications that extend way beyond Mr. Williams and his stupid FBARs.
What did the court of appeal say?
The relevant part of the decision, where the court explains why Williams was willful, is as follows:
Here, the evidence as a whole leaves us with a definite and firm conviction that the district court clearly erred in finding that Williams did not willfully violate § 5314. Williams signed his 2000 federal 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.” “A taxpayer who signs a tax return will not be heard to claim innocence for not having actually read the return, as he or she is charged with constructive knowledge of its contents.” Greer v. Commissioner of Internal Revenue, 595 F.3d 338, 347 n. 4 (6th Cir. 2010); United States v. Doherty, 233 F.3d 1275, 1282 n.10 (11th Cir. 2000) (same). Williams’s signature is prima facie evidence that he knew the contents of the return, United States v. Mohney, 949 F.2d 1397, 1407 (6th Cir. 1991), and at a minimum line 7a’s directions to “[s]ee instructions for exceptions and filing requirements for Form TD F 90-22.1” put Williams on inquiry notice of the FBAR requirement.
Nothing in the record indicates that Williams ever consulted Form TD F 90-22.1 or its instructions. In fact, Williams testified that he did not read line 7a and “never paid any attention to any of the written words” on his federal tax return. J.A. 299. Thus, Williams made a “conscious effort to avoid learning about reporting requirements,” Sturman, 951 F.2d at 1476, and his false answers on both the tax organizer and his federal tax return evidence conduct that was “meant to conceal or mislead sources of income or other financial information,” id. (“It is reasonable to assume that a person who has foreign bank accounts would read the information specified by the government in tax forms. Evidence of acts to conceal income and financial information, combined with the defendant’s failure to pursue knowledge of further reporting requirements as suggested on Schedule B, provide a sufficient basis to establish willfulness on the part of the defendant.”). This conduct constitutes willful blindness to the FBAR requirement. Poole, 640 F.3d at 122 (“[I]ntentional ignorance and actual knowledge are equally culpable under the law.”)
What the court is saying is:
If you sign a tax return you are admitting knowledge of the contents and and a failure to “follow up” on any directives in the return constitutes “willful blindness” which is sufficient to establish the requirement of “knowledge of the legal duty”. Once you have been deemed to have “knowledge of the legal duty”, the fact of non-compliance (in the absence of compelling evidence”) constitutes willfulness.
Absolutely frightening. If this is the case, could one argue that the requirement to sign a tax return could violate the 5th amendment?
One interesting feature of the decision is …
Apparently Williams was given (by his accountants) a check list to complete. When completing the “check list” he did NOT disclose to his accountants that he had Foreign account. The court seems to have put great weight on this fact!
Why did the court rule that William’s conduct was willful?
The answer is simple: they wanted to convict Williams. This decision is unbelievably unprincipled.
This is one more in a line of decisions that demonstrate that “mens rea” is not, in a factual sense, a requirement to convict under U.S. law. See a recent post that I wrote on the diminishing requirement of mens rea under U.S. law. This is frightening. Last week I was shown a tax return that exceeded 150 pages and was prepared by a high priced accountant. The taxpayer hired the accountant in to order to make a maximum effort to be in compliance with the law. The taxpayer signed the return without having a clue what was in it. According to this court decision, the signing of the return means that you are:
1. Deemed to have knowledge of the contents of the return (even though no human being could understand it); and
2. Any mistakes in relation to the return CAN and MAY (under certain undisclosed circumstances) lead to a finding of willfulness.
The trouble with the decision is that it is based on reasoning that can be extended (and as history shows) will be extended to every Tom, Dick and Harry (but not Timothy). In other words, the court has made the distinction between willfulness and non-willfulness very difficult to see! Where is the line? I am not sure that I see it. Do you?
Jack Townsend, in a similar view, in his post writes:
The basis for the holding, I think, is the notion that the Court repeats that defendant’s signature on the return puts him at criminal as to anything that was not correctly reported on the return. The notion is that, even if he did not know about the incorrect reporting and the leads that he might have found to the FBAR, he is willfully blind — and thus willful — as to the failure to file the FBAR. I think that is a dangerous and wrong notion that is not facially limited to just FBAR situations and very bad facts.
The problem, of course, is that the notions bantered about by the majority can present risks in cases where the facts are not bad.
Thank God for minorities …
Fortunately there is a minority decision that is much more reasonable and (without expressly saying so) exposes the majority decision for what it is – nothing more than a desire to convict Williams. As Jack Townsend notes:
I recommend the dissent as being a more nuanced reading of the tea leaves before the court. If a clearly erroneous review means anything, it should have resulted in affirmance of the district court’s holding on the fact issue of willfulness. In effect, the majority seems to turn the factual holding into a legal issue compelling the conclusion on the basis discussed above.
The court should have left the decision of the trial judge intact. Instead the court has sanctioned the newest stage of Form Nation Tyranny:
To be charged is to be convicted!
Imagine the possibilities open to the IRS with Form 8938? From the IRS perspective, Form 8938 is surely “Manna from heaven!” Form 8938 coupled with the decision of the Appellate court in Williams will provide an “penalty annuity” to the IRS.
Renounce U.S. citizenship. It’s just not worth the risk of exposure to endless variations of “Form Crime”.
Part B – The 2016 updates: The third party commentary on Williams
I. In 2012 this post was reposted at the Isaac Brock Society where it generated many interesting comments.
Of particular interest was this comment form “30 Year IRS Vet”:
A couple of things stand out in this case in terms of the opinion’s value for future guidance. At best the case has some in terrorum publicity value for the IRS. The facts here are a good example of what the IRS considers to be egregious: the defendant deposited more than $7,000,000 into Swiss bank accounts over a period of eight years, earning more than $800,000 in income on the deposits which he did not report on his 1040’s. For those people sitting on the fence about whether to make a noisy disclosure outside the program, more formally apply under the new guidelines for a voluntary disclosure, or continue to follow the “full ostrich” approach Williams is virtually irrelevant.
Next: The dissenting opinion makes more sense to me on the issue of willfulness but it seems Mr. Williams got some very poor legal advice. The game is up for him as early as the year 2000. He hires a lawyer in November of 2000. As of that date he knows the IRS is already on to him and he goes on to file a false return for 2000 by checking the “no” box on Schedule B and fails to file an FBAR for 2000. There is already an IRS agent assigned to work the case. As late as February 2003 he applies to the IRS for a formal voluntary disclosure under the program for 1999 to 2000 which the IRS is compelled reject under the their Manual
II. An interesting article from Moskowith tax law agrees that Williams involved in particularly egregious situation:
In its decision November 8, 2012, the District Court for the District of Utah found in United States v. McBride that the assessment of FBAR penalties was lawful and that the IRS may proceed with its collection efforts. In order to establish the lawfulness of FBAR penalty assessments, the United States has strategically ‘cherry picked’ the cases it has brought against taxpayers. Both in United States v. Williams, (4th Cir. 2012) [non-precedential opinion], and now in United States v. McBride, regardless of the evidentiary used by the court, it is hard to see how the Government couldn’t win its cases. McBride is another case of “low hanging fruit” with case facts establishing conduct of blatant lying by the taxpayer(s) to the IRS agents, clear intent to underreport income via offshore accounts, etc.
However, there does appear to be a significant victory in both McBride and Williams for taxpayers with unreported offshore accounts. It appears that neither court has agreed that it is permissible to impute knowledge simply because a taxpayer checked “no” on Schedule B.
III. Interesting commentary from Michael Debliss on the Williams case, explaining both the “worst case scenario and why it might not be that dangerous:
This holding had been widely accepted to be the standard for willfulness. But that was all about to change. In reversing, the Fourth Circuit Court of Appeals reasoned that Williams made a “conscious effort to avoid learning about reporting requirements.”
While the majority could have rested there and concluded that the record established willful blindness and reversed on that basis alone, they decided to go one step further. That one step sent shock waves through all the circuits, creating a firestorm of opposition amongst critics. The majority held that Williams’ signature on his tax return was “prima facie evidence that he knew the contents of the return,” even though Williams denied ever reviewing it.
The majority found that the instructions in Schedule B, which refers to the FBAR, put Williams and every other taxpayer on “inquiry notice” of the filing requirement. What does this mean? Very simply that a taxpayer is presumed to be cognizant of the FBAR requirement simply by signing the tax return.
The practical effect of this opinion is nothing short of mind blowing. First, instead of having to prove a specific intent to “violate a known legal duty,” which other tax cases have upheld as the standard for willfulness, the opinion suggests that a taxpayer’s presumed understanding of the FBAR requirement may be enough to make him liable for penalties for willful violations. In other words, whether a person actually knew about the FBAR reporting requirements is meaningless.
Second, it gives a major boost to the IRS’s current intensive pursuit of overseas tax evasion. How? By making it easier for the IRS to prove willfulness in the context of a willful FBAR penalty. Very simply, the IRS now has enormous leverage to collect the hefty penalties that accompany the willful FBAR penalty. Indeed, the civil penalty for willfully failing to file an FBAR may reach $100,000, or 50% of the value of the offshore account, whichever is greater. As one expert observed, “This case is likely to be the start of a wave of FBAR audits for the IRS because of the sheer sums the IRS stands to collect by ramping up civil FBAR enforcement.”
While Williams might strike fear in the hearts of even the bravest taxpayers, taxpayers can take some relief in the following. First, the case was a gross example of offshore tax evasion. Not only did Mr. Williams fail to disclose his Swiss accounts on his tax returns, but he also denied having overseas assets to his accountant and attorney. Indeed, this was the equivalent of waiving a red flag in front of a bull.
Second, Williams is an unpublished opinion. Therefore, it is not binding precedent on federal courts in the fourth circuit, much less any of its sister circuits. And third, if the IRM is any indication, it appears that the official position of the IRS is to interpret the meaning of willfulness in accordance with the heightened definition (i.e., an intentional violation of a known legal duty). However, a word of caution is in order. As one expert said, “The IRS would be crazy not to use this ruling to its advantage. There is simply too much money at stake.”
IV. A exceptional article by a Georgetown Law Student Kyle Niewoehner explaining why Williams is bad law.
The solution for future courts is to look past the flawed Williams–McBride reasoning and adhere to the Sturman standard, which looked for an actual intent to violate the FBAR requirement or a course of conduct that would allow a court to infer willfulness. This would clearly avoid the liability problems created by the strict liability of Williams–McBride while upholding the relevant Supreme Court precedent and the current version of the statute.